Bright dawn’s still a long way off

Where are we with power supply in 2015?

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.