Comments from FAPA on Eskom’s request for a Tariff Increase
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Presented by: Dr Jurg ZaaymanChairman: Ferro Alloy Producers’ Association
FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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FAPA members are the Smelters of Chrome,
Manganese and Silicon Alloys
FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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The whole SA Ferro Alloy
Industry faces extinction
because of too high electricity
prices
A number of smelters have
closed down resulting in a large
number of direct and indirect
Job Losses
More smelters will close down
if this tariff application is
approved
Currently we have Surplus Electricity supply (Excessively High Industrial Tariffs)
More than 80% of worlds’ reserves of Manganese and Chrome
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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FAPA Strongly Opposed to this
EXTREME Eskom Tariff application
• Eskom is not an efficient (cost control) electricity supplier anymoreand does not qualify for any tariff increase
• South Afica’s electricity tariffs are too high and rank in US dollar termsamongst the highest in the world
• Eskom entered into a utility death spiral where too high tariffs resultedin reduced sales
• Eskom are loosing Baseload consumers – economical and technicalchallenges
• There are alternative solutions to solve Eskom’s financial burdens otherthan a double digit tariff increase.
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom is not an Efficient
Electricity Supplier
1) Eskom is totally overstaffed – during the past decade Eskom employed 14 000 additional people with no increase in electricity sales while more than 110 000 direct and indirect jobs were lost at the operations of FAPA members
33 000employees
47 000employees
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom is not an Efficient
Electricity Supplier
2) Eskom Project Cost Overruns
Medupi
2007 Budget R 69.1 billion
Currently R 145 billion
Cost at Completion R 195 billion(including interest)
Source: Eskom, Chris Yelland in Daily Maverick
Kusile
2007 Budget R 80.6 billion
Currently R 161 billion
Cost at Completion R 225 billion(including interest)
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom is not an Efficient
Electricity Supplier
3) Eskom Coal Cost Increases
2007: R 10 billion (API4 = 63 $ / tonne and R 7 ~ $ 1)
2016: R 48 billion (API4 = 64 $ / tonne and R 14.7 ~ $ 1)
Spot price in US$ terms the same and less electricity generated
Means that coal costs should have been max R 21 billion – not R 48 billion
Source: Eskom annual reports, API4 index
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom is not an Efficient
Electricity Supplier
4) Alleged Fraudulent Expenditures
R 1.6 billion paid to McKinsey and Trillian
R 2.1 billion discount on coal quality claim
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Eskom price Increase 27.5% 31.3% 24.8% 25.8% 16.0% 8.0% 8.0% 12.7% 9.4% 2.2% 19.9%
SA Average CPI 10.0% 7.3% 4.1% 5.0% 5.8% 5.8% 6.1% 4.5% 6.6% 5.6% 6.8%
Eskom price c / kWh 25 33 42 52 61 66 71 80 87 89 107
Electricity price at CPI 25 27 28 30 32 33 35 37 39 42 44
0
20
40
60
80
100
120
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Price c / kWh
Electricity Prices and Percentage Increases
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom Tariffs are too High
331% over 10 years
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom Tariffs are too High
Source: EIA, IAE, Statista, OANDA, ICDA
Relative National Electricity Prices in 2014/2015
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom Tariffs are too high
SA is exporting jobs to China
Unemployment rate > 27.7%
SA has lost ferrochrome market share to China
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Market share of Global FeCr productionSA’s market share of FeCr
production has declined over the
years with China taking SA’s market
share and surpassing SA as the
largest ferrochrome producing
country in the world.
China has very little chrome ore
reserves and currently imports about
60% of its chrome ore demand from
SA.
