Eskom's Billiton losses already R10.7bn

Eskom's Billiton losses already R10.7bn

2013-04-04 14:41

Johannesburg – Eskom has already made a loss of R10.7bn through supplying electricity to Hillside, the bigger of the two aluminium smelters at BHP Billiton [JSE:BIL].

Hillside uses 1 200 MW, which makes it the third-biggest electricity user in the country. This usage is surpassed only by the cities of Cape Town and Durban, which each uses 1 300 MW.

Based on the formula agreed to determine the price at which Eskom had to supply electricity to the smelters, Hillside paid about 22.65c per kilowatt hour (kWh) for two-thirds of the 1 200 megawatts it uses, as opposed to R1.40/kWh charged to normal consumers.

The deal was concluded in 1992.

This loss figure comes from calculations made by Sake24, Fin24’s sister publication, to determine the impact of Eskom's contracts with BHP Billiton.

It is alarming that between R8bn and R9bn of these losses were made in the past three years. There is no doubt that the numbers will continue to grow and could threaten the existence of Eskom if something is not done, according to Sake24.

These figures come after Sake24 won a lengthy legal battle in March, in which the Court of Appeal ruled that BHP Billiton must make public the prices it pays Eskom for electricity.

An analysis of the impact the contracts had on Eskom’s financial position over the past few years leaves many questions unanswered.

Most concerning is how it was possible for the National Energy Regulator of SA (Nersa) to approve the contracts.

Nersa did not exist when the original contract was signed with BHP Billiton in 1992, but the deal was revisited in 2001 for an extension project at the smelter, with a variable rate of between 12.88c/kWh and 32c/kWh.

The lifespan of the contract was extended from 25 to 33 years in the revisited contract.

Eskom has been trying to renegotiate the contracts since 2009 but Billiton refuses to do so, saying that Eskom has to honour the original agreement.

In a letter to Business Day newspaper, BHP Billiton South Africa chairperson Xolani Mkhwanazi said the contracts were negotiated in good faith on a risk-sharing basis, and followed recognised international models.

“BHP Billiton expects our contracts to be honoured,” he said.

He also defended the contracts, saying in past years they had benefited Eskom as well. "Over the period of the contracts, BHP Billiton for many years paid above the standard electricity tariff for industry," he said.

"As a result of these contracts, Eskom has generated significant additional revenues and benefits, which have contributed to the cost of establishing the electricity generation and transmission infrastructure in South Africa."

The loss that Eskom made does not include figures from derivatives tied to the contracts.

Nersa is planning to hold a public hearing on the BHP Billiton contracts at the end of April.

  • John - 2013-04-04 14:49

    BHP are a modern day Pirate they should be hung.....Eskom cancel this illegal contract......

      Riekie Koekemoer - 2013-04-04 15:29

      No John the pirates are the people illegally connected. They use more than BHP.

      Claude Barnes - 2013-04-04 15:30

      Hang the idiots at Eskom who signed off the deal. You cannot blame BHP Billiton who in turn invested capiatl based on the cheap rate of electricity. Eskom had at that time a suplus for which they were getting no return and sold it of cheaply. Now things have changes you cannot just cancel a valid agreement. It's a business risk which backfired on Eskom. There is some serious idiots at Eskom who extended the contract when the writing was on the wall.

      werner.nel.712 - 2013-04-04 15:37

      Correct Claude. And how many power stations where mothballed by Eskom? and then" "Eskom in effect pays industrial users not to use electricity during peak periods, or when Eskom is doing maintenance, through the buybacks. "The buyback was an amount of R8.9bn that Eskom was putting in the tariff to say when they want to do maintenance on their plants, they would go to a company and say, ‘Don’t produce what you are producing, we are going to pay you’ " Now how is that for business sense!

      werner.nel.712 - 2013-04-04 15:39

      In December 1998, a report called "White Paper on the Energy Policy of the Republic of South Africa" was published by the Government. On page 41 of the report it states "...growth in electricity demand is only projected to exceed generation capacity by approximately the year 2007... long capacity-expansion lead times require strategies to be in place in the mid-term, in order to meet the needs of the growing economy".

      Willie Willemse - 2013-04-04 16:15

      Force Billiton to renegotiate. If they don't respond positively limit their supply. To hell with the consequences. Do what Israel does: be proactive and explain afterwards.

