There are positive signs suppliers will lower cost of coal to Eskom, says David Mabuza
Deputy president says the government is seeking an amicable way to ease pressure on power utility
Deputy president David Mabuza says there are positive signs that the cost of coal will be lowered as the government scrambles to find ways to save Eskom, the country’s ailing power utility.
“There are positive signs that coal costs will be lowered. Meetings with suppliers took place, but they are raising a lot of issues regarding labour. They are saying if they reduce costs they will have to reduce the number of people they employ, but as government we are saying no,” Mabuza said.
“We are looking for an amicable way to solve this ... that will be of benefit to the suppliers and Eskom,” he said.
Eskom’s primary energy costs rose 17% in its most recent financial year, due to higher coal charges. The utility has burnt more than 100-million tons of coal annually for at least a decade.
The costs have also been pushed up by increased production from independent power producers (IPP). Eskom has had to pay a set rate for the energy supplied by the IPPs.
The government has said on several occasions that it would like to renegotiate the tariff of the first two bidding rounds of the renewable IPP programme, as the prices negotiated at the time were expensive relative to the later rounds.
But IPPs and the investor community have warned that a renegotiation of contracts will undermine investor sentiment and cast doubt on the government’s integrity in honouring contractual obligations.
The Mail & Guardian newspaper reported in October that Eskom could have saved about R10bn over the next six years had it negotiated a better deal with its coal suppliers.
The embattled power utility supplies virtually all of SA’s energy and exports some to its neighbours. However, with a mounting debt of R440bn, which it cannot service from revenue, Eskom is regarded as a major risk to SA’s finances.
Responding to questions in the National Council of Provinces on Thursday, Mabuza said talks with supplies were at an advanced stage and there was willingness to lower costs of coal.
Several ministries recently approached coal and renewable energy producers to ask for lower-cost supplies, Bloomberg reported in October.
Coal producers plan more talks with the government, according to the Minerals Council SA, the country’s mining lobby. “Careful consideration is being given to being mindful of competition regulation,” it said in a statement.
Miners charge Eskom a wide range of prices for coal in contracts of varying length. The cost of the fuel at SA’s Richards Bay port, from where some producers export, has dropped 32% over the past year, putting additional pressure on the companies.
Seriti Resources Holdings, which is finalising talks to buy the SA coal assets of South32, has taken part in the talks with the government. “It’s in all of our interests to get Eskom back on its feet,” the company said in a statement in October.
South32, an Australian-listed miner that was spun out of BHP in 2015, announced this week that it had concluded a sales purchase agreement with Seriti Resources for its SA Energy Coal business for an upfront payment of R100m.
The parties will now start with work to fulfil a number of conditions, one of which is the renegotiation of coal supply contracts for Eskom.
During the question and answer session in parliament on Thursday, Mabuza pointed out that Eskom’s problems were deeper than the cost of coal. The power utility had been hamstrung by poor management, as illustrated by the failure to manage its debt, the deputy president said.
“We need to beef up the management of Eskom and get skilled leadership to run the utility,” Mabuza said.
The utility still does not have a permanent CEO after the resignation Phakamani Hadebe in May.
“It is worrying that Eskom has over the past 10 years failed to manage its debt. We have to ensure that the money we give to Eskom is correctly utilised,” Mabuza said.