Eskom Looks To Secure Thermal Coal Supply To Meet Growing Electricity Demand in South Africa

South Africa’s power utility, Eskom, is investigating extending its cost plus coal purchase contracts to producers who are currently selling Eskom quality thermal coal on the international markets. South African Coal Report examines further.
Eskom | NERSA | Paul O'Flaherty | Thermal Coal | Electricity | South African
Eskom | NERSA | Paul O'Flaherty | Thermal Coal | Electricity | South African
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Oct. 29, 2012 - PRLog -- Responding to questions at an Eskom capital projects roundtable organised by magazine Finweek and consulting group Accenture, Paul O’Flaherty, Eskom finance director, said Eskom required the co-operation of coal producers because it could no longer afford to buy coal at certain internationally traded rates.

At the same time, however, O’Flaherty stood by Eskom’s call for a market-related, three-year price path for electricity which most likely will result in annual double digit increases for mining companies. Although not confirmed by Eskom, a request for 15% to 19% per year increases in electricity tariffs over the next three to five years will be put to the National Electricity Regulator of South Africa (NERSA) within the next two weeks. O’Flaherty said that in order to be cost reflective, the electricity tariff should be 90c per KW/hour compared to 60c/KW hour today.

The hike in electricity costs would heap further pressure on South Africa’s coal producers, especially if they are restricted from selling part or all of their coal production to Eskom at below export prices. Eskom this year agreed to lower the tariff increase for electricity to 16.5% after President Jacob Zuma requested Eskom revisit the cost of electricity. There had been a 24.8% increase in the electricity tariff over the previous two years.

O’Flaherty defended the proposed increase in tariffs on the basis that Eskom had to command its own credit rating rather than rely on South Africa’s sovereign rating which was already under pressure. Earlier this month, Moodys’ downgraded South Africa’s sovereign rating to just a notch above sub-investment grade; it then moved to adjust Eskom’s rating and that of other institutions in the country to a similar status.

About 78% of Eskom’s R340B (US$39.1B) capital build, aimed at adding 9,600MW to the grid predominantly through coal-fired power stations, has been secured through a government guarantee. Bank covenants, however, stipulate that borrowers may not have a sub-investment grading which means Eskom is running the risk of breaking debt agreements, some of which extend for the next 20 to 30 years.

However, a banker at one of South Africa’s top mining and resources financiers said that it was proving difficult to secure equity investment for junior miners who only had domestic quality thermal coal to sell to Eskom. “You can’t do it, or it’s difficult, if sales are going to Eskom,” he said.

O’Flaherty said that Eskom had to spend R65B ($1.8B) a year in order to double South Africa’s energy capacity by 2019. Of the proposed 17,000MW in new power required, some 5,756MW had already been secured with Medupi and Kusile power stations and the Ingula pumped storage facility, a hydroelectric scheme, providing the balance.

The source of South Africa’s electricity supply thereafter remains a contentious debate, however. According to the government’s policy on the country’s future energy mix, the Integrated Resource Plan 2010 (IRP), a further 56,000MWin new power is planned by 2030. Of this capacity, about 18% of it has to be sourced from nuclear power, but with little implementation of the IRP 2010, critics say South Africa could experience more power supply deficits in years to come.

In an effort to establish a plan for nuclear energy, the government formed the National Nuclear Energy Executive Co-ordination Committee. However, the committee has not yet met. As a result, attention has been thrown back on coal; specifically, the development of a third, large coal-fired power station referred to informally as ‘Coal 3’.

O’Flaherty, however, says Eskom is not waiting for government committees to meet. The utility has already established several sites for nuclear energy provision and has set about environmental assessment studies of the sites. “We were criticised in the past [regarding establishing coal-fired power stations] of not shouting loud enough. Well, now we’re shouting,” said O’Flaherty.

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