Development Dialogue
22 July 2014
Options for Managing Electricity
Supply to Aluminium plants
Presentation on CBA Modelling
Contents
1.
Background
– Overview
– Why did Eskom Enter into the Contracts with BHP?
– Problem statement
2.
3.
4.
5.
6.
Objectives of the Social CBA
Data Sources and Missing Data
Overview of the South African Aluminium Industry
Overview of the Electricity Contracts for the Aluminium Industry
Cost Benefit Analysis
– Modelling
– Results
7.
8.
9.
Conclusions
Policy Implications of a CBA
Discussion
Background: Overview
The Long and the Short of it:
-
-
Eskom entered into the S/NPAs with BHP in the 1990s.
The contracts resulted in low-priced (below production cost) electricity to
BHP.
They were negotiated on a Risk-sharing basis, which was important to
ensure financial viability over the long-term.
Since the recession, commodity prices have gone down, which means the
prices BHP pays have dropped as well (The electricity price BHP pays in SA
is directly linked to the Aluminium price).
BHP uses about 6% of Eskom’s electricity supply.
At the time of the contracts, Eskom had excess capacity. This has
decreased in recent years with a resultant shortage of electricity with
associated price increases for electricity.
The length of the contract(s) has been somewhat controversial.
Eskom estimates the liability of the contracts to be R11.5bn (for 2013).
Where the liability can be taken as the opportunity cost of supplying BHP
on the special price vs. supplying at Megaflex rates i.e. the PV of what
Eskom projects BHP would pay for electricity against projections around
what similar electricity users would pay.
Background: Why did Eskom enter
into the contracts with BHP?
• After taking a feasibility study Eskom agreed to supply
Alusaf (predecessor to BHP) electricity at a rate that was in
line with world energy prices (at the time).
• Projections around the following economic variables
seemed conducive (in favour of Eskom) in 1992 – 2020
period.
- Aluminium price
- Exchange rates (R/US$), or foreign production price indices.
- Interest rates
• Eskom had excess electricity capacity, and it is expensive to
store excess electricity.
• Cost of power generation was much cheaper in the past.
Background: Problem Statement
Problem statement:
- Is there a negative impact arising from the Eskom
electricity supply agreement with BHP Billiton; and
- if the electricity contract were broken, what would
the penalties be, and
- if the electricity price rises to the smelters, what
would be the cost in terms of production and
employment; and
- how would that compare to the impact of greater
electricity availability in the economy?
Objectives of the Social CBA
Aim of the Study:
• To compare social costs and benefits of smelters with and without
electricity subsidy in order to address the problem statement:
- Scenario 1: Have subsidy (BHP continues paying contractual tariffs)
- Scenario 2: No subsidy (BHP pays Megaflex tariffs, for similar industry
user)
• Governments use Economic Impact Analysis (EIA) (type of CBA) more than
any other method to assess the broader policy implications.
• EIA generally produces a quantitative measure of the economic effect of an
intervention.
• In practice, through income-expenditure analysis or input-output analysis,
EIA inevitably involves the use of multipliers — hence the overall impact is a
multiple of the initial impact.
Data Sources and Missing data
• Data Sources
– Company-specific annual reports of firms in the aluminium
industry (and downstream sectors);
– The inter-relationships between inputs and outputs
– Quantec data.
• Missing data
– Aluminium sector-specific data e.g. input costs, details of employees,
skill levels and associated salaries and wages.
– Quantec captures industry trends in the aluminium sector through the
more aggregated ‘Basic Non-ferrous metals’ category using the
Standardised Industry Classification (SIC 352). This category includes
metals with no iron such as aluminium, nickel and zinc.
– No information was obtained by TIPS from BHP
Overview of the South African
Aluminium Industry
Figure 2: BHP smelters (production 000’s kt
pa)
Figure 1: Production in the Aluminium
industry (1000 tons)
1000
800
900
700
800
600
700
500
600
400
500
400
300
200
Aluminium production
decreased since 2006,
but is higher than the
2002
rates
of
production
100
Hillside is the largest producer
and Bayside the lowest. About
50% of the Bayside operation
was moth-balled in 2008 due to
the energy crisis.
300
200
100
0
2005
2006
2007
2008
2009
2010
2011
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Hillside
Bayside
Mozal
2012
2013
Overview of the South African
Aluminium Industry (cont.)
