EDITORIAL: A lesson at the coalface on who not to do business with
It is nothing short of outrageous that the government has stepped in to urge coal suppliers to cut their prices to Eskom for the good of the country, when Eskom and the government have done so little to cut costs themselves.
In the case of the independent power producers (IPP) of renewable energy, the request from the government to renegotiate power purchase agreements is risky and short-sighted.
Commercial contracts can, of course, be renegotiated between contracting parties when the need arises. No coal supplier wants their number one customer to go out of business, so they do have an interest in negotiating new terms where possible.
It is the responsibility of Eskom management to investigate contracts it believes were secured through corruption, and cancel them.
But that is not what is happening here. This is not a renegotiation of commercial terms; it is political pressure from the government at the highest levels to protect a badly run and inefficient state-owned company while, out of a lack of political courage, it delays crucial decisions that must be taken to save the company.
By intervening in this manner, the government has now raised the risk premium for all suppliers to Eskom. It has also cast doubt on what has been SA’s most successful investment programme — the renewable energy IPP procurement programme — which brought in R190bn of investment over five years.
In the case of the coal contracts, the government is clearly of the view that the private sector is profiteering out of Eskom’s misfortune.
Over the period that Eskom was run by Brian Molefe, Anoj Singh and Matshela Koko, Eskom’s coal procurement strategy markedly changed. The old Eskom model in which power stations were built on top of coal mines, in which Eskom itself invested and developed and then bought coal from on a cost-plus basis, was increasingly abandoned.
It was replaced by short-term contracts with coal suppliers who trucked coal in from long distances. The change in strategy — invoked on the grounds that the cost-plus mines had now grown too expensive and were exploiting Eskom — created dozens of opportunities for new supply and trucking contracts for cronies at inflated prices.
While the new Eskom management has been working to replace the short-term contracts with longer-term ones, some of these legacy contracts still remain. It is the responsibility of Eskom management to investigate contracts it believes were secured through corruption, and cancel them. It is also their responsibility to identify the excessively priced contracts and renegotiate them or cancel them.
So while there could well be a case to be made of excessive pricing from some suppliers, it is Eskom’s, not the government’s, responsibility to address the problem.
The circumstances around the renewable energy IPPs are very different. These contracts — which take the form of power purchase agreements — were not negotiated by Eskom at all but by the government. Eskom, though, was required to sign the power purchase agreements and buy their power.
In the early stages of the programme, prices for wind and solar energy were far higher than they are now. In round one, for instance, the prices for solar photovoltaic and wind power were R4.02/kWh and R1.67/kWh. By round four in 2016, prices had fallen to R0.96/kWh for solar and R0.76/kWh for wind. The government now wants to renegotiate the first three rounds.
While it sounds simple enough, it isn’t. These are 20-year contracts, with the pricing based on costs at the time and the financing. To renegotiate these when these costs and financing are already hard-baked into the contract is not an easy matter. Even if costs of the first three rounds were dropped by 10%, the impact on Eskom would be minimal.
And while the benefits are minimal, the risks are high. Doubt will be cast on SA’s credibility to adhere to the terms of commercial contracts. These long-term contracts have also been sold on in the secondary markets as investments, precisely because of their reliable cash flows.
At the same time, little has been done about Eskom’s disproportionate cost base. All in all, it’s a naked example of how not to do business.