      Art Brigg - 2013-04-04 20:35

      Bunch of thieving crooks.

      Thando Gqabaza - 2013-04-05 07:45

      Mbeki is to blame for this.

      neil.harris.370177 - 2013-04-05 09:48

      How do you blam Mbheki for contracts which were entered into by the Apartheid government you clowns. DO you research before you spew nonsense

      edward.clack.33 - 2013-04-05 11:37

      Wouldn't it be a LOT cheaper for Eskom for the substation feeding BHP to suddenly pop? And for the replacement to also pop. Equipment can be so unreliable these days.

  • Annette Zang - 2013-04-04 14:49

    This country does not need BHP Billiton - cut them off !

      stirrer.stirrer - 2013-04-04 16:04

      To top it all, they're an Aussie company, so all profits go overseas. They are raping and pillaging our economy and all the citizens of SA. To "legally" get out of the contracts, SA should declare it a matter of national security due to the energy crisis it causes and the cost to the SA taxpayer.

      Peter Gibbs - 2013-04-05 09:26

      @Jamba. What platinum?????

      Karl Klopjag - 2013-04-05 11:40

      Break a deal and you destroy your international creditworthiness totally. That will reduce SA to a caveman society. Your word is your bond.

  • BraSteve Myaluze - 2013-04-04 14:54

    Just add the estimated R11 billion carbon tax to that. I see more increases on the way

      Maxwell Mvelase - 2013-04-04 15:20

      With the equipment that they have onsite I doubt they are taxed that much for carbon, in fact they're selling their carbon credits and getting good money for it monthly. Should Eskom decide to increase their tariffs, the BHP profits won't be affected that much.

  • Timothy Crowley - 2013-04-04 14:57

    That should read tax payers losses already R10.7bn.

  • werner.nel.712 - 2013-04-04 15:00

    Performance bonuses for ALL AT ESKOM!!!! Great JOB!

  • Andre Karels - 2013-04-04 15:01

    the cost of running a smelter is mind blowing and normally only operate at night . how many more jobs must be lost in sa ,

      Karl Klopjag - 2013-04-05 11:44

      An aluminium smelter runs 24/7. Even a momentary interruption to the power-supply results in the molten metal in the potlines solidifying and effectively destroying the plant for good. That's why molten aluminium is called "liquid electricity".

  • Maxwell Mvelase - 2013-04-04 15:10

    Unfortunately BHP are not the only ones having the Special tariff structure. Sappi, Impala plats(Zimplats), and Hulletts to name a few. The reason normally given is that they are key customers which Eskom would not be able to operate without since they're good paying customers.

  • Maxwell Mvelase - 2013-04-04 15:16

    Unfortunately BHP is not the only one with the Special Tariff Structure. Sappi, Impala plats(Zimplats), and Hulletts to name a few. They normally called Key Customers and without them on Eskom's data base, Eskom would be making a bigger lose than current.

  • Gary De Sousa - 2013-04-04 15:17

    One cannot just cut them off or do you want to be seen as even more of a 3rd rate country?? it was all legal and believe me escom and the gov saw value in jobs and money or they would not have done it.

      Karl Klopjag - 2013-04-05 11:46

      The people of SA have to pay so that the government of SA can fulfil its promises. Eskom is owned by the SA government, and it is therefore the responsibility of the people of SA. Sad but true.

  • Gerald Parker - 2013-04-04 15:17

    Declare ESKOM insolvent Form a new company immediately and the charge BHP Billiton normal price PLUS the amount that was the difference between what they were paying and normal retail.

      Karl Klopjag - 2013-04-05 11:47

      Eskom, being State-owned, cannot be declared bankrupt unless the entire country is also declared bankrupt.

  • johan.harlaar.9 - 2013-04-04 15:19

    If Billiton paid over the standard industry rates then you wonder what that rate is. It then means that besides our tax we directly subsidize the country's industry as well. Which means that we pay more tax than we think.

  • Susan Paul - 2013-04-04 15:19

    Eskom, not gonna get any sympathy from me,your own stupidity...

