Coal

How Eskom paid billions more for coal after ignoring early warnings

How Eskom paid billions more for coal after ignoring early warnings <www.businesslive.co.za/bd/life/books/2018-09-12-how-eskom-paid-billions-more-for-coal-after-ignoring-early-warnings/> Fallout hit Exxaro, SA’s largest black-owned mining company 12 SEPTEMBER 2018 – 05:10 STEPHAN HOFSTATTER[image: Flabbergasted: Exxaro CEO Mxolisi Mgojo said he was gobsmacked when former public enterprises minister Lynne Brown blocked approval by the Eskom board of a R1.8bn investment in sinking a new shaft at one of the mines supplying Matla power station. Picture: FINANCIAL MAIL/RUSSELL ROBERTS] <lh3.googleusercontent.com/mK00Lggb75GkBXByAu6eabZoeN1kmGQnh6LFdPSrqOuZf3wzUAC8kz-u3GUE-ucVGKYyz6elCRCysbM3GtMsgV_Y2GT_Uevj=s1200> Flabbergasted: Exxaro CEO Mxolisi Mgojo said he was gobsmacked when former public enterprises minister Lynne Brown blocked approval by the Eskom board of a R1.8bn investment in sinking a new shaft at one of the mines supplying Matla power station. Picture: FINANCIAL MAIL/RUSSELL ROBERTS
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. <lh3.googleusercontent.com/PkRXiayZh41KhpSAFW5fnbc800foyQIcdKnzUOEQ9S5cV8Qrthq92XFc6mmdEcK1zEJiGHMzG7ODkzMygD7FnUeOBlSebkroog=s1200>
“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.

1 Comment

Click here to post a comment

  • Emailed comment from an EGSA member:
    “…Includes the largely unknown ‘tied mines’ and the astonishing risk-free subsidy they receive, as well as the conflict between the different factions within BEE. Notable also because of its total ignoring of renewable energy and climate change”