By Antonio Ruffini, Editor, ESI Africa
If Eskom and suppliers of coal are unable to achieve a compact to ensure the utility’s power stations get sufficient, suitable and affordable coal into the future, 16% a year electricity tariff increases will not be sufficient.
Government declarations of coal as a strategic commodity should not be viewed merely as a misguided attempt at resource nationalisation. Rather it should be viewed as an attempt by government to secure coal resources for energy production to fuel South Africa’s economy. Eskom purchases some 125 million tonnes of coal a year and in its last financial year did so at a price just over R200 per tonne. South Africa exports coal at prices of over R700/tonne.
Some of the coal exported is the lower calorific value coal supplied to the Indian market which is also used by Eskom power stations. This is not premium quality coal, and the export price of this coal would be more in the region of R500/tonne. Nonetheless, coal contributes to some 25% of Eskom’s bottom line costs. If it were to pay export parity prices for a significant portion of the two billion tonnes of coal it still needs to contract up to 2052, the implications for South Africa would be severe.
In the increasingly distant past, coal was not an exciting commodity and cost plus annuity income contracts were valued more highly by coal companies in South Africa than they are today. At the same time South Africa’s mining industry is rapidly falling down the global rankings, and international investors are looking to other investment destinations. The country’s mining sector is facing more stringent environmental and permitting requirements, safety related work stoppages and increasing levels of labour militancy. Government over the past few years has appeared not to be supportive to the sector in general as opposed to encouraging what has been the country’s major economic base and competitive advantage. This is hardly a background condusive to a compact on coal supply, and the required investment of hundreds of billions of rand to build new mines. Yet such a compact on coal supply has to be an imperative.
The good news is that most parties involved seem to be aware of this. While the Chamber of Mines, which represents the mining industry, in its submission on Eskom’s requested 16% a year electricity tariff increase earlier in 2013 stated this was too high it hid a divergence of opinion. Although the country’s hard rock sector does welcome lower electricity price increases, this viewpoint was not necessarily shared by the coal sector. The coal sector has a greater appreciation that it will be near impossible to avoid a step change in the price that Eskom will have to pay for a lot of its uncontracted coal, and electricity prices will have to reflect this.
Obviously not all this coal has to be procured at the same time and Eskom hopes to keep any price increases in the procurement of coal at lower than 10% a year over the next five years. To put the problem into perspective without being unnecessarily alarmist, up to 2018 some 80% of the coal required by Eskom is already contracted. Eskom Primary Energy divisional executive Kiren Maharaj tells ESI Africa that the timeline for procuring the uncontracted coal can roughly be split into three tranches of about five to ten years each. The first third is required within five to ten years, the next third over the subsequent period of ten years and the final tranche in the period of ten years after that.
To put things further into perspective in the very short term, taking into account the winter of 2013 the coal supply situation was well under control. Eskom’s coal supply to its power stations was affected by strike action earlier in the 2013, but going into the South African winter Eskom had an average of 46 days of stockpiled supply at its 13 coal fired power stations. This was down from 49 days prior to the strike. It was nonetheless a stronger position than the previous year when the stockpiles stood at an average of 42 days.
At the moment Eskom has roughly 40 coal supply agreements in place, though that does not translate directly into the same number of different suppliers, as some suppliers provide more than one kind of coal product to the utility. More than 60% of Eskom’s total coal supply is provided by five large groups: Exxaro, Anglo American Thermal Coal, BHP Billiton Energy Coal South Africa, the Glencore/Shanduka/ Optimum group, and Xstrata which is undertaking a merger with Glencore.
The nature and price of the coal depends on the logistics of transport, the type of product supplied, the duration of the contract and other factors. The ideal model is for conveyor transported coal from nearby mining operations, and over 60% of the coal Eskom receives is from this source. Less than 10% of the coal is received by rail and the remainder, about 25%, arrives at the power stations by road. Road transport is inherently more flexible than rail transport, but the disadvantages of having a large fleet of coal trucks on the roads outweigh the advantages. Rail can achieve flexibility with many of the coal suppliers having their own sidings.
With issues such as road degradation and safety as well as cost and flexibility as major considerations, Eskom is undertaking some major projects to transfer the transport of coal from road to rail where feasible. The most affected power stations in terms of receiving their coal by road are, in descending order: Majuba, Tutuka, Camden and Grootvlei.
“There are three projects in different phases of development,” Maharaj says. One of these is in the early ramp-up phase, it being the Tutuka road to rail project. The rehabilitated R168 million line is in place and in April 2013 was transporting at a rate of some 100,000 tonnes of coal a year to Tutuka power station. The eventual target is for up to three million tonnes of coal a year to be transferred from road to rail transport using this line.
