State-owed electricity utility Eskom has again appealed for a domestic coal-pricing regime that is premised on an “efficient and transparent cost, with a fair return” rather than one that migrates towards export parity-price (EPP) levels.
Should such a migration occur, upward pressure would be placed on Eskom’s costs and on South Africa’s already fast-rising power tariffs.
It calculates that an increase in the price from current levels to an EPP of R600/t delivered for the 30-million tons it currently purchases yearly through short-term contracts, will result in a 5% increase in its total operating cost, which stands at 56.4 c/kWh.
Eskom, which purchased 124.27-million tons of coal in 2012, still buys the majority of its coal through cost-plus and fixed-cost contracts. However, the proportion of coal acquired through short-term contracts had increased from around 17% in 2007 to 30% in 2012, as the performance of cost-plus mines has decreased.
Moreover, the utility is concerned that, owing to underinvestment in new capacity, high levels of industry consolidation and the emergence of viable export markets for Eskom-grade coal, miners could expect the utility to pay EPP in future.
In fact, it is precisely this threat that prompted Eskom to apply to the Competition Tribunal to intervene in the merger between Glencore and Xstrata. The utility eventually withdrew the application in favour of a confidential negotiated settlement.
But the pricing threat remains, particularly for the period after 2018, when coals shortages of up to 40-million tons a year are being forecast.
Substantial mining investment will be required to deal with that shortfall, with Eskom estimating that capital requirement at close to R100-billion.
Eskom has informed lawmakers that a balance needs to be struck that ensures domestic energy security together with sustainable growth of coal exports.
It has identified several enablers of what it describes as the “ideal utilisation” of South Africa’s remaining resources including: efficient domestic- and export-coal logistics; supply security for domestic users; the timely development of resources; and the development of alternative fuel sources, such as underground coal gasification.
But it also sees pricing, volume and quality factors as key to securing coal for domestic power generation requirements.