Inside the coal supply emergency at Eskom

Credible reports are being received of alarming coal supply problems at numerous Eskom coal-fired power stations in South Africa’s Mpumalanga province.

The reports indicate that the situation has become so serious that Eskom’s primary energy division has recommended to the utility’s new generation head, Thava Govender, that a coal supply emergency be declared.

This follows information received on 27 March 2018 by EE Publishers, and only confirmed by Eskom after persistent questioning, that Eskom has been relying on emergency, diesel-driven, open-cycle gas turbines (OCGTs) regularly to meet demand this year.

The latest coal supply reports suggest that Eskom’s current coal supply problems are as serious, if not worse, than those that existed in South Africa shortly before the load shedding of 2008.

On Saturday, 14 April 2018, Eskom confirmed to EE Publishers that, at present, stockpiles at seven of its power stations – Arnot, Camden, Hendrina, Komati, Kriel, Majuba and Tutuka – are low, and that additional contracts for all these power stations are required.

While the reports indicate that Eskom’s 3600 MW Matla power station is also about to run out of coal, Eskom spokesman Khulu Phasiwe denies this, and states that “Matla has sufficient coal stocks”.

However, when pressed further on the matter, no clear answer was received from Eskom to EE Publishers’ specific question as to how many days of USABLE coal is currently in the Matla coal stockyard. The reports indicate that the coal currently in the Matla stockyard is in fact unusable.

Eskom also denied its head of generation had received any recommendation that a coal supply emergency should be declared. However Eskom added that even if such a recommendation existed, it would not be able to confirm this.

“It would be highly irregular and irresponsible of us if the board, the minister and regulator could learn anything about this company through media reports. Eskom will release all its operational and financial information once all the correct protocols have been followed”, said Khulu Phasiwe.

The causes of the crisis

The coal supply problems at Eskom arise from declining production volumes from a number of “tied” coal mines that are linked with and supply coal directly to specific Eskom power stations in Mpumalanga.

The coal supply arrangements with tied collieries require that Eskom bear all capital expenditure (capex) costs for the establishment, development and expansion of a tied coal mine.

Eskom then contracts with a coal miner to operate the mine and deliver coal to the tied power station on a “cost plus” basis, with the contract price for coal delivered covering only the engineering, fixed and variable operating costs, plus a management fee.

However for the last five years or so, Eskom has been failing to meet its capex commitments for the ongoing development and expansion of a number of tied collieries.

This has resulted in massive declines in the production of coal delivered from these tied mines to Eskom, in some cases to as low as 20% of planned levels.

The result has also been massive associated price increases per tonne of coal delivered, because the fixed overhead and management fees are then recovered off a much lower production volume.

Other coal supply challenges at Eskom’s Arnot, Hendrina and Komati power stations arise from the dysfunctional Tegeta coal mining operations, that have left Eskom high-and-dry in the months prior and subsequent to the Gupta mines filing for business rescue in February 2018.

Instead of incurring the capex to develop and expand tied collieries to maintain production volumes, Eskom has elected instead to save the capex, and meet the tied-mine production shortfalls though contracting separately with emerging coal miners on shorter term contracts.

This has also led a shift in the transport of coal by conveyer belt to road transportation, leading to hundreds of trucks a day delivering coal to Eskom power stations at great cost, in the process causing destruction of the roads in Mpumalanga – also for Eskom’s cost.

The problem now, according to reports received, is that the production shortfalls from the tied collieries In Mpumalanga have become so large that they cannot be procured in full any longer from the domestic market, and Eskom is currently burning more coal than it can source.

The justification for coal procurement from non-tied mines

The procurement of the tied-mine shortfalls from “non-tied” mines at high cost has been justified in some minds based on the artificially high prices of coal from the tied collieries, resulting from Eskom’s decision to avoid capex.

In addition, Eskom justifies procurement from non-tied miners on the need to increase diversity and facilitate black economic empowerment (BEE) in the coal mining sector.

Others have suggested the production shortfalls and rising prices from under-capitalised tied mines has been an elaborately engineered scheme by interested persons in Eskom’s primary energy division to create a series of crises that justify emergency coal procurements without going out to tender.

According to this narrative, the intention would be to have lucrative coal supply and transportation contracts placed with business associates, friends and family at inflated prices, using BEE as a cover.

Whatever the truth of the matter, the outcome is that a large number of costly coal supply and road transportation contracts have been and will be concluded with non-tied coal miners in Mpumalanga.

Perhaps this explains the vociferous nature of the emerging new coal mining and road transportation sectors, and the clamour from these new sectors as they lobby to benefit from and protect their commercial interests from alternative, cleaner energy sources.

The need for transparency

The new Eskom board was appointed to ensure more effective oversight, increased transparency and greater accountability from the utility.

However, all the formal Eskom power system status reporting has been systematically and deliberately discontinued by former CEOs Brian Molefe and Matshela Koko, and no power system status information is currently made available routinely.

This serves to reduce transparency and oversight by the board, scrutiny by the media, analysts and public, and accountability by Eskom management.

There is perhaps again a need for the board to initiate an independent forensic investigation into the procurement practices within Eskom’s primary energy division, as was done by Deloitte and the Special Investigative Unit (SIU) following the load shedding In 2008.

Eskom is currently asking the regulator, NERSA, for R67-billion of unbudgeted costs and reduced sales volumes to be passed through to customers via a 30% increase in electricity tariffs, using the regulatory clearing account (RCA) mechanism.

There are also indications that Eskom will be applying for a significantly greater price increase per annum than CPIX for the fourth multi-year price determination (MYPD4) period commencing 1 April 2019.

Eskom needs to start demonstrating through its actions its intention, commitment and ability to act in a more transparent way that will build confidence and trust by stakeholders, financiers, banks, lenders, suppliers, customers and the general public.

Now read: Eskom forced to burn more diesel due to plant failures

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Inside the coal supply emergency at Eskom