Lamu coal power plant
Bucket of coal and helmet coal miner. Credit: 123rf

On Saturday, Eskom Chairman Dr Baldwin (Ben) Ngubane, voiced his concerns around the recent sensationalism in the media around the utility’s so-called ‘non-compliant procurement procedure’ with the Exxaro Arnot Colliery.

Drawing light to the media in question, the utility said in a statement: “In a desperate effort to substantiate its claims, the newspaper alleges that Eskom had ‘blindsided’ Exxaro Resources by informing them that their contract to supply coal to Arnot power station would not be renewed.

“The newspaper further states that Eskom’s decision to delay the awarding of the long-term contract until it has satisfied itself that all bidders met all the conditions stipulated in the tender was evidence that ‘Eskom is helping to bail out Tegeta’s new mine’,” the utility noted.

In response to this, the utility highlighted that all its contracting relationships are concluded on sound commercial principles and considerations. In addition, all the Tegeta coal contracts with Eskom have been extensively audited by various agencies, including National Treasury.

Standing ground over Exxaro contract

In response to media reports, Ngubane said: “Eskom stands firm by its process undertaken to conclude extensions of its coal supply agreements with its suppliers. I am satisfied that due process has been followed and we can be proud of the savings achieved by the executive team to date.

“In emergency situations, Eskom has utilised the prepayment mechanism to ensure security of supply. Furthermore, it is important to note that prepayment is a common commercial practice that is used widely and not unique to Eskom.”

He added: “The principle of prepayment is prevalent in Eskom’s cost-plus supply contracts with the large mining houses such as Anglo American, BECSA and Exxaro. These mining houses supply approximately 80% of Eskom’s coal while Tegeta supplies less than 5% of the coal volume required by Eskom.”

Coal suppliers

Despite media focusing on one supplier, namely Tegeta, Eskom has named the other six suppliers as well, and they are: South32 (BECSA), Exxaro, Glencore, Keaton Mining (Pty) Ltd, Hlagisa Mining, and Umsimbithi Mining.

Adding in a statement, the parastatal said that in April, four of the seven suppliers, namely Exxaro, Hlagisa, Umsimbithi and Tegeta remained supplying Arnot, while the balance of the suppliers indicated were redirected to supply their original designated power stations.

This supply mix change left the utility with a deficit of 2.1 million tonnes, which was required to meet the winter supply plan. Eskom approached its existing suppliers to source additional supply to mitigate this shortfall, the utility said.

Coal cost and contracts

Ngubane further stated: “It must be noted that the Exxaro Arnot Colliery had a contract with Eskom to supply coal to Arnot Power Station for 40 years. This contract expired in December 2015. The cost of coal at date of expiry was ZAR1,132/tonne.

“I am advised that Tegeta now supplies Arnot at an average price of ZAR500/ton. The unit cost of coal supplied under this contract is at a discounted rate of 3%, resulting in a further saving to Eskom of billions of rand in an eight month period and ultimately, the consumer.”

Eskom rejects any insinuation of favouritism towards suppliers such as Tegeta who are willing to step in to avert the coal supply crisis and allow Eskom to meet the winter demand.

The Board’s position can be summarised as follows:

  • It is concerned at the recent media speculation and sensationalism.
  • It must be noted that Eskom was paying ZAR1,132/tonne to Exxaro and this was on a cost plus basis.
  • Tegeta supplies Arnot at an average price of ZAR500/tonne, leading to savings of over a billion rand in the eight months of supplier leading to direct savings to Eskom customers.
  • Tegeta is a 51% black owned emerging miner, which meets Eskom’s requirements.
  • Eskom has no issue doing business with the company based on sound commercial considerations and is not driven by unsubstantiated media issues.
  • Tegeta stepped in to avert a crisis at Hendrina Power Station by saving jobs and continues to supply Eskom at the original contracted price.
  • All due process has been followed and Eskom is proud of the savings achieved by its executives.
  • Prepayment is a common practice in coal purchasing and Eskom has used this mechanism previously. In fact, the cost plus mines have been the recipients of an average amount of ZAR38 billion to date this year to companies such as Anglo American, BHP Billiton and Exxarro.
  • Eskom firmly rejects the suggestion that Tegeta is favoured or that due process was not followed.