Bright dawn’s still a long way off

Where are we with power sup­ply in 2015?

Financial Mail - Investors Monthly - - Off-grid - CHAR­LOTTE MATHEWS

De­lays at Medupi, the first of Eskom’s two new 4,800MW coal-fired power sta­tions, which is due to start de­liv­er­ing power by the first half of next year, have ab­sorbed most of the lime­light. But first de­liv­ery of power from Kusile, the sec­ond power sta­tion, now also looks un­cer­tain.

Eskom’s del­i­cate power bal­ance was again high­lighted with the col­lapse of a coal silo at Ma­juba, which caused brief load-shed­ding this month. Th­ese crises have taken longer than ex­pected to hit the coun­try and are more mod­est than feared, mainly be­cause elec­tric­ity de­mand has been flat­ter than fore­cast. In 2010 an Eskom doc­u­ment warned that rolling black­outs would get worse from 2011 to 2016, though at the time it ex­pected the first unit of Medupi would be de­liv­er­ing power by end-2012.

Now Medupi’s first 600MW unit is due to be “syn­chro­nised” or linked to the grid only on De­cem­ber 24 and will de­liver steady power only from the mid­dle of next year. Its re­main­ing units are due to come on line at six-month in­ter­vals after that.

So at best SA may get about 1,200MW from Medupi by end-2015, when Kusile was also sched­uled to start de­liv­er­ing. Not so fast. In Eskom’s lat­est an­nual re­port, it says Kusile’s first unit was due for first syn­chro­ni­sa­tion in Oc­to­ber next year but be­cause of “poor con­trac­tor per­for­mance” it is more likely to be Jan­uary 2016. A pre­vi­ous es­ti­mate put first de­liv­ery of power from Kusile at June 2013.

There’s another po­ten­tial de­lay: where will Kusile get its coal from?

In June 2012 Eskom said it was about to sign an agree­ment with An­glo Amer­i­can Inyosi Coal to sup­ply Kusile with 11-mil­lion tons of coal a year from a new coal mine, New Largo, that An­glo would build at an es­ti­mated cost of R16bn-R20bn.

More than two years later, the con­tract is still not signed be­cause of a stand-off over the mine’s em­pow­er­ment sta­tus. New Largo would have 27% black eq­uity own­er­ship, which is slightly more than the 26% re­quired by the min­ing char­ter. But the Depart­ment of Pub­lic En­ter­prises, un­der which Eskom falls, in­sists its sup­pli­ers now have to be 50% plus one share black-owned ac­cord­ing to the broad-based black eco­nomic em­pow­er­ment (BBBEE) codes.

If An­glo con­cedes that the BBBEE codes over­ride the em­pow­er­ment agree­ments that the min­ing com­pa­nies reached with the Depart­ment of Min­eral Re­sources, it fol­lows that all mines will have to have BEE at 50% plus one share.

Most share­hold­ers in min­ing com­pa­nies, who bear the brunt of the costs of BEE share dis­counts

There’s another po­ten­tial de­lay: where will Kusile get its coal from?

and low-cost ven­dor fi­nanc­ing, would support An­glo’s re­sis­tance.

The gov­ern­ment, too, is stand­ing on its prin­ci­ples. The min­ing in­dus­try is still dom­i­nated by white business. That, it be­lieves, needs to change, start­ing with the coal sec­tor.

Mean­while, though New Largo has all the nec­es­sary per­mits, it is es­ti­mated it would still take at least two years to build the mine. So even if the con­tract were signed now, first de­liv­ery of coal would be only in Jan­uary 2017, about a year after Kusile might need it.

To some ex­tent the fact that Eskom has not yet signed a coal con­tract with An­glo is prob­a­bly a good thing be­cause it ended up hav­ing to pay penal­ties to Exxaro for coal con­tracted for Medupi, thanks to de­lays in ramp­ing up the power sta­tion.

Kusile will not need all its coal at once if it is bring­ing on line only one unit at a time. Eskom should be able to buy a cou­ple of mil­lion tons on shorter-term con­tracts for a year or two. There is ca­pac­ity among black-owned min­ing com­pa­nies, though they will need time to ramp up. Eskom should be giv­ing them no­tice now that it will need their coal in a year.

Those are likely to be medium-term con­tracts, maybe three to five years. Eskom will get its best price and se­cu­rity of sup­ply only from long-term con­tracts with a tied mine.

After the de­ba­cle at Medupi, can the pub­lic trust that Eskom has learnt its lessons and can bring Kusile on stream with­out any more de­lays and at the best price for its cus­tomers? So far it’s not look­ing good.

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