Eskom needs coal, or else...

As mines pro­duce less, the power util­ity will strug­gle to se­cure a long-term sup­ply

CityPress - - Business - SU­SAN COM­RIE su­san.com­rie@city­press.co.za

South Africa is fac­ing a re­oc­cur­rence of power short­ages and en­ergy cost hikes, all at great ex­pense to the econ­omy, if Eskom doesn’t se­cure its long-term coal sup­ply. Dur­ing a pre­sen­ta­tion at the IHS En­ergy SA Coal Ex­ports Con­fer­ence in Cape Town this week, Be­van Jones, CEO of Thebe Ven­tures, il­lus­trated three fu­ture coal sce­nar­ios – two of which end with the word ‘panic’ and Eskom pay­ing ex­or­bi­tantly high prices for coal.

Coal an­a­lyst Xavier Prevost said: “We are run­ning out of pro­duc­tion. The big mines are pro­duc­ing less and less.

“The small mines that are meant to re­place them are not hap­pen­ing, be­cause we are get­ting so con­strained with fi­nances and in­vest­ment,” he added.

The prob­lem that Jones and oth­ers out­lined was that while Eskom had se­cured its coal sup­ply in the short term, the power util­ity was still fac­ing a po­ten­tial coal cliff as pro­duc­tion from its long-term, cost-plus mines starts to fall.

“What we don’t want is to keep kick­ing the can down the road, and then in three to four years’ time find out no one has built the coal mines and we don’t have coal to run our coal-fired sta­tions and we’ve got blackouts,” Jones said, speak­ing in his per­sonal ca­pac­ity.

Eskom se­nior gen­eral man­ager of pri­mary en­ergy Vusi Mboweni said the power util­ity needed to pro­cure 2 bil­lion tons of coal over the next 35 years.

While this rep­re­sents a huge op­por­tu­nity for coal pro­duc­ers, there’s lit­tle agree­ment on how to fund the mines that will pro­duce this re­source, while also keep­ing Eskom’s coal costs un­der con­trol.

Eskom is fac­ing a R39 bil­lion re­cap­i­tal­i­sa­tion bill for its cost­plus mines, where it has tra­di­tion­ally sourced most of its coal.

While Prevost ad­vo­cated con­tin­u­ing with this model, new Eskom CEO Brian Molefe has said that he wanted to move away from cost-plus to procur­ing coal on the “open mar­ket”, plac­ing the capex bur­den on the mines in­stead of on Eskom’s bal­ance sheet.

Cham­ber of Mines CEO Roger Bax­ter said: “As we go for­ward, a more mar­ket-based pric­ing ap­proach, which in­cen­tivises the pri­vate sec­tor to raise the cap­i­tal to in­vest in coal mines, is go­ing to be nec­es­sary.

“Re­mem­ber, over the next 10 to 15 years, we’re talk­ing about R60 bil­lion to R100 bil­lion of cap­i­tal that’s go­ing to have to be in­vested in coal min­ing,” he added.

Jones, who founded the trad­ing plat­form Global Coal, be­lieved that the way to at­tract the nec­es­sary in­vest­ment was to es­tab­lish an open, trans­par­ent mar­ket­place for coal, where grades are stan­dard­ised and prices are dis­closed.

“When you move to a mar­ket price, there’s one price for power and in ef­fect one price for the dif­fer­ent grades of coal … If cap­i­tal needs to be spent, that comes into the mar­ket price,” he said.

“If we don’t do this, we risk a sit­u­a­tion in a few years’ time where no new mines have been built and Eskom faces a coal short­age,” Jones added.

“Eskom has to se­cure coal at what­ever [price] and, un­for­tu­nately, un­less the govern­ment steps in some way, which wouldn’t be the best thing, Eskom would be des­per­ate and the mine would have it over a bar­rel and they would be able to charge what­ever price they wanted to.” Jones also be­lieved an open mar­ket re­moves op­por­tu­ni­ties for crony­ism, tak­ing some of the pres­sure off Eskom to con­tin­u­ally jus­tify the deals it signs. “The pro­ducer and the con­sumers are the ones who ben­e­fit in a trans­par­ent mar­ket, the peo­ple who lose out are the agents, the ten­der­preneurs, the hang­er­son … In a mar­ket en­vi­ron­ment, there’s no room for the agents to add on lay­ers and lay­ers of fat.”

How­ever, while Jones pro­poses a com­pet­i­tive, openmar­ket strat­egy to keep costs sus­tain­able in the long run, the govern­ment is con­sid­er­ing an in­ter­ven­tion­ist model. Mboweni told del­e­gates that Eskom had been ex­pe­ri­enc­ing in­fla­tion of 17% a year in the price of coal.

Mosa Mabuza, the deputy di­rec­tor-gen­eral of regulation and in­vest­ment pro­mo­tion in the depart­ment of min­eral re­sources, told City Press in an in­ter­view: “Seven­teen per­cent per an­num, now that’s ab­surd. I will be fail­ing in my job if I al­low the mar­ket to be run­ning on a frolic of its own like that.”

Tra­di­tion­ally, the ex­port mar­ket has de­manded higher grades of coal, but with coun­tries like In­dia buy­ing up lower grades of coal, Eskom faces the risk of com­pe­ti­tion for some types of do­mes­tic coal. If this hap­pens, Mabuza said the govern­ment would con­sider declar­ing the grade that Eskom uses as a strate­gic re­source.

“The beauty is that coal is not ho­moge­nous; it has got all kinds of qual­i­ties. And there are some qual­i­ties where we’ll have to re­strict,” Mabuza said.

“We have 65 bil­lion tons of coal re­sources. In re­serves, prob­a­bly 30 bil­lion tons to 35 bil­lion tons. Eskom only needs 2 bil­lion tons of that … so if it means we pull a reg­u­la­tory lever that means we pro­tect the 2 bil­lion tons, then this 2 bil­lion tons will have to be sub­ject to cer­tain terms and con­di­tions.”

PHOTO: JENS FRIIS

KEEP­ING THE LIGHTS ON The paras­tatal needs to pro­cure 2 bil­lion tons of coal over the next 35 years

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