Coal mooted as strategic resource

Johannesburg - The government is considering declaring coal a strategic resource, Public Enterprises Minister Malusi Gigaba said on Thursday.

"We are engaged in discussions with the ministers of mineral resources and energy to secure the security of supply (of coal)," he said at Eskom's annual results in Cape Town, shown to media in Johannesburg via video link.

"We need the right volumes and the right quality of coal, at the right prices."

Eskom had traditionally bought low-grade coal for its power stations from suppliers, leaving high-quality coal to the export market.

However, demand from Asian countries, particularly India, had increased in recent years. This had pushed prices up, affecting Eskom's coal stockpiles.

In the year to March 2012, Eskom had seen coal prices increasing by 17%, the results showed.

In addition, to sustain the increased load on its power stations  a higher grade of coal was needed.

South Africa, as a coal-intensive economy, needed to respond to this challenge. Quotas could be implemented, prescribing the quantity and quality of coal which could be available for domestic use.

"Electricity is regulated, but coal is not," he said. "Our top priority is the security of supply for South Africa." Eskom CEO Brian Dames agreed.

"Coal is our biggest input cost, and filters directly into the tariff," he said.

"Our expectation for the following year is that coal goes up by a single digit. It is very important that we achieve that."

Financial director Paul O'Flaherty said Eskom had been forced to buy coal at an additional cost from other mines as the quality of coal offered by its suppliers deteriorated.

"We will have to address this with the mining industry," he said.

Despite the increased coal price, Eskom nevertheless declared a 60% increase in net profit for the year. Net profit was R13.2bn, from R8.4bn for the previous year.

This was only slightly above the R12.8bn reported for the first half of its financial year to September.

Most of Eskom's profit is earned in the winter months, in the first half of its year. This is when tariffs for large customers are higher and maintenance costs are lower.

Gigaba said the results were pleasing.

"Eskom must continue to improve its financial health so that it can invest to support economic growth and job creation and improve the quality of life," he said.

But he warned even more difficulties lay ahead for the utility, as the capital expansion programme still had to be completed.

There were significant achievements during the year under review - Eskom's third year of "healthy" financial performance.

Over 70% of the funding had been secured for the R340bn programme by the end of March.

There had been no load-shedding since April 2008, and Eskom had exceeded the targets government had set.

The government, as the shareholder, had waived its dividend to allow the surplus to be reinvested in Eskom's build programme, said Gigaba.

This had enabled electricity tariff increases to be reduced from 25% to 16%, putting R8bn back in the economy.

Dames said electricity from independent power producers (IPPs) was bought by Eskom for more than it could sell electricity to the consumer.

Power from IPPs cost 70 cents per kilowatt hour, but Eskom sold electricity at 50 cents per kilowatt hour.

"Electricity prices are still not cost-reflective in South Africa," he said, as this was the cheapest alternative power supply available to the utility.

"We need IPPs in the system. The choice we have to make is how much to introduce."

Eskom had made safety a top priority at the company, after 25 fatalities were recorded in the year. These were mainly due to vehicle accidents and electrical incidents, he said.

O'Flaherty said two previously mothballed stations, Camden and Grootvlei, had been returned to service. The commissioning of a third station, Komati, was two-thirds complete.

A total of 5.8 GW of new generating capacity, 3 899km of high voltage transmission lines, and 20 195 MVA of new transformer capacity had been installed since 2005. Construction of the two new coal-fired power stations Medupi and Kusile was continuing.

Together with a pump storage scheme, Ingula, and new transmission infrastructure, these would add 17 GW to the grid in 2019.

"We are doing everything in our power to make sure we bring (the new capacity) online and within budget," he said.

"We are making sure that we can bring some of that forward."

The Democratic Alliance condemned Eskom's increase in profit.

"This is almost entirely due to the massive tariff increases that South Africans have had to endure in the recent past," said spokesperson Natasha Michaels.

"An additional tariff increase for next year cannot be justified."