Eskom’s coal deals: Nersa steps in Bench­mark­ing the price of the coal Eskom pro­cures might bring some trans­parency to the over­all pro­cure­ment process.

Finweek English Edition - - THE WEEK - Ed­i­to­rial@fin­week.co.za

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.

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