Eskom has major issues with coal supply

A low-key spat between Eskom, the Department of Mineral Resources and a small mining company over mining rights awarded to a colliery that Eskom once owned, has added fuel to a growing debate in the domestic mining and energy sector over whether or not South Africa was facing serious coal production, logistics and supply constraints, or even a coal supply crisis.

Yes, says the state-owned power utility, South Africa could be facing a crisis in the making as security of coal supplies over the long term may be threatened.

Eskom has complained about the quality of coal being supplied to it and that domestic coal is being diverted to export markets.

And claims of an impending coal crisis seem to be supported in part by international business research and consulting firm, Frost & Sullivan, which says at least 40 new coal mines would have to be built at huge cost to meet future demand and maintain projected growth.

Other researchers point to falling coal outputs in 2009 and further limited production growth ahead, saying the industry is facing a myriad of problems that will constrain output.

At the McCloskey Coal Conference held in Cape Town earlier this year, Transnet’s rail infrastructure constraints were fingered as impeding coal supply and delivery.

However, South Africa’s coal miners and their industry body, the Chamber of Mines, deny there is a crisis of supply or quality – now or impending.

Just how dependent South Africa is on this combustible black sedimentary rock is demonstrated by the fact that coal accounts for 70% of South Africa’s primary energy consumption, 93% of electricity generation and 30% of petroleum liquid fuels.

And just how fragile Eskom’s reliance on secure coal supplies could prove to be, is demonstrated by current negotiations between Eskom and Vunene Mining, which was awarded the mining rights to the Usutu colliery – rights that Eskom once owned and now badly needs.

In February this year, the Web-based financial news service Moneyweb first revealed how Eskom had bought the Usutu rights from BHP Billiton in the early 1990s after the mothballing of its Camden power station. Eskom claims it then applied to have the old order rights converted to new order rights in 2005 as required by new legislation, and says it even has a letter confirming that the Department of Mineral Resources received its application. However, the department disputes this.

There are contradictory versions emerging from the different parties involved as to whether or not Eskom applied for the conversion of its rights and as to when the prospecting rights were converted to full mining rights.

The colliery is linked by conveyor belt to Camden, but now the rights bungle has caused coal supplies to be brought in by truck from other coal mines. The financial cost and the wear on roads is high.

Bureaucratic delays and incompetency seem to have played a role in undermining the secure supply of coal to Eskom’s Camden power station. For example, according to a report in the Mail & Guardian, a supply agreement reached in February 2008 foundered, as Vunene had failed to secure full mining rights by August 2008.

Frost & Sullivan already last year raised its concern over future coal supplies in South Africa. The business research firm said an investment of R90 billion to R110bn would be required to build the 40 new coal mines needed to meet the projected growth in domestic and export demand for coal over the next decade in South Africa – an investment it says is crucial to ensure the country’s energy needs are met.

Following the 2008 electricity crisis in South Africa, Eskom has embarked on a costly programme to increase its generation capacity, with most of its new generation capacity to be coal-fired.

Three mothballed coal-fired power stations – Camden, Grootvlei and Komati – have been brought back into use while Eskom is currently building two very large new coal-fired power stations at Medupi and Kusile.

And with the country facing an anticipated electricity shortfall of 1 000 megawatts next year, Eskom is anxious to tie up secure coal supplies.

Professor Anton Eberhard of the Graduate School of Business at the University of Cape Town has said that earlier plans envisaged the construction of two further mega coal power stations by Eskom, but that environmental concerns may make this unlikely.

Eskom accuses local coal miners of focusing on more lucrative export markets, particularly in Asia, and wants the state to act to guarantee security of supply for
power generation.

The power utility has even called on the government to declare coal a strategic mineral. Minister of Mineral Resources Susan Shabangu has not responded to the latter demand, but did give assurances that if need be, she would take action to ensure sufficient supplies for electricity generation by Eskom, referring to possible regulation to control increased coal exports.

However, she urged the industry to first try and resolve its problems.

South African coal miners have rejected Eskom’s concerns about increased exports, saying export markets require a different quality of coal from that supplied to Eskom.

And the Chamber of Mines, which represents South Africa’s mining industry, emphatically states that there is no coal supply or quality crisis. It did acknowledge, however, that coal quality problems had affected two power stations, but that the problems had been addressed and the entire mining sector could not be blamed for that.

Prof. Eberhard did not seem to share Eskom’s concerns – at least not to the same extent.

In a paper he prepared for the Program on Energy and Sustainable Development at Stanford University in January, he wrote that “some of Eskom’s power stations have suffered from increasingly poor quality coals (as better quality coals are diverted to exports)”, but added that “it would still be a mistake to reimpose restrictions on exports in favour of local supply”.

“These are mostly separate markets. Any problems with deteriorating quality of supply to Eskom should be dealt with through tighter contract management,” Prof. Eberhard stated.

He said that an anticipated rise in domestic demand over the next decade would not necessarily constrain growth in exports.

Furthermore, he foresaw that total coal-fired generating capacity would peak soon after 2020, with domestic demand for coal starting to fall thereafter as coal-fired power stations were decommissioned.

Prof. Eberhard added, however, that new coal mines would nonetheless have to be developed as existing mines exhaust their reserves.

He envisaged that local coal demand would be impacted by rises in coal prices as a result of increased exposure to higher cost, short-term contracts and possibly carbon taxes.

Prof. Eberhard further noted that “a major current constraint in moving coal to markets, particularly export markets, is South Africa’s ageing and inefficient rail infrastructure.”

Meanwhile, Eskom remained unconvinced that its future coal supplies are secure. The utility’s chief commercial officer Dan Marokane told the McCloskey Coal Conference that there was a need for a national plan to ensure sufficient long-term supplies.

He said Eskom wanted South Africa’s coal resources “to be developed and exploited in the national interest”. According to him, a key element would be a national primary energy coal development plan that would provide a framework for investment in the industry.

No doubt this will not be the last word spoken on the constraints and controversies impacting on South Africa’s coal supplies and power generation.

Stef Terblanche