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Nersa Calls for Comment on Special Pricing Deal to Unlock Ferrosilicon Production
July 5, 2017  

Supplied by Douglas Millar from SAIEE

The National Energy Regulator of South Africa (Nersa) is calling for written comments on an application by Eskom to implement a two-year incentive pricing package that will enable the restart of ferrosilicon production in the Limpopo and Mpumalanga provinces.

The regulator turned down an earlier request for the implementation of a so-called negotiated pricing agreement (NPA) between the two companies, owing to the absence of a framework for adjudicating such applications.

The plants in Polokwane and eMalahleni are owned by Silicon Smelters, a subsidiary of British metals and materials producer Ferroglobe, which is listed on the Nasdaq.

In a consultation paper on the proposed NPA, Nersa states that the company ceased all ferrosilicon production in June 2016, owing to a combination of weak demand and uncompetitive production costs, with electricity listed as one of the largest cost components. Producing a ton of ferrosilicon consumes 13.3 MWh of electricity, making the process as energy-intensive as aluminium smelting.

Silicon Smelters, which has moved to retrench over 3 000 staff as a result of the production cuts, has indicated that it has no immediate intention of restarting domestic production unless a more favourable electricity price can be secured. It also notes that Ferroglobe has been successful in negotiating “significantly improved” power pricing in a number of other countries.

For its part, Eskom has indicated that it is eager to discuss ways of increasing sales to electricity intensive businesses, noting that industrial demand has fallen steadily since 2007, while its supply surplus is expected to rise as new output is introduced.

The utility has even introduced an official target of increasing local sales by 2.1% year-on-year by the financial year 2019/20, while increasing export sales by 8% year-on-year by the financial year 2020/21.

The State-owned power utility claims to have up to 4 000 MW of surplus currently available on a daily basis and has indicated that the excess-supply situation could persist until at least 2021.

Eskom is, therefore, proposing a rebate to Silicon Smelters on the Megaflex tariff offered to industrial customers, which would reduce the unit price of electricity to the ferrosilicon plants. The two-year deal would be subject to a minimum price level and could be adjusted should the price of ferrosilicon rise during the period. It would also be subject to yearly inflation-related adjustments.

The NPA would also include a commitment by the smelters to have about 80% of their applicable load interrupted by the system operator for two hours every weekday, as well as a hardship clause should either party not be able to honour the deal should circumstances change.

Eskom has indicated previously that it views the Silicon Smelters NPA as a test case and that there is potential to do similar deals with other power-intensive businesses should the arrangement be approved by Nersa.

The Energy Intensive User Group of Southern Africa (EIUG), meanwhile, has indicated that it sees no policy, legislative or regulatory impediment to the introduction of NPAs, if these were able to facilitate the restart of idle mining and process-industry activities.

The EIUG refers specifically to government’s Electricity Pricing Policy, which has several sections that are accommodative of special deals, while it notes that the Electricity Regulation also permits Nersa to deviate, in prescribed circumstances, from set or approved tariffs.

“The special pricing arrangements allowed Eskom’s excess capacity to be used up, directly benefitting all electricity customers who would otherwise have paid a higher price for electricity,” The EIUG has stated previously.

The closing date for written comments is July 17