Figure 3: Trade position of Aluminium and articles thereof
18,000,000,000
Exports have
increased since
2002, peaking
in 2007-08 and
2011.
16,000,000,000
14,000,000,000
Imports have
increased
significantly,
peaking in
2012.
12,000,000,000
Rands
10,000,000,000
8,000,000,000
In recent years,
the BOP has
started to
reflect the
increase in
aluminium
imports.
6,000,000,000
4,000,000,000
2,000,000,000
0
2002
2003
2004
Exports: Aluminium and articles thereof
2005
2006
2007
2008
2009
Imports: Aluminium and articles thereof
2010
2011
Balance of payments
2012
Overview of the South African
Aluminium Industry (cont.)
Electricity usage
• Hillside 1& 2 Potlines: 850
MW
• Hillside 3 Potline: 225 MW
• Bayside: 350 MW
• Mozal: 900 MW
Total: ~ 2300 MW
Eskom operates 27 power stations
with a total nominal capacity of
41 919 MW
Smelters use around 5.5% of
Eskom’s nominal capacity
Overview of the South African
Aluminium Industry (cont.)
Aluminium industry employment, ~ 15,000 (direct), 29,000 (direct, indirect and induced)
Direct
employment
Direct
employment
Upstream
Intermediate/midstream
Primary
Hillside and Bayside
Mozal
3000 (including
contractors)
98
Secondary and recyclers/merchants
Zimalco
150
Others
150
Aluminium scrap industry
TOTAL UPSTREAM
8800
12,198
Aluminium foundry industry
1700
Fabricators and semi fabricators
Hulamin
2100
Wispeco
1000
Others
TOTAL DOWNSTREAM
Unknown
~ 4,800
Econometrix report (2012):
•
•
Bayside and Hillside smelters jointly created 7 000 jobs (direct and indirect) in KwaZulu-Natal (KZN),
primarily in the Richards Bay area; impacting on the livelihood of more than 33 000 people in
northern KZN
Using a dependency ratio of 4.0, it is estimated that the livelihood of approximately 28 000 people
could be dependent on the operations
Overview of the Electricity Contracts for
the Aluminium Industry
Pricing clauses: Hillside Potlines 1 & 2
Energy Change: The charge for electrical energy supplied in each month shall be
calculated as follows:
ES x 6.54 x AL x R/$= Rands
Demand Charge: The charge for electrical power supplied in each month shall be
calculated as follows:
MD x 3.237 x AL x R/$= Rands
where,
ES = the total number of GW.h of energy supplied in the month;
MD = the maximum demand in GVA (Gigavolt amperes) supplied during peak hours [as
defined in the Eskom Schedule of Standard Prices for Tariff (E)] in the month;
AL = is the three-month London Metal Exchange (LME) sellers’ price for 99.7% high grade
aluminium ingot expressed in US Dollars per ton;
R/$ = the Rand/US Dollar exchange rate
Overview of the Electricity Contracts for
the Aluminium Industry (cont.)
Pricing clauses: Hillside Potline 3
•
A basic charge of R174.80 (+VAT= R199.27) per month for each point of delivery, which
charge shall be payable every month whether any electricity is used or not
•
A DEMAND CHARGE for each kilovolt-ampere of the maximum demand supplied during
peak hours in the month at the rate of R40.23 (+VAT= R45.86)
•
An ENERGY CHARGE at the rate of 7.26 cents (+VAT= 8.28c) per kilowatt-hour (kWh) of
electrical energy supplied in the month.
•
These charges are subject to floor and ceiling provisions, discounts and transmission
surcharges
•
On 1 January each year, since 2002, Eskom escalates the prices annually such that the
pricing in year n+1 is equal to the price in year n multiplied by the ratio between the
South African Producer Price Index, PPI (November in year n)/ PPI (November in year n1)
•
Unlike the contracts for Potlines 1 and 2, there are provisions for escalation of costs by
using the PPI
Overview of the Electricity Contracts for
the Aluminium Industry (cont.)
