Eskom fails to land better coal deals
Eskom, the power utility that supplies virtually all of SA’s energy, has been unable to renegotiate almost all its identified coal contracts that it regards as necessary to cut costs and the net cost of electricity. Parliament heard that out of the negotiations with the identified seven suppliers, only one has yielded an indirect benefit to Eskom.
Eskom, the power utility that supplies virtually all of SA’s energy, has been unable to renegotiate almost all its identified coal contracts that it regards as necessary to cut costs and the net cost of electricity.
Parliament heard that out of the negotiations with the identified seven suppliers, only one has yielded an indirect benefit to Eskom. This is related to an indirect saving on changing the loading point of an existing contract, thereby reducing the logistics cost.
The power utility, which is battling to stabilise its finances and is burdened with a debt load of almost R500bn it cannot service from revenue, has been pushing to renegotiate coal contracts and agreements signed with independent power producers (IPPs) to reduce the net cost of electricity for consumers. IPPs and the investor community have warned that a renegotiation of contracts will undermine investor sentiment and cast doubt on the government’s integrity in honouring contractual obligations.
Briefing parliament’s appropriations committee on Friday on various matters including deviations and expansions, Eskom’s executives said key cost reduction levers included the optimisation of the coal inventory by reducing coal deliveries to minimum contractual levels for all contracts.
In addition, due to the low demand for electricity in the first half of 2020 amid a slump in economic activity due to Covid-19 lockdowns, force majeure letters were issued to suppliers and engagements are under way to reduce coal deliveries to below the minimum contractual levels.
“These operational requirements posed challenges to the renegotiation process as some suppliers wanted the resolution of operational issues as a prerequisite for any engagements on cost-reduction initiatives. Given the current high stock levels, an increase in their monthly volumes back to nominal levels is not feasible,” Eskom said in a submission to MPs.
The utility said it was unsuccessful in achieving the desired outcomes of renegotiating the prices down and “therefore the direct savings value attached to the above high-priced contract renegotiation initiatives are now valued at 0”.
Eskom’s primary energy
costs rose about 17% in 2019, due to higher coal charges.
The utility has burnt more than 100-million tonnes of coal annually for at least a decade. The costs have also been pushed up by increased production from IPPs. It has had to pay a set rate for the energy supplied by the IPPs.
Eskom CEO André de Ruyter said all the coal contracts bar one are less than two years long, thus are short term. A 12-year contract that remains is with the company Mzimkhulu, he said.
According to previous reports, Mzimkhulu is a coal supply company owned by erstwhile Eskom board chair Jabu Mabuza’s brother-in-law, Themba Langa.
In 2019, Mabuza told the Zondo commission of inquiry into state capture that he had declared his long-standing relationship with Langa, and said he did not sit in any board meetings regarding mining at Eskom.
Eskom was still working to diversify its coal supply base and reduce costs, De Ruyter told MPs. The power utility is aiming to facilitate the entry of more black-owned suppliers in the coal supply chain, he said.
Speaking on the issue of deviations and expansions, Eskom CFO Calib Cassim said out of all the contracts Eskom has with various suppliers, the power utility had applied to the Treasury for 30 deviations and 46 expansions.
Deviations and expansions are invoked when departments and entities ask to be exempted from following due tendering processes as stipulated in the Public Finance Management Act, citing emergencies or a single capable provider. However, these are often open to abuse and corruption.
In Eskom’s case, 10 deviations and five expansions were supported by the Treasury, while the rest were conditionally supported, rejected or withdrawn. Eskom entered into 1,109 new contracts for the 2021 financial year, and it has 4,034 open contracts.
“Eskom and the National Treasury are engaging at a higher level to agree on the acceptable turnaround time to process the applications.
“There are now regular meetings scheduled between the parties,” Cassim said.
THE UTILITY SAID IT WAS UNSUCCESSFUL IN ACHIEVING THE DESIRED OUTCOMES OF RENEGOTIATING THE PRICES DOWN