The hidden cost of Eskom's electricity deals with smelters

Daily Maverick

2 days ago

Eskom, Nersa and the Ministry of Energy & Electricity must explain why energy-intensive smelters deserve these deals – and why other commercial, industrial, manufacturing and mining customers, and ordinary consumers, should foot the bill.
A fierce debate has erupted over the preferential electricity pricing deals – known as Negotiated Pricing Agreements (NPAs) – that Eskom has struck with major industrial users like South32's Hillside aluminium smelter and ferrochrome producers.
Government insists these deals are vital to protect jobs and exports, but critics say they lack transparency, impose costs on other customers and ordinary consumers, and contradict the principles of a fair and competitive electricity market.
Hillside: South Africa's 'congealed electricity'
South32's Hillside Aluminium smelter in Richards Bay is one of the largest of its kind globally, and a cornerstone of South Africa's aluminium industry. With no local bauxite reserves, Hillside relies on imported feedstock and vast amounts of electricity – 10.3 TWh per year, around 5.6% of Eskom's total sales.
Under the 10-year NPA approved by Nersa in 2021, Hillside pays a discounted rate for electricity that currently amounts to around R10-billion per year less than it would pay on Eskom's standard Megaflex tariff for mines and large industry. The effective discount over the life of the agreement is about 50%.
Interruptability vs affordability
Eskom justifies this discount by pointing to Hillside's role in stabilising the grid. The smelter's operations can be interrupted briefly during supply shortfalls, providing a form of demand-side flexibility that Eskom can use instead of reserve generation.
But according to a recent and critical analysis by Meridian Economics, this function could be replicated – more cheaply – using 1.2 GW of two-hour battery energy storage. Using current battery procurement prices from the IPP Office, such a solution would cost less than R3-billion per year, suggesting a net discount of R7-billion annually to Hillside.
The case for socioeconomic value
Supporters of the NPA argue it helps preserve jobs and downstream aluminium beneficiation. Hillside employs about 1,800 workers directly and supplies 27% of its output domestically.
But critics say this argument is based on false binaries – that without the NPA, the smelter would close and jobs would vanish. Instead, the electricity used at Hillside could be reallocated to smaller businesses, potentially yielding broader and more resilient economic benefits.
The real question, then, is not whether Hillside provides value, but whether that value exceeds what other sectors could generate with the same power.
Nersa and the fog of regulation
The National Energy Regulator of South Africa (Nersa) approved the Hillside NPA in 2021, but the process was opaque. The decision lacked detailed economic modelling, failed to evaluate alternatives like battery storage, and made no attempt to compare Hillside's benefit to that of alternative electricity uses. It would further appear that no other party in South Africa has done a proper economic analysis and calculation of the real socioeconomic benefits of the Hillside NPA.
Furthermore, key economic inputs – like the pricing escalation clause and aluminium price 'upside' mechanisms – were based on unclear rationale. Although the NPA was touted as free of embedded derivatives, Meridian Economics argues that a call-option structure remains embedded in the deal.
Cabinet's broader move — more NPAs are coming
In a related development, the Cabinet has just approved a framework to extend NPAs to South Africa's ferrochrome and alloys smelters – long-time industrial electricity users struggling with soaring electricity tariffs.
According to Energy and Electricity Minister Kgosientsho Ramokgopa, the aim is to protect energy-intensive exporters and maintain South Africa's industrial base.
But this raises more questions than answers: Are these deals being driven by sound economic analysis and proper power planning, or by ad hoc industrial policy dressed up as regulation?
A system at odds with reform
Eskom is in financial distress. Other customers – particularly households and SMEs – are paying ever-higher prices for less reliable power. Load shedding, grid instability and rising tariffs have become hallmarks of the crisis.
And yet, one of Eskom's biggest customers pays half-price for electricity – a situation kept under wraps until civil society group Open Secrets forced publication of the full Hillside NPA. That it took four years for civil society to scrutinise the deal signals how deeply broken the oversight processes are.
Towards a transparent future
The principle of cross-subsidisation can be legitimate, but only when clearly justified. Preferential electricity pricing must be scrutinised like any public subsidy: through open modelling, public hearings and clear metrics of cost-benefit. Right now, that is not happening.
Eskom, Nersa and the Ministry of Energy & Electricity must explain why energy-intensive smelters deserve these deals – and why other commercial, industrial, manufacturing and mining customers, and ordinary consumers, should foot the bill.
Without that, NPAs risk entrenching elite privilege at the expense of national equity, economic dynamism and the future of South Africa's energy system. DM