Figure 4: Difference between BHP prices and
comparable average Megaflex tariff
1.20
1.00
Megaflex tariff
over Hillside 1 & 2,
% difference
2002
-10%
2003
15%
2004
-12%
2005
-3%
2006
-31%
2007
-32%
2008
-26%
Average 2002-2008
-14%
2009
80%
2010
115%
2011
146%
2012
210%
2013 (till June)
166%
Average 2009 till
June 2013
143%
0.60
0.40
0.20
Hillside Potline 1&2
Jan-13
May-13
Sep-12
Jan-12
May-12
Sep-11
Jan-11
May-11
Sep-10
Jan-10
May-10
Sep-09
Jan-09
May-09
Sep-08
Jan-08
Hillside Potline 3
May-08
Sep-07
Jan-07
May-07
Sep-06
Jan-06
Average Megaflex
May-06
Sep-05
Jan-05
May-05
Sep-04
Jan-04
May-04
Sep-03
Jan-03
May-03
Sep-02
Jan-02
0.00
May-02
R/kWh
0.80
Year
Overview of the Electricity Contracts for
the Aluminium Industry (cont.)
Table: Difference between the smelter prices and Eskom’s operating costs
Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 (till
June)
Average
Megaflex
(R/kWh)
Hillside
Potlines
1&2
(R/kWh)
Hillside
Potline 3
(R/kWh)
Eskom’s
costs:
Annual
Reports
(R/kWh)
0.14
0.14
0.11
0.13
0.14
0.14
0.18
0.28
0.38
0.48
0.57
0.16
0.12
0.12
0.14
0.20
0.21
0.24
0.16
0.18
0.20
0.19
0.14
0.16
0.16
0.16
0.17
0.19
0.20
0.23
0.23
0.24
0.26
0.13
0.14
0.11
0.14
0.16
0.19
0.26
0.28
0.33
-
0.52
0.20
0.28
-
Hillside
Potlines 1 &
2,
% difference
over costs
Hillside
Potline 3,
% difference
over costs
Average
Megaflex,
%
difference
over costs
28%
-11%
12%
18%
15%
2%
18%
37%
30%
25%
-39%
-36%
-41%
40%
19%
18%
6%
-11%
-18%
-27%
14%
-5%
-11%
-7%
9%
35%
46%
Overview of the Electricity Contracts for
the Aluminium Industry (cont.)
Special pricing agreements, history and pricing clauses
• The different BHP contracts
LME and exchange rate
– Hillside Potlines 1 & 2
2001 Nightsave escalated by change in PPI
– Hillside Potline 3
– Mozal
Not in the public domain, Mozal contract re-negotiated in 2010 and no longer
linked to LME and exchange rate
– Bayside
• Interruptibility provision- max of 2hr/week at BHP’s cost;
Eskom can impose when grid is under immense pressure
Overview of the Electricity Contracts for
the Aluminium Industry (cont.)
Impact of these contracts on Eskom’s financials- embedded derivatives
•
•
•
NPAs, where the revenue is linked to commodity prices and foreign currency rates (mainly dollar)
or foreign production price indices, give rise to embedded derivatives
An embedded derivative is a provision in a contract that modifies the cash flow of a contract by
making it dependent on some underlying measurement
Combining derivatives with traditional contracts (embedding derivative), changes the way risk is
distributed among the parties to the contracts
Rmill
Income statement
•
•
•
•
•
Reviewed Reviewed 30
Audited 31
2006 2007 2008 2009 2010 2011 September September
March 2012
2011
2012
1318 4305 -1680 -9514 2284 -1261
334
698
236
Eskom’s contract with BHP accounted for 95% of the utility's embedded derivative liabilities
BHP has had a dispute with Eskom regarding:
the length of the contracts. Eskom referred the matter to NERSA which is investigating.
BHP accuses Eskom of having profited from the contracts between 1995 – 2008 when the
aluminium price was high, but now after the recession when the price fell Eskom does not want to
honour the downside of the contract.
Mozal renegotiated in 2010, Skorpion Zinc also in 2010
Dispute on duration of contracts - big effect on embedded derivatives
Impact on Eskom? Lowers credit rating, increases cost of borrowing
Overview of the Electricity Contracts for
the Aluminium Industry (cont.)
Implications of increased electricity prices to BHP Billiton on each level of the
aluminium value chain
•
Impact on BHP
Smelter financials not in public domain.