  • James Smythe - 2013-04-04 15:23

    To hell with legalities - cancel the contracts then fight it out in court dragging it out over the next 15 years! Call Billiton's bluff and stop stealing consumer's money through excessively high rates necessitated by these contracts where we are all subsidising Billiton profits! That would be the cheapest strategy, on balance!

      Karl Klopjag - 2013-04-05 11:50

      To hell with legalities also means to hell with the creditworthiness of the entire nation. If you think Zimbabwe was looking grim, you have no idea very how much worse a defaulter country with no creditworthiness will look in a year's time. Zimbabwe would be a paradise by comparison.

      James Smythe - 2013-04-05 12:15

      Not so - this would represent a valid legal challenge against contracts entered into in the past by office-bearers of Eskom and Billiton, who have conspired to disregard the interests of the people of SA and of Eskom itself. Thus there would be no effect on this country's creditworthiness.

  • konstabel.koekemoer - 2013-04-04 15:23

    As Eskom is a government monopoly they have a has a commitment or 'contract' to provide every paying South African citizen and company with a reliable supply of electricity at the best price possible. So this BHP contract must be against the constitution of South Africa and should be challenged. BHP Billiton is a totally disgusting company who puts thier profits ahead of the entire country. Eskom must limit their supply and not pay them any more compensation.

      Karl Klopjag - 2013-04-05 11:55

      Eskom has a LEGAL contract with BHP-Billiton which legally outweighs any moral contract with the South African public. Breach of contract by a State-owned enterprise would, at a stroke, effectively permanently demolish the creditworthiness and contractual credibility of the entire country. Morally-speaking, that would be far worse than delivering their end of the bargain, albeit at a big public loss.

  • robqb - 2013-04-04 15:26

    Hey guys, don't blame anybody but Eishkom. If you go out with the thought of buying a Rolls and the salesman offers you a brand new Rolls at R150000. Once you have signed that contract at that price, there is nothing that the salesman, or the company selling the car, can do. It's a binding contract. Eskom now needs to sue their sales person that sold electricity at below cost. If I was BHP I would give Eskom the middle finger. Not to worry, the local public will carry the can for the next few years to help Eskom recoup that money. Please bend over, general public.

  • Emil Langeveld - 2013-04-04 15:28

    Surely the issue to be decided must be the honouring of a 'legal contract' between Eskom and Billiton vs the right of tax paying citizens not to have blackouts or load shedding - and even more important, the right of all other businesses OTHER than Billiton not to incur losses as a result of electricity cuts ?

      Karl Klopjag - 2013-04-05 11:59

      The raw material is bauxite -- Australia has plenty of bauxite and South Africa has none. They sell us the ore, we process in into metal and export that. Just as how we export most of our raw iron ore to China and India, and they process our stone ore into iron and steel over there.

  • Warren Carne - 2013-04-04 15:29

    BS Billiton,time to can the contracts

      Karl Klopjag - 2013-04-05 12:00

      Time to wreck SA's creditworthiness? You must be mad.

  • George Harris - 2013-04-04 15:31

    The government can push through any other bill, I am sure if it was financially motivated for them they could at least phase out this contract. But I suppose the backhander was paid out a long time ago. Corruption from the last government and this one, when will we learn!

      Adele Coetzee - 2013-04-04 16:06

      Ag please! This has nothing to do with the goverment. Why does the previous goverment get blamed for everything that goes wrong! Eskom is at fault here. Nobody else!

  • Badger - 2013-04-04 15:36

    ***shaking head***

  • Tian Reyneke - 2013-04-04 15:38


  • MJ Oosthuizen - 2013-04-04 15:42

    Wonder how many of us will attend the NERSA public hearing at the end of April...

  • freddy.vanwijk - 2013-04-04 15:46

    And Eskom wants the taxpayer to pay for those loses. It's called economic sabotage.

  • bushy.mogale.39 - 2013-04-04 15:50

    The poort will always be the most hard hit by the increases.

  • Bhekubaba Mawelela - 2013-04-04 16:09

    its a simple constitutional course that this contract be reviewed.1992 is long gone now,time to shake the mathematics a little a bit.

      Karl Klopjag - 2013-04-05 12:05

      A contract, once signed, cannot be undone until it is fully served. The first Eskom/Alusaf contract was signed in 1992 under the NP's watch. That contract expires in 2017. But a second, bigger, additional supply contract was signed with Alusaf-Billiton in 2001, to expire in 2028 -- and that was under the ANC's watch.

