Although Eskom confirmed that it would not make a profit from the sale of electricity to two ferrochrome producers at a tariff of 62c/kWh, the State-owned company nevertheless argued that the costs associated with forgoing the 12.8 TWh of yearly demand arising from the smelters would be larger and more damaging.

Specifically, Eskom said the deal would allow it to avoid a R56-billion “downside risk” associated with take-or-pay coal contracts, while safeguarding R42.5-billion in revenue over the period of the smelter contracts, which also had take-or-pay commitments.

The price and terms of a proposed revised negotiated pricing agreement (NPA) between Eskom and ferrochrome producers Samancor Chrome and Glencore-Merafe Chrome Venture were the subject of public hearings hosted by the National Energy Regulator of South Africa (Nersa) on May 25.

In January, Nersa approved an interim tariff of 87.74c/kWh for the two companies after they invoked the hardship provisions of their existing NPAs.

Those original NPAs included a tariff of 136c/kWh that was already well below the more than 200c/kWh charged to Eskom’s standard tariff customers, which had hitherto also absorbed all the costs of Eskom’s NPAs with electricity-intensive firms.

However, the companies indicated that further job losses and smelter shuts would arise unless the tariff could be reduced further to 62/kWh, and retrenchment processes were initiated and postponed several times as subsequent negotiations with Eskom were undertaken.

The ferrochrome producers cited an inability to compete with smelters in China, which were largely processing South African-mined chrome ore using electricity that is far more favourably priced.

Electricity accounts for about 52% of ferrochrome production costs.

South Africa is estimated to host 80% of the world’s chrome reserves, but the country’s share of global ferrochrome output has fallen from 51% in 2001 to about 10% currently, while China’s share has expanded from about 5% to 65% over the same period.

The slump has coincided with steep electricity tariff increases of more than 500% to the smelters since 2010 and currently only 11 of the domestic industry’s 66 smelters are still operating.

Therefore, while the domestic ferrochrome industry has a theoretical yearly nameplate of 4.9-million tons it is producing less than 1-million tons and much of the previous capacity is unlikely to be restarted as it has been out of production for too long.

In April, Eskom announced that a 62c/kWh offer had been made to Samancor Chrome and Glencore-Merafe and it subsequently applied to Nersa to amend its NPAs with the ferrochrome producers.

The regulator initiated public consultations while committing to complete its deliberations before the end of May.

LOAD RETENTION

At the virtual hearing, Eskom Distribution's Gugulethu Dumakude argued that the NPAs should not be viewed as a tariff concession but as a load-retention intervention.

She said that losing the 12.8 TWh of demand would have broader implications for the power system, including irrecoverable revenue losses, under-utilised generation capacity and upward tariff pressure on remaining customers.

Under the proposed framework, Samancor Chrome would enter into a five-year contract with a minimum three-year, 80% take-or-pay commitment, while Glencore-Merafe would conclude a three-year agreement with a minimum two-year, 80% take-or-pay arrangement.

The proposed contracts also include several revenue protection mechanisms for Eskom, including a deferred revenue mechanism during the early stages of the agreements and a 50/50 upside-sharing arrangement above a defined ferrochrome price threshold.

Economic hardship relief would also only be allowed after a minimum commitment period.

The utility insisted that the NPAs would be ring-fenced and that their costs would not result in cross-subsidisation by other customer categories.

“We are going to ensure that the revenue shortfall is not socialised through the Multiyear Price Determination,” Dumakude said, indicating that it would be tracked from the implementation date and reported on separately.

In a joint presentation, Samancor Chrome’s Steph van Sittert and Glencore Alloys' Japie Fullard highlighted the upstream and downstream benefits to the South African economy of sustaining domestic ferrochrome production.

They noted that the industry contributed R70-billion to GDP in 2023 and 2024, supported up to 185 000 direct and indirect jobs and that the NPAs could provide a “win-win” template for implementing South Africa’s beneficiation policy.

“The South African NPA tariff mechanism could help retain demand, restart capacity, and preserve economic value while remaining commercially rational for Eskom,” the executives said in their joint presentation, while underlining the strategic value to Eskom of retaining customers with a baseload demand profile.

Van Sittert and Fullard stressed that the tariff did not represent a “silver bullet” for the industry but provided crucial breathing space to pursue other technology and policy interventions that could facilitate ongoing smelter operations.

The NPAs received the backing of various other presenters, including trade union Solidarity, which warned that thousands of jobs were at stake.

In a statement Solidarity deputy general-secretary Willie Venter noted that the smelters were the largest employers in many towns, particularly in the North-West and Limpopo provinces.

“If they disappear, entire communities will suffer as a result,” Venter warned.

LACK OF DISCLOSURE

However, Meridian Economics’ Adam Roff used the hearings to highlight several shortcomings with the public participation process, which he warned could open the eventual Nersa determination to legal review.

Roff argued that the information provided by Nersa in its consultation paper merely identified the nature of the deal but not the facts.

“Almost all the basic information required to assess the deal has not been disclosed,” he said, noting that the actual price does not appear in the consultation document.

“We don't know how the price was determined. We don't know what it costs Eskom to supply the power. We don't know the impact on Eskom's other customers or government support, and therefore the taxpayer. We don't know the exact jobs impact if the NPAs are approved. We don't know the jobs impact if they're not approved. And we don't know the jobs impact if the same concession was offered to other customers in other industries,” Roff asserted.

He argued that Nersa itself could not make a rational decision without the information and that if it did have the information its lack of disclosure rendered the process procedurally unfair, as it excluded the public from being able to comment meaningfully.

“It may well be that the proposed NPA price of 62c/kWh is the highest the smelters can sustainably pay, and the best overall socioeconomic solution for the country. But no evidence has been placed before the public in the consultation process that suggests this is so.”

Therefore, Roff urged Nersa to publish “minimally redacted” copies of the application and agreements and allow a full public process with meaningful participation on this information.

“In the absence of a legally compliant consultation process, the decision is at risk of judicial review, thereby further delaying its finalisation.”