Bayside and Hillside, despite the preferential electricity rates, have allegedly shown
successive losses in the last few years.
Dominant, significant market power – may cut back production, or pass on costs
depending on import price ceiling; unlikely to pass on costs to export markets.
•
Impact on secondary smelters
No direct impact, use scrap mainly (small amounts of virgin aluminium).
Indirect impact – less virgin material, increases demand for scrap (particularly high
grade) which increases the price of scrap.
*Note that scrap cannot fully replace the use of virgin material
Main concern: Municipality electricity mark-ups and scrap pricing, availability and
quality
policy directive that scrap merchants offer preferential prices to local users of scrap
and first offer product to these local users is not yet in full effect
Limited ability to pass on cost increases
Cost Benefit Analysis – Modelling
Quantitative Analysis with Direct and Indirect Costs and Benefits
Calculated:
• Assess the impact of two scenarios, projected until 2020
–
–
Scenario 1: Maintain the status quo;
Scenario 2: Increase the tariffs to Megaflex levels (i.e. no subsidy)
• Assess the direct impact on the firm (smelters)
• Assess the indirect, second round, impacts on the downstream industries and
certain economy wide factors
Approach:
• Calculate Net Present Value (NPV) of each scenario to compare overall
outcomes.
• Future profit values are discounted at the prime lending rate of 8.5%.
• Data accuracy is a concern and the CBA should not to be looked at in
isolation.
• Impending litigation means that BHP will not release information easily
• CBA must be looked at in conjunction with legal and firm level analysis
Cost Benefit Analysis – Modelling (cont.)
Modelling Dynamics
• The model is driven by production (as a result of limited information available)
obtained from BHP on a quarterly and semi-annual basis.
• Output levels for BHP are fairly stable, except for 2008 and 2012. Thus there is
certainty regarding impacts on revenues, exports, imports and employment.
• In MA we use 3,2,1,0 weighting for the different years for Hillside so that a
smaller weight is assigned to 2012 production.
• Weighted Moving Average was used to project production from 2013-2020 for
Hillside.
Modelling Assumptions
• Subsidy for Mozal is the same for Hillside 3 and the subsidy for Bayside is same
for Hillside 1 and 2.
• 50% decline in production after Megaflex electricity price increase.
• Consumption multiplier = 2.89
• Employment multiplier (mining) = 0.5
• Export multiplier (mining) = 1.07
• Government fiscal multiplier = 1.6
Cost Benefit Analysis – Modelling (cont.)
Direct Effects (on the
BHP Smelters and
employees) – NPV
calculated for:
• Revenue and sales
from output and
production
• Exports
• Cost of production
including:
– raw material
input (imports
and locally
sourced)
– salaries,
wages, and
benefits
– electricity cost
– Profitability
and
– Taxation
Indirect Effects (economy-wide second round effects) – NPV
calculated for:
• Consumption effects on growth from: Employees’ salaries and
wages to the economic nodal area where the smelters are
located; Remittances repatriated out of South Africa and into
South Africa; Profits and resultant dividends and retained
earnings.
• Tax effects on growth from: Companies Tax; Income tax of
employees; VAT effects from consumption of employees.
• Subsidy effects on growth from: Unemployment Insurance;
Electricity effect on smelters and the rest of the economy;
• Impact on Downstream industries, including: Hulamin; Wispeco;
Zimalco etc.
• Environmental effect on the carbon footprint
• BHP Corporate Social Investment (CSI) effect on growth:
CSI programmes; Infrastructure upliftment/investment.
• Balance of payments: Imports of raw aluminium; Imports of
processed aluminium products; Remittances from foreign
employees working in South Africa; Exports of aluminium ingots;
Exports of processed aluminium products (downstream role
players); Remittances from South Africans working abroad at
Mozal.
Cost Benefit Analysis – Results (cont.)