Construction has just begun on the R5,900 million Majuba heavy haul line which will see an additional 4.8 million tonnes a year of coal transport moved from road to rail, this to be achieved by the end of 2015. Majuba uses some 13 to 14 million tonnes of coal a year. Currently it sees 6.5 million tonnes a year arrive by rail.
The third rail project at Camden power station was implemented in 2009. Currently about 1.5 million tonne a year of coal is transported to Camden in containers on rail wagons.
The next project, still in the planning phase, is for the conversion of road to rail coal transport related to the Grootvlei return to service power station.
Interestingly, while the Medupi power station under construction will receive the bulk of its coal by conveyor from the adjacent Grootegeluk mine owned by Exxaro, the situation at Kusile is more complex. That power station could ultimately get its coal from a mix of suppliers, by means of conveyor, rail and road. Medupi will ramp up its coal requirement from about two million tonnes a year to 16 million tonnes a year when all six units are fully operational, and Kusile’s requirement is similar.
Kusile is also likely to make use of a variety of coal suppliers, the reason being that the New Largo resource originally earmarked to supply the power station is not large enough on its own. “The power station as specified in the end requires additional coal to that supplied by this resource, but there is sufficient suitable coal in the area to supply it,” Maharaj says.
She says that originally the export market demanded a coal calorific value of 27 MJ/kg, whereas today the Indian market accepts coal as low as 23 MJ/kg, which is also used by Eskom power stations. “Over the years as the Eskom power stations were built they were designed to take an ever lower calorific value coal and Medupi and Kusile are in line with that.” This is as technology advances to enable the utilisation of higher ash coal.
Such is the concern, however, that Eskom is even looking at the Waterberg as a long term possibility for the supply of coal to its Mpumalanga based power stations, even though the likely transport cost alone would be in the region of R200/ tonne. “However, before the Waterberg could be considered, a lot of work would have to be undertaken on that coal to determine if it is indeed compatible with the power stations in Mpumalanga.”
Perhaps one of the biggest concerns Maharaj has is whether South Africa’s mining sector indeed has the capacity to develop the lower quality, more fragmented, more difficult to mine coal resources that remain in Mpumalanga. “We see many reports on skills shortages in the mining sector and the question is, has the mining sector in South Africa plateaued instead of evolving? One sees how mines perform well in the early years, but progressively the resources become more difficult to mine and this is reflected in the productivity of the operations over time.”
Eskom acknowledges that on its side it could do more to maximise its coal utilisation efficiency and burn rates, hence it is undertaking the urgent catch up maintenance programme at its power stations. It is doing this as a priority while dealing with the severe constraint of insufficient generation capacity in South Africa. “However, there are limitations to what Eskom can do at its power stations, as these were not designed for the management of coal stockpiles. Their original design was for them to receive coal on conveyors and move this into the power stations, with stockpiles intended to be nothing more than temporary holding facilities. Establishing a washing plant would require permits. Similarly the handling of coal discards is not something the power stations are geared or designed for.”
One of the newer mechanisms that Eskom does use is quality control monitoring of the coal at the suppliers, particularly in the case of newer shorter term contracts. “This is in everyone’s interest, as, if the coal is found to be substandard for Eskom’s power station requirements, it is not transported to them. The alternative would be the cost of having to retransport unsuitable coal that is not used.”
That Eskom power stations are receiving coal closer to the bottom end of the contracted acceptable quality range from some large long-term suppliers has not been denied. The argument has been raised, however, that if Eskom wants to raise the quality it should be willing to pay such suppliers to invest in washing plant, for example. However, Maharaj argues in turn that a contracted deal is a contracted deal and the implicit terms of the contract should be met. This is not dissimilar to the argument put forward by BHP Billiton regarding the supply of electricity to its aluminium smelters. These arguments, if anything, strongly illustrated the all-round benefits of a compact on coal supply to Eskom power stations.
One of the more promising signs that a coal compact is achievable is that minister of public enterprises Malusi Gigaba has a good understanding of the realities Eskom faces in terms of its coal supply. “The ministry of public enterprises is aligned with the analysis of the coal requirements of Eskom and the strategies and policies necessary to achieve this,” Maharaj says. The coal suppliers too are aware of the issues, as is Eskom aware of its constraints. Thus there are strong signs of alignment among these key stakeholders.
This is essential if electricity is to remain affordable in South Africa.