Eskom loses billions on coal contracts

Coal supply and contracting has been identified as a major risk by Eskom’s government shareholder.

Coal supply and contracting has been identified as a major risk by Eskom’s government shareholder.

Broke state power utility Eskom is losing billions of rands by paying different prices to suppliers for the same quality coal.

The result of this is a loss of R1.4-billion, at worst, on two contracts alone. Eskom is paying one supplier, Glencore, double the price it is paying another, smaller supplier for the same quality coal.

An analysis of a spreadsheet of some of Eskom’s short- and mid-term contracts entered into last year, and seen by the Mail & Guardian, show a R343.41 difference between Glencore’s R607.01/tonne price for coal (with a calorific value of 20.5) and the cheapest supplier of the same quality coal, Stuart’s Coal, which is priced at R263.63/tonne.

(Graphic: John McCann)

Calorific value or CV is the amount of energy contained in each piece of coal and is considered the most important factor in determining coal quality.The higher the CV, the better the coal.

Had Eskom contracted Glencore at the same price as Stuart’s Coal for 2.7 million tonnes over 18 months, it could have made a saving of R927-million on that contract alone. Eskom could have saved a further R550-million on another Glencore contract, for the same quality coal, which was priced at R518.45/tonne.

The analysis also revealed Eskom has been paying five different prices to five different companies, including Glencore and Stuart’s Coal, for the same quality coal.

In another example, Eskom contracted Glencore to deliver 21.50CV coal to Kriel power station at R665.85/tonne, but it also contracted Welgemeend Colliery to deliver the same quality coal to Matla power station at R342.28/tonne.
The saving on this transaction, had Eskom paid the same, would have been R291-million.

It is critical to note that the prices listed here do not include transportation costs, which, depending on mode of transport and distance between the mine and the power station, could easily add a further R90-R300 per tonne.

Several current and former Eskom employees have labelled this discrepancy as irresponsible, but the state-owned company has refused to discuss individual contracts.

Eskom told the M&G that the details of coal supply agreements,including the start and end dates, the CV, the prices, and the value of specific contracts are commercially sensitive and confidential.

On the pricing disparities for the same grade of coal, Eskom said: “Mines can have vastly different costs for producing comparable coal, and these factors are largely related to the nature of the resource and the mining processes.”

Eskom said other factors that influenced the price of coal included the geology of the resource and seam to be mined, and the mining method, the beneficiation method to be utilised, the yield percentage and infrastructure, mining equipment and working costs of the mine.

“Eskom aspires to enter contracts that are negotiated at arms-length, based on covering the cost base of the mining operation plus a fair return”.

“This is dependent on the supplier divulging their cost base and the return is a function of the mining and capital risk, willing buyer and willing seller as well as a function of supply and demand,” Eskom added.

Several current and former Eskom employees — speaking on condition of anonymity — said the coal pricing, before transportation costs, could vary from mine to mine, but this variance should never be as high as the examples contained in the spreadsheet.

“No two contract prices will ever be the same, because of other value such as sulphur content, abrasiveness, etcetera, but the amounts you are reading are just too high. Eskom should explain why this is so,” said a former primary energy official.

Another said: “It has always baffled me why Eskom allowed these prices to spiral out of control when it cannot pass it onto the consumer if it is outside of Nersa’s RCA [the National Energy Regulator of South Africa’s regulatory clearing account] determinations. It means the coal costs are simply too high.”

The regulatory clearing account is a Nersa monitoring and tracking instrument that compares certain uncontrollable costs and revenues assumed in the multi-year price determination to what Eskom actually incurred.

The retrospective difference between the cost and the revenue is what determines whether Nersa, if it feels it is prudent, will increase tariffs to allow Eskom to claw the money back, or decrease it if it feels the consumer overpaid in the previous year.

In early March,Nersa approved electricity hikes of 9.41%, 8.1% and 5.2% for the next three financial years. This was below Eskom’s application for double-digit tariff increases, but adding the 4.4% increase previously approved, the real increase for 2019-2020 is 13.81%.

A primary energy employee with no direct knowledge of these contracts speculated that it could well be that some companies exploited Eskom’s coal crisis last year and negotiated above normal prices to their advantage.

“Remember, companies know that good quality coal fetches a lot of money overseas, as Eskom’s fleet generally burns low grade coal.” 

Coal is among Eskom’s biggest costs, as coal power accounts for 36000MW of Eskom’s 46000MW capacity, and billions are spent every year on this.

The 25 contracts seen by the M&G, which were entered into between March and October 2018, with terms varying from 10 months to five years, are worth a whopping R38-billion.

By the time these contracts end, more than 70-million tonnes of coal would have been delivered to 12 of Eskom’s power stations, some of which include the seven that experienced chronic coal supply issues last year and required emergency procurement dispensation from the national treasury.

Last weekend City Press reported that the Special Investigating Unit was probing allegations that the great load-shedding crisis of 2008, when government spent R13-trillion on emergency coal procurement, was self-made, for self-enrichment.

Eskom’s liquidity problems, which has seen the utility’s debt grow to more than R420-billion this year, is a huge risk for the company and the fiscus. Ratings agency Moody’s, the only one that still holds South Africa at investment grade, said this week that Eskom will remain the main source of contingent liability risk for the government.

It was quoted as saying Eskom’s debt amounted to “around 8% of gross domestic product, of which 5% of GDP benefits from government guarantees”.

During this year’s budget speech, Finance Minister Tito Mboweni announced a R69-billion support package for Eskom over the next three years. The treasury also said that this could grow to over R150-billion over the next 10 years.

Coal supply and contracting has been identified as a major risk by Eskom’s government shareholder, represented by Public Enterprises Minister Pravin Gordhan and the utilities leadership in a joint press briefing held on Wednesday.

Gordhan, alongside Eskom chairperson Jabu Mabuza and the utility’s chief executive Phakamani Hadebe, briefed the media on the precarious state of power

stations and revealed details of last month’s round of load-shedding, which went all the way up to stage four and, for the first time, went on throughout the night on some occasions.

Sabelo Skiti

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