South African taxpayers will have to foot a bill of R10 billion over the next six years because Eskom failed to negotiate a standard price for the coal.
This is according to a Mail & Guardian report which said Eskom has contracted 16 coal-producing companies to provide it with more than 70 million tonnes of coal in the next six years.
According to the report, Eskom would have paid R28 billion for this coal if it paid a standard price.
However, some of the coal-producing companies charge Eskom much higher prices for their coal, which increased the cost to over R38 billion.
This means that Eskom is paying R10 billion more for their coal than the standard price, which equates to R4.5 million per day over the six-year period.
This increased cost, the Mail & Guardian said, would be passed on to South African electricity consumers and taxpayers.
Eskom told MyBroadband that all pricing information is commercially sensitive and is governed by the terms and conditions of the respective agreements.
“Specifics relating to a particular supplier, in this case, Glencore, and their coal supply agreements (CSA) cannot be disclosed or discussed unless consent is granted from the supplier themselves,” Eskom said.
In terms of Nersa’s coal pricing guidelines, the regulator’s analysis and the reasons are only made available to Eskom on a high-level basis.
“Hence without the full details of how NERSA reached the guideline price, which also includes a transport component as it is a delivered price, Eskom cannot comment on the prudence of NERSA,” the company said.
Eskom’s coal procurement process
Eskom explained that its coal procurement process is predicated on covering the cost base of the mining operation plus a fair return.
Eskom investigates potential suppliers by taking the factors listed below into account:
- Geology of resource and seam to be mined
- Stripping Ratios
- Mining method
- Beneficiation method to be utilized and yield percentage.
- Coal qualities offered
- Infrastructure costs
- Mine equipment costs
- Working costs of the mine
Suppliers must also divulge their cost base, while the return is a function of the mining and capital risk, the presence of a willing buyer and willing seller, as well as supply and demand factors.
“The notion that Eskom has failed to negotiate proper coal contracts across the board is misleading,” Eskom said.
Eskom’s coal procurement process is poorly understood
Eskom said the perception of poorly negotiated contracts and other generalizations are because the utility’s coal procurement process is poorly understood.
“For example, in instances where suppliers are unwilling to divulge their costs, and where there is an immediate need for coal to cover the shortfall, the option of either reducing the burn with the risk of load shedding needs to be weighed up against paying the higher prices for a shorter duration to alleviate this risk,” Eskom said.
This, Eskom said, is precisely what happened during the latter half of 2018, when Eskom ended up paying higher prices after protracted negotiations due to the rapid decline of coal stock.
“There was an urgent need to replenish coal stock in the short term. Subsequent to this Eskom has issued tenders to the market to procure coal for its long-term needs,” Eskom said.