heres an article written a few days ago.Eskom faces coal...

heres an article written a few days ago.

Eskom faces coal conundrum
David Gleason, 20 September 2013, 05:54
There are some hard questions in the coal conundrum facing Eskom, and the answers will probably be uncomfortable, writes David Gleason

     
ESKOM CE Brian Dames must be a worried man. If he isn’t, he should be. Eskom’s past policy was to build new power stations adjacent to defined coal fields. The owners, such as the former Trans Natal and Anglo Coal, would enter into long-term tied delivery agreements on an "operating cost plus" basis.

It was a policy that worked well. There were no transport costs — the coal was delivered by conveyer straight into the station — and the collieries were managed efficiently. Beginning around 2001 coal from tied collieries was supplemented by buying in from other sources. The contracts were invariably given to black economic empowerment (BEE) companies. Frequently, they bought the coal in from established producers such as Xstrata, added a fat markup, and on-sold to Eskom.

But the tied collieries’ coal reserves are fast running out. It seems they will be substantially depleted by 2016. That will require coal to be obtained from the Waterberg, since Mpumalanga’s higher-quality reserves are exported.

Eskom’s coal burn rate is 124-million tonnes per annum (mtpa).

Excluding the Matimba station in the Waterberg, which requires about 15-mtpa, Eskom’s coal requirement in Mpumalanga, where most of its stations are situated, will be of the order of 100-mtpa.

Beginning around 2016, perhaps as much as 60-mtpa will have to be hauled in, rising to around 100-mtpa in 2018 and thereafter.

The Waterberg coalfields appear to be the only feasible supplier.

The Springbok Flats coalfield north of Pretoria is too radioactive and the Free State fields are too deep. The logic is that this coal should be moved by rail, but the 600km long line between Lephalale and eMalahleni can carry only about 4-mtpa. Upgrading it so it can handle prodigious volumes will take about 10 years.

The alternative is road transport, and the arithmetic is enough to make brave men pale. A 35-ton truck will take two days to deliver the coal and return, so that over a month it will carry 525 tons — if it doesn’t break down or need servicing.

Beginning with the initial requirement of 60-mtpa or 5-million tons a month, will require a colossal 9,500 trucks, each thundering up and down roads that were never designed to carry this weight.

And, assuming the transport charge is R1 per ton per kilometre, it will cost R600 to shift one ton of Waterberg coal.

The current spot price of thermal coal on world markets is between $75 and $80 a ton (roughly R800/t). Assuming Eskom is able to buy thermal coal on long-term contracts at, say, R300/t, this means an all-in price of close to R1,000/t. There’s no way consumers will avoid steep price hikes to pay for this.

Perhaps there are some easy answers to this conundrum. I would certainly like to know of them.

Meanwhile, section 16 of the Electricity Regulation Act (4 of 2006) provides that the tariffs charged must enable an "efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return".

"Efficient" needs to be defined.

Eskom has no handy benchmark. So a look around reveals the Indian Tata Group’s Mundra power project in Gujarat state. Its maximum generating capacity is 4,000MW, not far off that intended for both Medupi and Kusile. Its coal is imported from Indonesia and its capital cost came in at about R32bn, in line with World Bank norms. That compares with the currently estimated capital cost of about R150bn (including interest) for Medupi.

There are some hard questions in all this, and the answers will probably be uncomfortable.