Energy crisis gives Rio doubt on Coega, Mathabo le Roux, B Day

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Energy crisis gives Rio doubt on Coega



Mathabo le Roux, Business Day, Johannesburg, 14 February 2008

The long-awaited R21bn aluminium smelter investment at Coega may not happen as soon as expected, after mining giant Rio Tinto Alcan expressed doubt yesterday about the future of the project because electricity supply was not guaranteed.

According to Bloomberg, Rio Tinto CE Tom Albanese said at a results presentation the group would not give the green light for the smelter until new power plants had been built.

The Coega project’s local spokesman, Robert Valdmanis, maintained that Albanese’s stance was “nothing new” and that “from our point of view we are continuing our work”. “We have confidence in ourselves and confidence in Eskom, and that is our view on the ground,” Valdmanis said.

But Albanese was resolute, saying SA must “prove” it had a solution to the power crisis.

In the strongest indication yet that Rio Tinto might still pull the plug on the mammoth project, Albanese reportedly said the group would want to see “not just conceptually on paper these power generation assets being talked about, but we want to see them actually being built on the ground ... before we were to commit to construction of Coega on the ground”.

Doubts about the future of the project were first raised when Eskom’s finance director, Bongani Nqwababa, expressed concern last month about bringing new energy-intensive investments on stream while the utility’s reserve margins were well below international benchmarks.

Eskom has been load- shedding daily to keep its systems running. T he power supply to large industrial users has been cut to 90% of actual requirement, in a rationing drive expected to continue until the end of the year and beyond.

Despite Eskom’s misgivings, state officials have consistently maintained that the smelter project would go ahead.

The trade and industry department’s chief director of industry policy, Nimrod Zalk, said recently while the state would be more circumspect in future about offering preferential power price agreements to lure electricity- intensive investments to SA, contractual commitments prohibited such agreements from being revisited retrospectively.

Minerals and Energy Minister Buyelwa Sonjica said last week the state would persist with its developmental electricity programme, giving cheap power to foreign investors, with power saved through its energy efficiency campaign earmarked for distribution to such investments.

If Eskom were unable to supply the Coega smelter with adequate power, it would have to pay Rio Tinto heavy fines. But it appears that Rio Tinto itself is considering walking away from the project.

The aluminium smelter at Coega would be SA’s largest greenfield investment to date. The project has been a marathon eight years in the making.

Because of the vast amount of electricity required for smelting — 1355MW would be consumed at full capacity — the project hinged on Eskom’s ability to guarantee sufficient power at a low price.

A pricing agreement was reached at the end of November, but Eskom has since run critically short of power and is unable to fully supply existing industry in SA.

Gas turbines to be build by independent power producer Ipsa at Coega have been mooted as a possible interim source of power for the project until Eskom brings additional generating capacity on stream.

However, the economics of such an arrangement are extremely questionable. The gas turbines will run on diesel until liquefied natural gas supplies are ensured — which is understood to be several years away.

At current diesel prices, it would cost upwards of R1,50/kWh to generate power from the turbines, industry analysts have confirmed.

Eskom is understood to have guaranteed the Coega project electricity at 14c/kWh.

From: http://www.businessday.co.za/articles/topstories.aspx?ID=BD4A705999

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