Eskom-Tegeta deal in best interests of SA
contract be extended to 2023 and the price be increased to R570 per ton from 2019, and this was meant to be done without going through an open tender process.
In a letter to Eskom dated September 17, 2015, independent business rescue practitioners proposed a deal that would result in a weighted average price of R443 per ton until 2023. In this proposal, Eskom would continue to pay R150 per ton for coal until December 2018. The contract would be extended until 2023 at a price of R630 per ton. Eskom rejected both proposals. Now it finds itself in a difficult position, because it took a tough decision in the best interest of the consumer. After due consideration, Eskom rejected the proposals by both Glencore and the business rescue practitioners, which would at least double the price of coal per ton between December 2015 and December 2018, with a direct impact on tariffs.
Refused increase
Not only did Eskom refuse the price increases, it insisted that Glencore implement a new black economic empowerment (BEE) transaction to ensure that Optimum Colliery was more than 50 percent black owned. This is in line with Eskom’s policy of sourcing coal from majority blackowned suppliers.
Consequently, Glencore agreed to a BEE transaction with Pembani, which comprises Pembani Group and Shanduka Resources, to increase the black ownership of Optimum Colliery to above 50 percent.
What is often overlooked is that Eskom did not sell Optimum Colliery to Tegeta. Tegeta and Pembani were put forward to Eskom by the business rescue practitioners, which were appointed by Glencore. Ultimately, Glencore sold Optimum Colliery directly to Tegeta.
What is actually happening is that the ongoing legacy of the pre-1994 economy is being confronted by the Eskom leadership. This is the legacy that we have not worked hard enough to dismantle. For this reason, Glencore was directed to radically transform and ensure that Optimum Colliery was more than 50 percent black owned.
Eskom’s policy of sourcing coal from majority black-owned suppliers is a thorn in the side of many of our main coal suppliers. These suppliers subscribe to the “once empowered always empowered” principle. They prefer a black ownership target of 26 percent rather than a minimum of 50 percent black ownership.
Eskom’s radical transformation agenda requires the mines that supply coal to Eskom power stations to have a black ownership target of more than 50 percent throughout the life of the mine. The next phase of this agenda is to encourage mining houses to implement employee share ownership schemes.
Whatever the transformation agenda, the security of coal supply to Eskom power stations cannot be compromised. The coal qualities must remain within specifications and the cost must be within the range prescribed by the National Energy Regulator of South Africa.
It is for this reason that Eskom said no to Glencore when they wanted to increase the price of coal to Hendrina power station from R150 per ton to R300 per ton and ultimately R570 per ton. Also, Glencore had to be made to pay penalties that were due to Eskom as a result of coal that was delivered without complying to specifications.
Eskom had a binding agreement with Glencore with certain accrued rights, and it could not forgo these rights in order to rescue Optimum Coal Mine.
In their credit opinion of September 20, Moody’s rating agency highlighted the negative impact of the primary energy costs on Eskom’s financial ratios.
It is important to realise that coal costs are a significant part of the total primary energy costs and they have been increasing by 13 percent on average between 2000 and 2016. Tough decisions are made daily to reduce the coal cost escalation to, at the most, 6 percent.
What is not appreciated by many is that the business rescue practitioners delivered a solution that allowed Eskom to secure a sustainable supply of high quality coal until 2018 for R150 per ton from a black supplier.
The business rescue practitioners were appointed by Glencore and not Eskom. The deal was compliant with all external and internal processes.
Whatever the transformation agenda, the security of coal supply to Eskom power stations cannot be compromised.