comments from fapa on eskom’s request for a tariff … fapa members are the smelters of chrome,...

Comments from FAPA on Eskom’s request for a Tariff Increase

1

Presented by: Dr Jurg ZaaymanChairman: Ferro Alloy Producers’ Association

FAPAFERRO ALLOY PRODUCERS ASSOCIATION

*************

2

FAPA members are the Smelters of Chrome,

Manganese and Silicon Alloys


*************

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

3


*************

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.

4


*************

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

5


*************

6


*************



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)

7


*************



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

8


*************



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

9


*************

Eskom Tariffs are too High

331% over 10 years

10


*************

Eskom Tariffs are too High

Source: EIA, IAE, Statista, OANDA, ICDA

Relative National Electricity Prices in 2014/2015

11


*************

Eskom Tariffs are too high

SA is exporting jobs to China

Unemployment rate > 27.7%

SA has lost ferrochrome market share to China

13

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)

12


*************


80% of World Cr and Mn ore deposits

13


*************


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

14


*************

Eskom has entered a

Utility Death Spiral

Source: Eskom

15


*************

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

16


*************

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 ?

17


*************

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

18


*************

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

19


*************

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

20


*************

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

21


*************

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

22


*************

Questions ?

comments from fapa on eskom’s request for a tariff … fapa members are the smelters of chrome,...

Documents