Direct Effects: R000s: NPV for Scen 1 is R34,2 billion; NPV for Scen 2 is R18,6 billion
Revenue
Costs of Production
Profits from Operations
Taxation
Net Profits
Year
Scenario 1 Scenario 2 Scenario 1
Scenario 2
Scenario 1
Scenario 2
Scenario 1
Scenario 2
Scenario 1
Scenario 2
2005
R 11,401
R 11,401
R 7,605
R 7,467
R 3,795
R 3,934
R 1,101
R 1,140
R 2,693
R 2,793
2006
R 16,959
R 16,959
R 11,117
R 10,390
R 5,842
R 6,568
R 1,678
R 1,881
R 4,163
R 4,687
2007
R 18,158
R 18,158
R 11,027
R 10,096
R 7,130
R 8,061
R 2,041
R 2,302
R 5,088
R 5,758
2008
R 20,233
R 20,233
R 11,950
R 11,305
R 8,282
R 8,927
R 2,364
R 2,544
R 5,918
R 6,382
2009
R 13,139
R 13,139
R 8,160
R 9,535
R 4,979
R 3,604
R 1,442
R 1,057
R 3,536
R 2,546
2010
R 14,021
R 7,010
R 8,767
R 5,595
R 5,254
R 1,415
R 1,522
R 422
R 3,732
R 993
2011
R 15,261
R 7,612
R 9,526
R 6,500
R 5,735
R 1,111
R 1,661
R 338
R 4,074
R 772
2012
R 12,136
R 7,364
R 9,167
R 7,891
R 2,969
-R 527
R 880
-R 118
R 2,089
-R 409
2013
R 18,315
R 9,441
R 14,205
R 10,097
R 4,110
-R 655
R 1,212
-R 151
R 2,897
-R 503
2014
R 20,645
R 10,690
R 16,086
R 11,577
R 4,558
-R 887
R 1,342
-R 214
R 3,216
-R 672
2015
R 22,520
R 5,823
R 17,518
R 6,501
R 5,001
-R 678
R 1,471
-R 171
R 3,530
-R 507
2016
R 22,276
R 5,748
R 17,377
R 6,954
R 4,898
-R 1,206
R 1,448
-R 318
R 3,450
-R 888
2017
R 21,450
R0
R 16,883
R0
R 4,567
R0
R 1,361
R0
R 3,206
R0
2018
R 21,282
R0
R 16,833
R0
R 4,448
R0
R 1,333
R0
R 3,114
R0
2019
R 20,214
R0
R 16,132
R0
R 4,081
R0
R 1,237
R0
R 2,844
R0
2020
R 20,084
R0
R 16,111
R0
R 3,973
R0
R 1,214
R0
R 2,758
R0
Total
R 288,102
R 133,583
R 208,470
R 103,914
R 79,632
R 29,668
R 23,314
R 8,714
R 56,317
R 20,954
R0
R0
R0
-R 1 000 000
R0
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Net Profits - Scen 2
Net Profits - Scen 1
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
R 6 954 838
R 6 501 970
2009
R 11 577 387
R0
R 5 595 099
R 6 500 376
R 7 891 910
R 10 096 790
R 8 767 045
R 9 535 355
R 8 160 333
R 11 305 515
R 11 027 086
2008
R 16 883 199
R 17 377 455
R 17 518 470
R 16 086 558
R 9 167 232
R 10 097 407
R 2 000 000
R 10 390 738
2007
R 7 000 000
R 16 833 621
R 16 132 269
R 16 111 075
R 6 000 000
R 14 205 863
R 5 000 000
R 11 950 424
R 9 526 258
R 4 000 000
R 11 117 599
R 1 000 000
R 7 467 556
2006
Figure 6: Net Profits
Figure 5: Costs of Production - R000s
-R 2 000 000
Costs of Production - Scen 2
Costs of Production - Scen 1
R 3 000 000
R 7 605 959
2005
Cost Benefit Analysis – Results (cont.)
Cost Benefit Analysis – Results (cont.)
Figure 7: Indirect Effects as a Percentage of
the Cumulative Indirect Effect: Scenario 1
Figure 8: Indirect Effects as a Percentage of
the Cumulative Indirect Effect: Scenario 2
Consumption,
Profits and
Dividends
4%
BOP effects
Taxation
8%
Effects
2%
CSI effects
0%
CSI effects
0%
Taxation Effects
3%
BOP effects
6%
Consumption,
Profits and
Dividends
4%
Upstream and
Downstream
sectors
21%
Upstream and
Downstream
sectors
33%
Electricity
Capacity
effects
-65%
Electricity
Capacity effects
54%
Scenario 1: Status Quo - Indirect Effects
Scenario 2: No Subsidy - Indirect Effects
Cost Benefit Analysis – Results (cont.)
