International aluminium producer Alcan appears set to emerge as the first recipient of South Africa's newest industrial incentive, known as the 'Developmental Electricity Pricing Programme', or DEPP, which was signed off by Trade and Industry Minister Mandisi Mpahlwa late last week.
The DEPP concept was first approved by Cabinet in 2005, but the guidelines only came into effect on November 18, when they were published on the Department of Trade and Industry's (DTI's) website.
Under the scheme, the electricity incentive will still be negotiated by power utility Eskom, but the administration of DEPP will fall under the DTI, which will adjudicate applications for the incentive before approval is either sanctioned or denied.
The incentive has also been introduced as a way of sustaining South Africa's ability to attract energy-intensive investment, despite the fact that South Africa's supply-demand equation has tightened and government has disallowed Eskom from pursuing commodity-linked tariff structures, which underpinned the development of aluminium smelter complexes in Kwazulu-Natal in the 1990s and in Maputo, Mozambique, earlier in this century. Under new international accounting rules, those tariffs are regarded as 'embedded derivatives' and have the potential to cause serious financial-reporting instability.
In addition, government wanted the incentive to be administered by the DTI, which is the custodian of South Africa's many other industrial financing and incentives schemes. In fact, Engineering News has learned that DTI's incentive administrator, The Enterprise Organisation, is currently evaluating the Alcan application, which is more less certain to be approved ahead of Friday's signing ceremony at the Coega industrial development zone (IDZ), in the Eastern Cape. At the function, Alcan will sign a slew of agreements, including the crucial power agreement with Eskom and the DTI. Once concluded, the way will be opened for the construction of a $2,7-billion aluminium smelter in the IDZ, which has hitherto been in desperate search of an anchor tenant.
Power incentive additional to R1,93bn tax incentive
The power incentive would be received in addition to a R1,93-billion tax incentive approved by government and the South African Revenue Service in March, under the now defunct R10-billion strategic industry projects scheme, or SIP. The project, which had been approved for SIP earlier, was among the last batch to receive SIP approval, as it had to be resubmitted by Alcan, which inherited the project during its acquisition of Pechiney. The project was also reconfigured to embrace the proved AP35 technology instead of the new-generation AP50, initially proposed by Pechiney.
The project qualified as a 'preferred' investment under SIP, with the two pot rooms and the anode plant receiving the maximum allowance of R600-million each. The casthouse, meanwhile, received a tax allowance of R137-million, or 50% of the full allowance. All told, the full tax allowance is R1,93-billion over two phases, with the first expiring in 2010 and the second in 2015.
But the real deal clincher, given the global supply-demand imbalances for electricity, was the power deal. Over the life of the aluminium smelter, the power incentive would also be worth billions, given that the electricity tariff would be substantially lower than Eskom's already well-priced tariffs for industrial clients.
It would also absorb a large portion of the 3 500 MW available under DEPP, as the Coega Aluminium smelter's electricity demand will be between 1 082 MW and 1 180 MW, depending on the final configuration. However, it is understood that the developers are likely to proceed with a scaled-up version, which would take the facility's capacity to around 720 000 t/y from two pot lines, instead of the 660 000 t/y initially envisaged under a so-called 'base case'. It is understood that the DTI has already received several other applications for DEPP, which will only consider projects absorbing more t
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