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 87.74 c/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 ...