Eskom coal ‘cliff’ could deal another blow to already battered electricity outlook

9th July 2013

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – Electricity supplies will be further constrained if South Africa fails to secure coal supplies, the Energy Intensive User Group (EIUG) warned a day after State-owned power utility Eskom confirmed that it would not be in a position to meet the end-of-year deadline for the flow of first power from the Medupi power station.

The EIUG tells Mining Weekly Online that there is general consensus that a gap in the supply of coal to Eskom is developing, not owing to lack of coal in the ground but rather because of the incorrect application of policy choices.

South African Coal Roadmap chairperson Ian Hall tells Mining Weekly Online that no significant coal project for supply to Eskom has been approved or funded for development since the coal roadmap process began more than two years ago.

XMP consulting senior coal analyst Xavier Prévost adds that many coal projects in the pipeline will remain frozen until the industry’s severe current capital constraints ease and the present problems facing South Africa’s mining sector are eliminated.

Wescoal CEO André Boje said at the company’s results presentation last month that the volume of new coal that Eskom would require in the next two years was the equivalent of another 20 Wescoals, on the basis of the JSE-listed junior producing at a rate of three-million tons a year, which it has still to achieve.

“In 2015, there’s a supply cliff for Eskom. Where are the 60-million tons going to come from? I haven’t got the answer. That’s a scary number, and you have got to be investing now to have the coal then,” Boje pointed out.

EIUG, which has researched a number of recent independent studies and consulted widely with a number of experts in the field, says that projects for new coal will not be mined by government, black economic-empowerment (BEE) operators or investors unless they get certainty on policy and, in particular, price.

Hall says the policy outlook remains unclear: “Although it is anticipated that the 2012 Minerals and Petroleum Resources Development Act (MPRDA) Amendment Bill will be presented sometime soon, presumably with some of the comments submitted taken into account, I, for one, haven’t seen it, so it remains unclear what its provisions will contain.

“Judging by the recent implementation of the 2008 amendment and the quick retraction of some of its provisions, I would suggest that there has not been any notable improvement in confidence with respect to clarity in the legislative landscape,” Hall adds.

Prévost makes the point that without finances, no mines can be put into operation, which means that coal production will decrease and consequently less coal will be made available to Eskom and for export.

“Two solutions come to mind, the first is opening up the field to independent power producers (IPPs), and the second is implementing new mines and power stations in the Waterberg.

“But both need heavy finances and, therefore, in the present climate, they are not possible,” Prévost adds.

EIUG, headed by chairperson Mike Rossouw, proposes a multipronged solution, firstly that assurance be given to existing coal producers that their existing businesses will not be compromised by new or changed policy.

“Security of tenure is paramount,” EIUG stresses.

Secondly, it proposes that the State invites requests for proposals from prospective investors for all the unallocated coal resources that the State itself owns and administers.

In this way, the State can assess how and the extent to which this resource can be brought into production and how much production should be sold locally.

EIUG concurs that the field should be opened to IPPs and proposes that the government establishes a BEE coal cooperative, which can secure financing for the needs of its members; partner with industry in mutually beneficial arrangements; and consolidate the current unsustainable arrangement of Eskom trying to deal with a plethora of small uneconomical operators.

Eskom told the IHS McCloskey South African Coal Exports Conference earlier this year that its strategy rested on opening the Waterberg; widening the universe of coal producers to include black-owned-and-operated suppliers; and intervention by the State, presumably to protect Eskom supply.

It is not clear how insisting on black-owned-and-operated mines will speed up coal delivery.

“I would suggest that this has the potential to add further delay,” says Hall.

How the State will intervene also remains unclear, although declaring coal strategic has been mooted.

“How will declaring coal strategic speed up delivery and how will this be implemented?” Hall asks.

The other key issue is the granting of environmental authorisations, water-use licences and mining rights.

This process is increasingly uncertain and arbitrary. There is no clarity about what is and what is not permitted in terms of mining of water catchments and watershed areas. It appears to be up to the relevant official to decide.

Because there is no mandatory response time for the issuing of water-use licences, investment decisions are delayed or not made at all because of the uncertain climate.

Out of the 46 mines currently supplying Eskom, 19 do not have water-use licences, a landscape in which top-tier companies cannot operate.

“Lastly, I don’t need to tell you that capital is extremely constrained,” says Hall.

The roadmap, which is due for official release this month, has identified continued supply to Eskom as the most pressing issue facing the industry, although exports must also be maximised, since they are the highest-value contributor and incentive for investment.

“This hinges on immediate and significant investment in the coal industry. In the current context, this is a real challenge,” Hall adds.

Solutions that will fail, EIUG warns, are declaring all coal a strategic resource; demanding more of the existing unsustainable small BEEs; capping prices or forcing allocation, which will have exactly the opposite effect of causing prices to rise and supplies to dry up; and making changes to the MPRDA without the necessary facts, of which EIUG has an abundance that it is ready to share, he adds.

Prévost sees the potential coal resources, especially for Eskom, as being still fairly abundant if one takes into account the low coal qualities required and that most of South Africa’s remaining coal in the ground is thermal coal and enough to supply Eskom power stations for a long time.

The total indicated resource of power station coal amounts to 33.3-billion tons, from which about 17-billion tons could be extracted as run-of-mine coal.

This, says Prévost, could support 35 new power stations at 12-million tons a year of coal burn for 40 years each.

However, why Eskom may face a shortage is because of the time it takes to convert resources to reserves and the cost of doing so.

Feasibility studies need to be funded, business plans drawn up and contracts secured from Eskom in order to facilitate profitable coal extraction.

“Although we still have enough coal supplies for Eskom, a number of the large mines are decreasing production and some will close down in the next ten years,” Prévost adds.

The ‘supply gap’ they will create could be filled with coal from new juniors or larger producers, but in the current capital-constrained environment, he foresees projects remaining frozen.

“Reading current press reports about hurdles confronting the industry, I see no solutions; instead of solving problems, mines seem to be facing even more,” he adds.

Eskom confirmed on Monday that it would not be in a position to meet the end of year deadline for the flow of first power from the Medupi power station, which is being built in the Limpopo province.

As reported by Mining Weekly Online, CEO Brian Dames reported that, following an independent assessment and fresh delays to the control and instrumentation contract, the second half of 2014 had now been set as the new, "realistic" deadline for synchronising Medupi's first unit, Unit 6, to the grid.

The power station was meant to supply first power to the grid by December 2013, a deadline reaffirmed as non-negotiable earlier this year by Public Enterprises Minister Malusi Gigaba, who is also looking to procure half of Eskom’s future coal needs from black-controlled enterprises.

Department of Public Enterprises spokesperson Mayihlome Tshwete described the new delay as “unfortunate”.

Edited by Creamer Media Reporter

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