Indirect Effects – R000s: NPV for Scen 1 is –R135,6 billion; NPV for Scen 2 is R339,8 billion
Year
Consumption, Profits
and Dividends Effects
on the Economy
Upstream and
Taxation Effects on the
Downstream Sector Effects
Economy
on the Economy
Scenario 1 Scenario 2 Scenario 1 Scenario 2
Scenario 1
Scenario 2
Electricity Capacity on the
Economy
Scenario 1
Scenario 2
BOP effects on the
Economy
Scenario 1 Scenario 2
2005
R 2,606,792
R 4,395,561
R 1,765,373
R 1,882,661
R 15,493,680
R 15,493,680
R0
R0
R 165,049
R 171,154
2006
R 3,701,883
R 4,395,561
R 2,687,746
R 3,071,612
R 23,046,475
R 23,046,475
R0
R0
R 255,110
R 287,174
2007
R 4,422,189
R 5,203,057
R 3,271,905
R 3,751,027
R 18,948,777
R 18,948,777
R0
R0
R 311,791
R 352,829
2008
R 5,073,824
R 5,661,814
R 3,975,071
R 4,331,087
R 21,114,343
R 21,114,343
-R 17,980,775
-R 10,597,681
R 362,620
R 391,068
2009
R 3,490,021
R 3,150,120
R 2,369,238
R 1,828,477
R 13,712,184
R 13,712,184
-R 28,864,488
-R 16,444,627
R 216,686
R 156,029
2010
R 3,711,226
R 1,423,181
R 2,444,622
R 1,658,930
R 14,632,626
R 11,445,485
-R 39,173,233
R0
R 228,675
R 60,891
2011
R 4,087,226
R 1,331,133
R 2,661,736
R 586,691
R 15,926,612
R 12,426,830
-R 49,621,365
R 69,693
R 249,636
R 47,355
2012
R 2,546,658
R 592,641
R 1,800,242
-R 141,225
R 14,910,575
R 13,384,412
-R 46,842,359
-R 5,875,985
R 127,996
-R 25,094
2013
R 3,458,300
R 602,672
R 1,944,393
-R 191,385
R 24,889,555
R 18,391,470
-R 65,894,802
-R 1,174,216
R 177,527
-R 30,864
2014
R 3,842,509
R 563,760
R 2,163,229
-R 287,525
R 28,054,577
R 20,823,231
-R 76,671,367
-R 1,570,987
R 197,045
-R 41,223
2015
R 4,248,253
R 205,948
R 2,359,758
R 426,664
R 30,602,809
R 11,342,585
-R 89,802,389
R 24,927,525
R 216,295
-R 31,070
2016
R 4,349,881
-R 13,472
R 2,322,323
-R 477,057
R 30,271,241
R 11,197,179
-R 105,237,552
R 29,270,450
R 211,420
-R 54,424
2017
R 4,319,575
R0
R 2,184,742
R 775,248
R 29,149,719
R 11,197,179
-R 122,997,695
R 70,702,171
R 196,470
R0
2018
R 4,425,248
R0
R 2,140,353
R0
R 28,920,732
R 11,197,179
-R 143,857,460
R 82,690,984
R 190,849
R0
2019
R 4,381,264
R0
R 1,987,029
R0
R 27,469,104
R 11,197,179
-R 168,215,778
R 96,692,690
R 174,264
R0
2020
R 4,508,834
R0
R 1,949,960
R0
R 27,292,565
R 11,197,179
-R 196,697,090
R 113,064,550
R 169,037
R0
Total
R 63,173,681
R 27,511,977
R 38,027,722
R 17,215,206
R 364,435,575
R 236,115,369
-R1,151,856,352
R 381,754,567
R 3,450,470
R 1,283,827
Cost Benefit Analysis – Results (cont.)
Figure 9: NPV of Direct and Indirect Effects
from 2005-2020: R000s
Figure 10: NPV Annual Average from
2005-2020: R000s
R 358 352 003
Scenario 1 - Status Quo: Scenario 2 - No Subsidy:
NPV
NPV
R 23 890 134
Variance
-R 101 143
694
Figure
NPV
od
Direct
Effects
Scenario 19:
- Status
Quo:
Scenario
2 - No and
Subsidy:Indirect
Variance
Average
Annual Average
fromAnnual
2005-2020:
R000s
-R 6 742 913
-R 459 495
696
-R 30 633 046
Cost Benefit Analysis – Results (cont.)
