How Eskom paid billions more for coal after ignoring early warnings
Fallout hit Exxaro, SA’s largest black-owned mining company
Early in 2015, an Eskom manager walked into a boardroom full of senior officials with a two-page presentation, headed “A failure to adequately spend on capex now will result in an operational calamity”.
The first page contained a graph that projected Eskom’s coal costs over the next eight years. One of the two lines showed what the utility would spend on coal if it allocated the full amount of R27bn needed to recapitalise its tied mines — those situated close to power stations that are dedicated to supplying Eskom with cheap coal through “cost-plus” or long-term supply agreements.
The recapitalisation would involve anything from sinking new shafts to reach higher-grade coal deposits, to refurbishing draglines, the gigantic machines that scoop up earth at open-cast mines.
The second line represented coal spend, with no capital allocated to Eskom’s tied mines.
From 2016, the lines begin to diverge dramatically as production plummeted at the run-down tied mines near Eskom’s power plants, forcing the utility to truck in coal at a much higher price. By 2023, the projected difference in coal costs as a result of failing to invest in the tied mines is R90bn.
“It means that if Eskom had spent R27bn investing in the cost-plus mines in 2015, we would have saved R90bn,” the manager told me.
The problem is that tied mines have become a political football. Because the original contracts were signed 30 or 40 years ago, Eskom’s new top brass could claim that the investments would subsidise the operations of traditionally white-owned companies such as Anglo American.
This is true, but it ignores several salient facts.
These mines supply Eskom with its cheapest coal by far, which means investing in them now will benefit all electricity consumers in the future. Eskom is contractually obliged to pay for capital costs.
It is also false to claim that only white monopoly capital benefits from this arrangement, because there has been significant progress in black empowerment at tied mines.
A good example is Exxaro. The company was formed in 2006 through a merger of the coal division of Kumba, a company owned by Anglo American, and Eyesizwe Coal. The merger created SA’s largest black-owned mining company, which supplies coal for a third of Eskom’s power generation.
One of Exxaro’s mines, Matla colliery, is tied to Eskom’s Matla power station, 130km east of Johannesburg. As with all cost-plus mines, Eskom was contractually bound to cover Exxaro’s capital and operating costs. The cost of coal was calculated as the actual cost of production plus an inflation-linked management fee and a relatively low return on investment.
In return, the mine provided Matla power station with a guaranteed supply of cheap coal it wasn’t permitted to sell anywhere else, including on the then lucrative export market. Matla’s three mines hold 250 million tons of coal reserves, which means it could be a significant secure source of cheap energy for decades. Since 2004, Matla repeatedly tried to convince Eskom to spend R1.8bn on sinking a new shaft on one of the mines because the existing shaft had become unsafe — a cost Eskom would have to cover in terms of its coal supply agreement, but to no avail.
Exxaro later discovered that when the Eskom board finally approved the investment, former public enterprises minister Lynne Brown blocked it. In a letter to Eskom in April 2017, she said she’d declined the request because she failed to see how “the objective of the democratic government” would “find expression in these arrangements” that predated 1994.
Exxaro CEO Mxolisi Mgojo was gobsmacked. “The minister’s stance is most surprising in circumstances where the coal supply agreement has been amended and affirmed on numerous occasions after 1994 and where Exxaro is one of the largest and foremost black-empowered mining companies in SA,” he said.
Exxaro was thus forced to close the shaft and reduce the amount of coal it supplied to Matla power station from 10 million to 7.5 million tons a year, leaving the door open to other suppliers.
Mgojo calculated that the power plant was forced to make up the shortfall with 400 truck-loads of coal a day, “with the concomitant traffic congestion, damage to the road and risk to other road users, when this coal could otherwise be delivered by conveyor belt directly from the Matla mine”.
Mgojo estimates that Eskom has paid R5bn more than it needed to in just two years by trucking in coal “at exorbitant prices”, when it could secure cheap coal from Matla for another 20 years simply by investing R1.8bn in the shaft.
The hidden hand became abundantly clear to Exxaro when it was subjected to the same modus operandi with another of its tied mines, Arnot.
Since the 1970s, Arnot colliery southeast of Middelburg has been contracted to supply Arnot power station with 4 million tons of coal a year from its underground and open-cast sections. As with other tied mines, coal was delivered by conveyor belt, keeping transport costs low, and Eskom was contractually responsible for capital and operating costs.
Eskom’s coal supply agreement with Exxaro specified that the utility was obliged to buy six portions of land known collectively as Mooifontein to allow the mine’s open-cast operation to expand as underground mining became too expensive. But Eskom repeatedly delayed buying Mooifontein while refusing to fund other urgently needed capital costs despite being contractually obligated to do so. This forced Exxaro to reduce coal supplies from 4 million tons to 1.8 million tons, dramatically pushing up the cost per ton to more than R1,000.
Exxaro’s 40-year contract at Arnot was set to expire at the end of 2015. When Brian Molefe arrived in April, the mine was at an advanced stage of negotiating a new deal with Eskom that would allow it to deliver cheaper coal to Arnot until the end of the power station’s life in 2023 by opening up Mooifontein. But in September 2015, Eskom inexplicably announced Exxaro’s contract would not be extended.
Despite being Eskom’s biggest coal supplier, repeated attempts by Exxaro executives to meet Molefe to resolve the deadlock were rebuffed.
In December 2015, Exxaro’s Arnot contract came to an end and the company was forced to close the mine that had supplied the power plant since 1975. More than 1,500 jobs were lost.
Looking back at these experiences, Mgojo said they raised several uncomfortable questions. He concluded that Eskom had “unlawfully pushed Exxaro out of the coal supply space and contracted with a third party/ies at a considerably higher cost to the fiscus”.
These “third parties” included the Guptas.
Mgojo laid the blame on Molefe, whose arrival had precipitated a marked deterioration in the relationship between Exxaro and Eskom.
“Eskom’s agreements with Exxaro were in certain instances not adhered to or, where they were being finalised, were frustrated,” he pointed out.
“Despite this, and the fact that Exxaro is the biggest supplier of coal to Eskom, Molefe refused to meet with Exxaro throughout his tenure at Eskom.” Molefe clearly had other priorities.
This is an edited extract of Licence to Loot, available in all good bookshops.