How Eskom Created The Coal Supply Crisis - Business Report

Aug 16, 2018
16 August 2018 - Eskom’s coal experience is extreme. But the factors that have enabled it – ideology and executive discretion – are far from singular.

David Christianson

The first instalment of South Africa’s long-anticipated ‘coal cliff’ has arrived. The ‘tied’ mines which supply coal to Eskom’s 15 large power stations are no longer delivering enough feedstock to cover demand.

As a result, the already cash-strapped utility is being forced to truck one million tonnes of coal from Limpopo to Mpumalanga to feed the ageing Kendal and the brand-new and only partially complete Kusile power stations. At about twice the cost of supply from the ‘tied’ mines, it has been estimated that this could cost Eskom – which has already had to be bailed out this year – as much as an extra R160 billion a month. We can expect the utility to pass the additional cost on to consumers or tax-payers, or both, as per usual.

The crisis in coal mining is a product of the same toxic mix of corruption and resource nationalism that threatens the entire mining industry in the country.

One point needs to be stated clearly at the outset: The coal cliff has nothing to do with South Africa running out of usable coal. The Minerals Council of South Africa points out that, at current levels of extraction (including exports), South Africa has sufficient coal reserves to last over a century. Others, including the Fossil Fuel Foundation, put the figure at closer to 200 years.

What is at stake here is the cost-plus or ‘tied’ coal mine model, the reason South Africa enjoyed some of the world’s cheapest and most reliable electricity for so many years. The most efficient way to get coal to the generator is to build the power station at the pit head. Under the model, Eskom would pay the capital and operating costs of the mine, plus a small margin to incentivise the private sector operator.

Eskom, having frittered away its cash on wages, consulting fees, cost overruns, kick-backs and funding the Gupta family, has been unable to put up the money for these cost-plus mines for some time. In 2016, under the egregious Brian Molefe, it announced it was abandoning the model. At that point the utility had already refused to finance necessary expansions to the mines feeding the Arnot and Malta power stations. The former has closed while the latter limps on, producing only four-fifths of the coal needed to supply the giant (3 600 MW) power station. 

Eskom’s biggest contribution to the crisis is based on ideology. While the original mining charter required 26 percent black ownership, Eskom’s contracts imposed an additional ownership requirement; its coal suppliers had to be 51 percent black-owned. The utility announced that it intended buying thermal coal from independent black-owned smaller producers, despite the demonstrated preference on the part of these companies for selling coal into the international market. In any case, this was more expensive, another cost to be passed onto South African consumers.

The largest negative effect of this policy is only just starting to play through. One of the power stations which has to have its coal supplies trucked across the country is Kusile, one of the two huge power stations introduced to solve the 2008 blackout. In keeping with best energy planning practice under the cost-plus model, Kusile is situated at the edge of a huge coal resource called New Largo. But there is no mine.

The owner of the New Largo licence, black-owned Seriti Resources – which purchased the asset from Anglo American last year – has yet to sign a coal supply contract with Eskom. Under the previous Anglo-American ownership, heads of agreement were briefly agreed before Eskom withdrew on the grounds that the planned mine did not meet its empowerment criteria. Attempts to negotiate an agreement for the 875Mt resource – capable of supplying Kusile for 50 years – go back to 2008.

Anyone with a passing understanding of the cost-plus model will know that it is simply bizarre to commission a R160 billion power station without simultaneously securing coal supply.

Eskom’s coal experience is extreme. But the factors that have enabled it – ideology and executive discretion – are far from singular. Those negotiating changes to South Africa’s mining regime need to take note.

David Christianson is a Policy Fellow of the SA Institute of Race Relations (IRR), a liberal think tank that promotes political and economic freedom

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