  • Moses Govender - 2013-04-04 16:09

    Why doesnt COSATU or some other union go and picket outside BHB Billiton or Eskom for that matter, because they are the chief destroyers of economic growth in the country! This would be a worthwhile cause and will get the whole SA behind them, instead of only demonstrating for higher wages like they normally do! This may put pressure to renegotiate the contracts.

      Karl Klopjag - 2013-04-05 12:08

      Picket? The Billiton smelters in question provide good, well-paid employment to around 40000 metalworkers in NUMSA, all of whom would stop paying any union dues if the smelters closed down and they lost their jobs. Cosatu would be cutting off their own leg and eating it if they took your advice.

  • Raymond Douglas Pickering - 2013-04-04 16:13

    I agree with Claude Barnes that the Eskom idiots need to be hung drawn & quartered. But you can't find any electricity cable to do this - it has all been stolen!

  • CALAMITYSA - 2013-04-04 16:13

    Knowing you do not know is wise - Not knowing you do not know is normal for the Eskom guys.

  • Raxwell Kashiri - 2013-04-04 16:14

    In any society the poor must always pay for the sins of the rich. And the government will always look away

  • Adele Coetzee - 2013-04-04 16:15

    And now we have to pay the price for their mistake!

  • Darryn Rogers - 2013-04-04 17:53

    Is that R10.7 Billion this week or this month or what ? I do think the length of the contracts is a little extreme, that said however, I am sure a skilled legal team (probably costing less than 1 day of losses) will be able to find a legal loophole in the contract

      Karl Klopjag - 2013-04-05 12:12

      Your own house mortgage bond is a 30 year contract. And a company like BHP-Billiton employ the best heavy-hitting legal brains in the world to handle their contractual matters. So too with Eskom. Those contracts are 100% waterproof.

  • Scott Colin Cundill - 2013-04-04 18:23

    Yes! Investigative journalism at its best. THIS is what journalism is about. You guys can be very proud. Get this message to the people, spread it. Then, when you're ready, dig into what the SA banks have been up to.........

  • Alan Collier - 2013-04-04 21:48

    Maxwell -SAPPI and Huletts may indeed have favorable rates but what you may not be aware of is they both sell power into and draw power from the grid. You can probably add Mondi and illovo to this list as well. In other words they are co-generators.

      Mandy Casey - 2013-04-05 18:28

      Hope that they sell back to grid at equally "favorable" rates.

  • Pieter Maritz - 2013-04-05 04:30

    10.7 Billion - No problem there is plenty more where that came from. Lets,s go for a big fat lunch and see what we can write this off to - The rich will get _______ do I need to continue!!!!

  • Pieter Kemp - 2013-04-05 08:07

    WHY can the Government not step in now,and force Escom to take the rapping and end this contract with immediate effect.

      Karl Klopjag - 2013-04-05 12:13

      A contract cannot be uncontracted.

  • Wayne Mark Benton - 2013-04-05 09:10

    It really doesn't matter...does it? The Majority of a Country's population doesn't understand it all anyway... ?? Is it a true maxim, that Cream always rises to the Top??Help yourself.. it's all FREE..!!

  • Anna Cunningham - 2013-04-05 09:55

    Charity starts at home come on Eskom you are bleeding us dry

  • Karl Klopjag - 2013-04-05 11:37

    If you agree to a price in a deal, you have to stick to your part of the bargain, no matter what.

  • Lorraine Botha - 2013-04-05 12:09

    There are alot of gripes about this contract, but does anyone know how much is paid back to the country in the form of taxation? As a company their 2012 tax was US$2,811 000 000. Much of that will come back into South Africa. Also anyone with pension schemes or private unit trusts will indirectly have shares in BHP Billiton and will benefit from dividends. To loose this company would be South Africa's loss. Be proud of it it was built up in south Africa.

  • Aqeelah Khan - 2013-06-14 09:40

    Okay, now I get it. we have to pay more for electricity because Eskom made a deal with an international company because Eskom, at the time deemed it profitable for the country. Sounds just like the E-Toll saga to me!!

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