Green Jobs

A Government Deluded: Alcan’s Continued Threat to South Africa’s Energy Security - 28 February 2008

By Tristen Taylor
Energy Policy Officer, Earthlife Africa Johannesburg

The recent energy shortage highlighted the utter economic insanity of the proposed Alcan aluminium smelter at Coega. The proposed smelter will consume 1350MW of electricity, or 4% of the nation’s total usage. One smelter employing a thousand people will need as much electricity as the entire city of Port Elizabeth requires.

Simply put, there is not electricity in the current system to supply present needs, as witnessed by the recent rolling blackouts that plunged this nation into a crisis and surely whittled down the prospects of economic growth for 2008. Adding another large scale user into the system will add further pressure to an already shaky electricity supply situation, resulting in more blackouts and possible job losses. In fact, there would have been no blackouts in December 2007 and January 2008 if existing aluminium smelters had been turned off.

Local and national opposition to the proposed smelter has been ongoing since 2006, and the question of Alcan’s electricity grab is now part of the national agenda. The technical experts, civil society, unions and the general public are all in agreement, power for existing users before multinationals like Alcan. Even the business press—natural supporters of industrial development and foreign direct investment—has rounded upon the Government and Alcan. Rob Rose wrote the following in a Business Day editorial (04/06/07):

“The gall of the government’s Lords of Darkness, in seeking to slap fines on its citizens for using electricity when these officials are willing to sell their souls to attract a power-guzzling smelter, tells you much.

“And their efforts to sweep away the tumbleweeds from the forlorn industrial development zone hint at a desperation for political validation for Coega.�

This quote and the Government’s continued, reckless support for the Alcan smelter hints at the structural model of South Africa’s economy, inherited from Apartheid and continued under the Thabo Mbeki, Trevor Manuel and Chamber of Mines troika. The backbone of the economy has and continues to be energy intensive industries whose large profits (including extravagant CEO bonuses) depend upon cheap and dirty electricity from Eskom’s coal-fired power stations. Government elites have designed and maintained an economic structure that is designed to provide low-cost energy for their fellow elites in big business. It is South Africa’s poor who bear the real costs through polluted environments, restricted access to electricity, and dangerous, back-breaking labour in coal mines.

This economic model—cheap energy for wealthy corporations—is being locked in with recent government policies. In December 2006, Eskom and the Government signed a raft of deals with Alcan under the Developmental Electricity Pricing Programme (DEPP). The DEPP, which was never sent to Parliament, provides a special tariff for foreign corporations that want to build high electricity usage, industrial plant in South Africa. The DEPP ensures that the tariff will be cheaper than anywhere else in the world (or, at least, on par with the next cheapest supplier of electricity) and will be low enough to guarantee the corporation a profitable internal rate of return. Contracts signed under the DEPP are subject to confidentiality clauses, meaning that the exact tariff will not be subject to public scrutiny.

What we do know is that the electricity contract to Alcan’s proposed aluminium smelter at Coega will be for the next 25 years and for 1350MW of electricity. The tariff could be as low as 12c/kWh. The indirect financial subsidies (building of transmission lines and externalised costs of generation) to Alcan will top over R12 billion. Earthlife Africa Johannesburg is preparing to take Eskom to court to force disclosure of the tariff to Alcan.

This at a time when Eskom is short of generating capacity, raising domestic tariffs, loaning from international finance capital, and is embarking on R300 billion CAPEX plan. This R300 billion will have to be recovered through revenue; that means you, me, and millions of other South Africans will pay for the cheap and dirty electricity that will generate obscene profits for local and foreign corporations.

Scrapping the power contract with Alcan would be a minor retreat from this economic policy, and, possibly, open up the doors to further examination of other power contracts such as BHP Billiton’s smelters. Hence, the Government’s extreme reluctance to do what is in the best interest of the nation; i.e. secure supply for pre-existing users of electricity before giving it away to foreign users. It does this at great risk. The mining industry employs far more workers than Alcan would (400,000 compared to 1,000) and may have to shed jobs if the electricity supply situation deteriorates. This could spark a recession.

There is another reason the Government remains committed to Alcan; political validation for Coega. Long slated as a white elephant, the Coega IDZ is one of President Mbeki’s pet projects and a cornerstone of a macro-economic policy designed to be as accommodating to foreign capital as possible. Coega is a free trade zone where foreign investors would receive import/export tariff waivers and other subsidies in return for building industrial plant. Despite this and the plaintive pleas from the Coega Development Corporation, nobody invested until Alcan figured out that it could obtain the world’s cheapest electricity at a rate less than what South African industrial users pay. If the Alcan contract is scrapped and Alcan returns to Canada and defrauds electricity users there (see box), Coega becomes the symbol of failed economic policy during the Mbeki era. Politicians are scrambling to save face.

The latest bid (Feb. 2008) to save Coega comes in the form of a proposal to power the Alcan smelter via an open-cycle gas turbine (OCGT) plant owned and operated by Ipsa. The natural gas for the OGCT plant would come from a PetroSA refinery also to be built at Coega. On the surface, this would seem a workable solution, but only on the surface. The OCGT plant would initially run on diesel, one of the most expensive methods to generate electricity, and would then be converted to natural gas, which is still more expensive than electricity from Eskom’s current or future coal-fired plants. Ipsa will not sell the power directly to Alcan, but would sell it to Eskom who would then resell it to Alcan. While the contractual details between Alcan and Eskom remain state secrets, it is logical to suppose that the tariff set under that deal is based upon electricity generated by coal. The reason Alcan wants to build a smelter in South Africa is cheap power; electricity is the main cost in producing aluminium.

Given that we already do not have enough power to go around shouldn’t Eskom be buying power from Ipsa to meet current demands and not supplying an additional, optional user? Once again, South Africans have a lower priority in terms of supply than a foreign user.

Furthermore, the use of natural gas as a method of generating electricity is fraught with long-term economic and environmental dangers. Natural gas is a finite resource, of which South Africa is not blessed with abundant supplies. Globally speaking, natural gas supplies are set to peak and then decline, resulting in price escalations coupled with rising demand. As a recent GroundWork Report (Peak Poison, pg. 89) states:

“…gas depletion is happening much faster than assumed and those who hope that gas will provide a ‘bridge’ to a clean energy future will find the bridge collapsing. And while gas burns cleaner than oil, the scale of losses undermines the environmental claims. Flaring releases millions of tonnes of carbon dioxide while venting and leaks release methane which is twenty times more powerful as a greenhouse gas.�

If the OCGT plant is set into reality, Eskom could be placed in the sticky situation of having to buy increasingly expensive power from Ipsa and then having to sell cheap power to Alcan at a loss. Is the Government prepared to lock the South African nation into a loss-making deal merely to save face? The answer looks like a resounding yes.