Eskom's coal conundrum

Johannesburg - Eskom's short-term coal contracts expire early next year, but the utility says it will be unable to manage without this expensive source of supply until 2018.

The company is currently negotiating with short-term coal providers to accept longer 10-year contracts extending to 2018. This could make Eskom's coal stocks more reliable and possibly also reduce costs in the long run.

Brian Dames, Eskom's head of operations, says short-term contracts currently vary from two to five years. These contracts provide 30% of the utility's coal, but represent up to 40% of its total coal outlay.

"In 2008 coal shortages caused a major crisis and Eskom had to enter into very expensive supplementary short-term contracts to replenish stocks. Export coal was, for example, priced up to $100/ton and the oil price was at $147/barrel. Eskom therefore had to pay dearly for its coal."

According to Dames the current market for coal purchases is more in Eskom's favour.

"The price of export coal is now, for example, $62/ton and the oil price has halved since last year. Eskom is therefore in a better position to negotiate new contracts."

Dames explains that up to 17% of the total cost of coal is actually the cost of getting it to power stations. Up to 28% of Eskom's coal is currently transported by road.

"As soon as you transport coal by road, it doubles the price per ton. This puts Eskom's primary costs under severe pressure and has also been one of the main reasons for the recent 31.3% tariff increase."

Dames says, however, that these strategies and further developments relate to the long term. For that reason Eskom will have to continue depending on short-term coal-supply contracts for at least the next 10 years.

- Sake24.com

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