Figure 11: Electricity Costs of Production: Variance between Current
Preferential Rates and Megaflex Rates - R000s
R 515 415 785
R 742 585 610
R 358 352 003
NPV TOTAL: 2005 Base year
(2005-2020)
NPV TOTAL: 2013 Base year
(2005-2020)
-R 399 226 245
-R 194 257 017
-R 101 143 694
Scenario 1: Status Quo
NPV TOTAL: 2013 Base year
(2013-2020)
Scenario 2: No Subsidy
The CBA shows that
Scenario 1 (the status quo)
results in a loss of NPV of in
the region of R101billion
per annum. This suggests
that increasing prices to
Megaflex rates implies that
the smelters would find it
financially unviable to
continue operations and
thus shut down.
This has a positive impact
on the economy as there is
extra electricity capacity
which can filter through to
the rest of the economy
will less adverse effects on
the rest of the economy.
However, any conclusion
based on these figures
alone would be partial.
This CBA has not taken into
account how this compares
to the loss to the economy
as a result of the carbon
footprint.
Conclusions
•
•
•
•
The impact of BHP on secondary aluminium level and foundries was limited (second level
of the value chain). Concerns were raised by these sectors around scrap pricing, quality
and availability as well as municipality tariffs.
The impact on Wispeco in the next level of the value chain, the semi fabrication level, is
also minimal given small volumes of ingots it buys from BHP and its ability to import this
at more or less the same price that BHP sells locally. This is because BHP prices its local
sales of re-melt ingots at levels at or close to import parity prices (IPP).
The impact on Hulamin, a large semi fabricator, is significant due to high cost of importing
billets as an alternative to BHP’s locally produced billets at Bayside. The cost of importing
value-added billet or slab is much higher than the price at which BHP sells locally. The
effect on Hulamin needs to be taken into account as Hulamin is a significant employer
(around 2000 employees) and is a large exporter, therefore contributing positively to the
Balance of Payments.
A key conclusion and policy recommendation is that any decision taken to increase BHP’s
electricity tariff to Megaflex levels should be combined with efforts to strengthen the
secondary aluminium value-chain through addressing municipality electricity pricing and
scrap issues (particularly the progress of the ITAC scrap policy directive), and local content
procurement (for the automotive sector) to cushion any negative impact the reduced/no
output from BHP smelters of primary aluminium would have on the value chain.
Conclusions (cont.)
•
•
•
The second leg of economic research involved a Cost Benefit Analysis of amending
electricity prices to the BHP smelters to Megaflex rates which general industry pays.
Given the lack of data from BHP and Eskom (due to upcoming litigation) the CBA results
be used in conjunction with the qualitative assessment.
Due to time constraints, it was not possible to compare the costs to the economy of loadshedding and the environmental impact.
According to the CBA:
–
–
–
–
–
–
–
–
•
•
Direct effects: NPV of Scenario 1 – Status Quo is estimated to be R 34,2 billion.
Indirect effects: NPV for Scenario 1 is –R135,6 billion
Cumulative effects: Total NPV for Scenario 1 is –R101,1 billion.
Direct effects: NPV for Scenario 2 – No Subsidy is R18,6 billion.
Indirect effects: NPV for Scenario 2 is R339,8 billion.
Cumulative effects: Total NPV for Scenario 2 is R358 billion.
Scenario 1 is better for BHP and the smelters but detrimental to the rest of the economy in
terms of the second round effects stemming from the impact of electricity capacity on the rest
of the economy. Scenario 2 has adverse direct effects on the smelter and its employees and
their dependents, but has far-reaching second and indirect benefits to the rest of the economy
due to the spare capacity of electricity.
This has implications on BHP’s future investments decision.
If the CBA results are to be considered and the increased capacity reduces load shedding
then the application of the standard Megaflex rates should be phased. Although one
manner, allowing for adjustments to more energy saving methods. Is Megaflex
appropriate for such heavy users of energy?
Any decision must be sensitive about message it sends to investors
Questions and Discussion