BHP in dispute over cheap power

BHP Billiton has become embroiled in a public dispute in South Africa over the price its aluminium smelters pay for electricity amid mounting fears that power shortages will occur this winter as demand rises.

The South African power utility Eskom has requested users to cut power usage 10 per cent as it seeks ways to cope with rising demand and declining power reserves.

And, amid rising speculation over the low price BHP pays for its electricity under long-term contracts, Eskom has called on the country's energy regulator to review the price BHP pays.

"Our aluminium business has always paid more for electricity than the cost of generation and, for many years, has paid well above the market rate for power," BHP said in an emailed statement, according to local media reports.

The business newspaper Beeld reported late last week that Eskom is selling electricity to BHP's aluminium smelters, Hillside in Richards Bay and Mozal in Mozambique, for half the R41¢ (4¢) it costs to produce one kilowatt-hour.

Under the agreement, BHP pays a reported R23¢/kWh at the Hillside smelter and R34¢ at Mozal, which is substantially less than the R1.61 paid by industrial power users and the R1.40 rate paid by households.

"While the agreements will now be in the public domain, we remain firm in our belief that the negotiated pricing agreements are legally binding," BHP said.

BHP entered into its initial contract with Eskom in 1992, with the contract to run until 2028.

However, faced with the need to fund the development of more power stations to cater to rising electricity demand, Eskom has been seeking to renegotiate the contract since at least 2009.

The contracts were entered into on the basis that Eskom's excess capacity was not going to be absorbed through normal economic growth for many years, even decades, although that has changed.

The price was also related to the international price of aluminium and the rand/US dollar exchange rate, BHP said, so that the true price paid could be calculated only over the full life of the contracts.

BHP consumed almost 10 per cent of Eskom's output, Eskom spokeswoman Hillary Joffe said.

The average tariff of other large mining companies was R56¢/kWh, Ms Joffe said, according to the reports.

Eskom had also signed a special agreement with BHP, which included an "interruptibility" clause allowing the utility to shut BHP's smelters for a set period when the grid came under pressure, she said.