Eskom pays for coal it can't use

The Medupi power station should be up and running by year end. (Reuters)

The Medupi power station should be up and running by year end. (Reuters)

Eskom won't be able to claw back the approximately R2-billion it has paid in penalties to mining company Exxaro under a coal supply agreement for the long-delayed Medupi power station.

This is according to Exxaro, which received just under R1.6-billion and R352-million in penalties from Eskom, in 2013 and 2012 respectively.

The coal has not yet been delivered, and the penalties are likely to continue mounting in 2014.

Exxaro is contracted to supply Medupi with coal from its expanded Grootgeluk mine. But extensive delays in the completion of the power station have meant that Eskom has not been able to use the coal it agreed to procure.

"In terms of the coal supply agreement ... Eskom has an obligation to keep Exxaro value neutral, meaning that changes to the agreement due to delays in the construction of the power station should put Exxaro in the same financial position it would have been had the Medupi power station been on time and hence taken the coal," Exxaro executive Mzila Mthenjane told the Mail & Guardian.

Shortfall payment
"Since the ramp-up of coal has not started due to Medupi power station delays, the coal supply agreement caters for the shortfall payment of R1.6-billion in 2013 and R352-million in 2012."

The mining company booked the revenues under "other income" in its annual financial results released in early March, stating that the amounts related "to shortfall income received from customers as a result of delays in agree[d] upon production off-take plans".

The company said Eskom would not be able to reclaim the costs, but that it was in negotiations to try to mitigate the impact on the utility.

Medupi's first unit was initially scheduled to be commissioned by 2011, but it is only expected to come on line by the end of this year.
The penalties seem set to continue.

Following the release of its annual results, Exxaro financial director Wim de Klerk told Miningmx that another R1.6-billion is expected to be paid over to Exxaro for the coming 2014 financial year.

Waiting on Eskom
Mthenjane confirmed this and that although Exxaro had planned to supply six million tonnes of coal to Medupi in 2014 it was unlikely to happen as it is waiting on "Eskom to advise how many tonnes they will require this year".

Exxaro did not indicate how much coal had been delivered in 2012 or 2013, referring questions to Eskom.

According to its 2012 June interim results, however, Exxaro had made initial deliveries to Medupi in the first half of that year.

In terms of the supply agreement, once the power station is complete, Exxaro is meant to supply Medupi with 14.6-million tonnes of coal a year. But according to its 2012 June interim results, Exxaro had at least made initial deliveries of coal to the still incomplete Medupi in the first half of that year.

Eskom told the M&G that the coal has not been supplied, but it will start taking deliveries in May.

When asked whether there was any hope the utility could recoup costs for coal it cannot use because of Medupi's delays Eskom said: "The Medupi coal supply agreement with Exxaro has been extended to ensure that Medupi's coal requirements are still met."

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