Beneficiation of chrome ore is
moving from SA to China. Chinese Chrome Ore Imports (tonnes)
Source: CRU
0%
10%
20%
30%
40%
50%
60%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Glo
ba
l F
eCr M
ark
et s
ha
re
SA China
4942 109
329868
1 9642 604 2 904
3 100
4 6754 490
6 316
7 220
0
3 000
6 000
9 000
12 000
15 000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Others
Albania
Kazakhstan
Australia
Iran
South Africa
Turkey
India
Annual
Imports (t)
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom Tariffs are too high
80% of World Cr and Mn ore deposits
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom Tariffs are too high
Source: FAPA Member survey
Losses Incurred by FAPA Members during 2016
Jobs lost (Direct and Indirect) > 110 000
Direct Employees salaries R 1.62 billion
Employee tax and VAT from disposable income R 0.49 billion
Local Procurement (excl electricity, ore and reductants) R 8.75 billion
Electricity Procurement R 8.25 billion
Loss in Foreign Exchange Earnings R 22.95 billion
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom has entered a
Utility Death Spiral
Source: Eskom
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Eskom has entered a
Utility Death Spiral
Eskom’s Growth Expectations / Targets not realistic
Solar and Wind Generation is already cheaper than Eskom’sLowest Day time Tariffs (Payback on PV > 10 MVA < 5years)
More and more people are going partially or totally off the grid
This trend will increase rapidly with the development of lowercost storage solutions e.g. Batteries
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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A number of Smelters Closed Down Recently
Source: Genesis
Eskom are loosing their most ValuableCustomers the Baseload Consumers
TATAASAIFMMachadodorpHernic in BRVarious Mn Furnaces
Low cost to provide smelters with electricity
Eskom make their biggest profits with Smelters
Higher voltages, Less distribution and Maintenance costs
Smelter tariffs are cross-subsidizing the poor
24/7 consumers of electricity
Why are Smelters so Important to Eskom and the SA Economy ?
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Why are Smelters closing down ?
30% < electricity costs < 60%Percentage of
Production Cost
Source: Genesis
Eskom are loosing their most valuablecustomers the Baseload consumers
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
% of Production Cost 23% 25% 31% 37% 37% 36% 38% 42% 44% 43% 48%
Eskom price c / kWh 25 33 42 52 61 66 71 80 87 89 107
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
20
40
60
80
100
120
Price
c/kWh
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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20 000
22 000
24 000
26 000
28 000
30 000
32 000
34 000
36 000
38 000
23:00 02:00 05:00 08:00 11:00 14:00 17:00 20:00 23:00 02:00
MW
Summer & Winter load profiles
Typical Winter Day Typical Summer Day
Source: Eskom
Because of smelters closing
Peak is getting steeper.
Difference between peak and off
peak is growing ~ 13 000 MW
Extreme Technical challenges
Smelters reduce load during
winter evening peak ~ 700 MW
Winter peak is a problem with more
units in cold reserve
Eskom are loosing their most valuablecustomers the Baseload consumers
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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20 000
22 000
24 000
26 000
28 000
30 000
32 000
34 000
36 000
38 000
23:00 02:00 05:00 08:00 11:00 14:00 17:00 20:00 23:00 02:00
MW
Summer & Winter load profiles
Typical Winter Day Typical Summer Day
Source: Eskom
Smelters consume electricity 24/7
Eskom experience extreme Financialchallenges with baseload reductions
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Alternatives to Tariff Increases
• Eskom can easily increase their cost savings targets
• Eskom can expedite their cost savings initiatives
• Complete Medupi and Kusile a.s.a.p. time ~ money
• Decommission old, inefficient and polluting power stations
• Reduce their dept through drastic measures
Example: Steve Lennon (former Eskom Executive) suggestion
Unbundle Generation units with their dept and make public offeringsThis will present economic transformation opportunities for black South Africans
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Conclusion
• Eskom tariffs are already too high and we will see numerous job losses with ongoing tariff increases
• Eskom should start with drastic cost savings to turn themselves and the economy of the country around
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FAPAFERRO ALLOY PRODUCERS ASSOCIATION
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Questions ?