Eskom’s coal deals: Nersa steps in Benchmarking the price of the coal Eskom procures might bring some transparency to the overall procurement process.
aproposalby the National Energy Regulator of South Africa (Nersa) to benchmark the price of coal Eskom buys from mining companies will add muchneeded transparency to the procurement process, said an industry analyst.
The analyst, who asked not to be named because he is an active participant in the market and a former senior employee of Eskom, however said that the electricity utility had brought Nersa’s action upon itself.
Nersa’s proposal is to adjust the multi-year price determination (MYPD) methodology that Eskom uses in order to justify increases in the annual electricity tariffs.
In previous MYPDs, Eskom has claimed that above-inflation increases for primary energy – coal – has driven demands for similarly above-inflation tariff hikes.
Eskom gives an average cost of coal but Nersa is proposing that Eskom provide it with its primary energy costs on a powerstation-by-station basis. Currently, Eskom’s negotiations with mining firms are held behind closed doors, although knowledge of prices Eskom pays is still surprisingly common knowledge in the market.
While this will bring transparency to the MYPD process, and is a step away from indexation of the domestic coal market, it is a step that Eskom has largely created itself, the source said.
This is because the mix of coal Eskom buys has changed significantly from about 2008 when almost all the coal it bought was through long-term contracts or from cost plus mines.
However, in the last seven to eight years, Eskom has found it increasingly difficult to invest in the expansions of the fixed-cost mines that would provide replacement tons of low-cost coal.
As a result, it has sourced more coal from smaller suppliers who have no means of conveying the coal from mine to power station – as a fixed-cost contract would include – so that deliveries are by road. “You can add at least R150 per ton to the cost of buying coal if you deliver by road,” the source said, adding that about 30m tons (mt) of Eskom’s total burn of 118mt is delivered by this route today.
It’s the decline in Eskom’s ability to pay for expansions that was behind the failure of Exxaro Resources to renew a coal supply agreement with Eskom from its Arnot mine to Arnot power station.
Exxaro had asked Eskom to conduct due diligence into developing a mine extension at Arnot that, once completed, would have resulted in the availability of cheap coal supply. Without the expansion, Exxaro required an increase to the coal contract in order to justify mining from old areas at Arnot.
In the last two years, supply from established mines, including Arnot as well as Anglo’s New Denmark and Kriel mines and the Khutala operation of South32, have fallen about 1m tons owing to underinvestment in new resources.
Eskom had not responded to telephonic messages from finweek for comment at the time of going to press.
There is one happy spin-off to this situation, however.
Transparency in the setting of coal supply agreements would throw the spotlight on the cost of coal from Tegeta Exploration & Resources, a subsidiary of the Gupta family’s Oakbay Resources, to Eskom (also see page 32).
Tegeta’s R2.15bn acquisition of Optimum Coal Holdings, which was subject to business rescue proceedings, has attracted controversy because analysts can’t see how Tegeta can run the Optimum mine profitably when the former owner of the mine, Glencore, could not.
Transparency in the setting of coal supply agreements would throw the spotlight on the cost of coal from Tegeta Exploration & Resources, a subsidiary of the Gupta family’s Oakbay Resources, to Eskom.