HomeIndustry SectorsGenerationEskom considers buyback of BHP Billiton supply contract

Eskom considers buyback of BHP Billiton supply contract

Johannesburg, South Africa — ESI-AFRICA.COM — 11 April 2011 – South African national power utility Eskom has seriously considered "buying back" the supply contract for BHP Billiton’s Hillside aluminium smelter, but says it still regards the exercise as too expensive.

A transaction such as this would in effect mean that the enormous Richards Bay operation would close, a particularly reliable source at Eskom told Sake24.

It would mean the loss of some 800 employees at the plant, but possibly the end of South Africa’s electricity problem, as the plant alone consumes about 1 200MW of Eskom’s  
37 000MW of generation capacity.

At Eskom’s quarterly information session, chief executive Brian Dames made it clear that there was a very serious threat of more power cuts during the coming winter. The electricity shortage would indeed be at its most serious in the next five years.

On top of that, the incident at the Duvha power station early in February – when a turbine generation unit was destroyed during a legally compulsory test – had rendered Eskom unable to perform adequate maintenance work before the start of winter.

“This means Eskom will be able to do only limited maintenance work for over a year, while preparing for the winter crisis peak demand,” Dames said.

He did not mention Hillside by name, but in his presentation said that Eskom believed an emergency solution could be the repurchasing of existing supply contracts. According to the utility’s calculations, 2 000MW could be saved in this way.

In responding to Sake24’s enquiry as to the cost of buying back the Hillside contract, Dames said he did not have the figure. But Eskom financial director Paul O’Flaherty, in a submission to Parliament last month, said that the negative value of the contract for the remainder of its lifetime stood at R6.2 billion. That was the loss that Eskom would incur from cancelling the contract’s remaining term.

But no-one knows how long the contract still has to run. In August 2009 Eskom announced that it was renegotiating the BHP Billiton contract, which was based on derivative instruments, including the aluminium price on the London Metal Exchange, because of the losses and their effect on Eskom’s financial statements – but these negotiations had still not been finalised.

In January this year Dames said a new contract could probably be signed in the first quarter, but declined to give further details when questioned about the delay in Friday’s briefing session.
A similar contract for the supply of electricity to Mozal was re-negotiated in April last year.

The price at which Eskom was supplying electricity for both contracts was kept secret for many years, but a Sake24 court application to force Eskom and Billiton to disclose the prices is due to be heard in the South Gauteng High Court in Johannesburg today or tomorrow.