Opposition to Eskom's World Bank Loan is hot air

Environmentalists vent frustration but ignore bigger picture
by Galen Sher

If you haven't heard already, Eskom has applied to the World Bank for a $3.75bn loan to cover some of its enormous financing gap. The majority of the loan ($3bn) will go towards the 4,800 MW Medupi coal-fired power station in Limpopo. Understandably, environmentalists in South Africa and abroad are concerned that the World Bank should not finance power generation based on fossil fuels. While it is good that people around the world are concerned about the environmental consequences of World Bank investments, much of the opposition is principle-based and lacks a broader perspective.

1. Medupi will be constructed regardless of the outcome of the World Bank loan

Construction of Medupi began in 2007 and has slowed since financing became more expensive. However, the project is going ahead with a coal-supply agreement recently confirmed. Opposition to the World Bank loan often ignores the fact that construction of Medupi will continue regardless of the outcome of the loan application.

2. There will be severe regional consequences if Medupi does not go ahead

South Africa supplies "60 percent of all electricity produced in sub-Saharan Africa and our neighbors Botswana, Lesotho, Namibia, Swaziland and Zimbabwe all rely on Eskom for their electricity."

Eskom would have to redirect funding from other projects (including renewable energy projects) to finance Medupi. Failing this redirection, Eskom will have to apply for further electricity price increases to finance Medupi.

Medupi will also generate job opportunities for workers in Limpopo.

3. The World Bank loan will also fund renewable energy projects

The balance of the loan, some "$745 million, will be invested in wind and concentrated solar power projects, each generating 100 MW, and in various efficiency improvements". Pravin Gordhan

4. The construction of Medupi must be seen in the context of South Africa's national climate change policy

South Africa is pursuing reductions in carbon emmissions of "34% by 2020 and 43% by 2025" (Pravin Gordhan). As long as the construction of Medupi and other coal-fired power plants in South Africa are compatible with these reduction targets, it is debatable whether construction of these power plants should be opposed at all.

Eskom has also undertaken efficiency improvements at Medupi to reduce coal and water consumption at the power station. The construction has also passed its environmental impact assessment through the Department of Trade and Energy. These are at least a small comfort.

Now, instead of getting frustrated with the environmental implications of such coal-fired power stations, the public should be more concerned with the potential corruption in the award of the contract to Hitachi to construct Medupi and Kusile - contracts valued at some R39bn!

The benefits of aluminium smelters and Eskom's risky contracts

By Galen Sher

The context
At Creamer Media's Engineering News, Matthew Hill has discussed a 2008 Econometrix report, which says the South Africa enjoys "enormous" benefits from its controversial aluminium smelters.

The report was commissioned in 2008 by BHP Billiton. Southern Africa has three aluminium smelters, two in Richards Bay and one in Maputo, all drawing their power from Eskom. They are part of Eskom's controversial undisclosed deals, obtaining power at much-reduced rates. The smelters have been criticised because:

1. They use large amounts of electricity - as much as 5% of South Africa's total electricity consumption.


2. They obtain their electricity at low cost, which is seen as inequitable.


3. They are a capital (machinery)-intensive use of resources, rather than a labour-intensive use of resources, and hence they do not meet South Africa's employment generation objectives.

Risky contracts
None of this is new. However, the article makes a striking observation:

Under the terms of its contract with Eskom, BHP Billiton pays less for power when the aluminium price falls and more when it climbs. For Eskom, the economic crisis of 2007 and 2008, which led to precipitous declines in commodity prices, including the price of aluminium, blew in the perfect storm, with large chunks of power reportedly supplied to the smelters at below cost. [emphasis added]

Any actuary would immediately spot these contract terms as being extremely risky for Eskom. The cost to Eskom of providing electricity has virtually no relationship to the aluminium price. Therefore, these contract terms effectively place Eskom in a position where it has taken an outright bet on the aluminium price. Specifically, when the contracts were signed Eskom effectively took a wager that the aluminium price would continue to rise at least as fast as inflation.

The aluminium price graph below (Source: London Metals Exchange) shows the aluminium price hovering between $2500/t and $3000/t until late 2008 when the financial crisis broke in earnest, after which the price drops to some $1300/t in March 2009. Today the price has recovered only to some $2200/t. Therefore, from March 2009 to today Eskom has been forced to provide the smelters with low-cost electricity at a time when the utility could least afford it. This situation has arisen through Eskom's own folly in entering into such risky contracts and failing to provide adequately for the risk.



The benefits of smelters
Notwithstanding the costs incurred through providing them with cheap electricity, Southern Africa's smelters have given the region substantial economic benefits, according to the unreleased Econometrix report:

1. The smelters employed more than 3 200 employees and 2 800 contractors when the report was written


2. contributing R1,3-billion in corporate tax to the South African and Mozambique governments


3. it was estimated that about 100 000 South African citizens depended on the Bayside and Hillside smelters for their livelihoods


4. Foreign currency earned from exports... [were] more than R21-billion. [Net of imports, the smelters earned the region R12 billion in foreign exchange.]


5. The facilities comprised around 1% of gross regional product.

The report goes on to argue that South African investment in aluminium smelters should be increased, not reduced, at the time of writing. If only Engineering News, BHP Billiton or Parliament would release the full report to the public.