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Eskom's electricity price hikes 'excessive' - Dentons

Feb 10 2017 10:30
Lameez Omarjee

Johannesburg – Eskom’s electricity price increases between 2011 and 2015 have been at a higher rate than international prices, according to the Dentons report.

News24 is in possession of a redacted copy of the report by the global law firm, following an investigation into Eskom’s state of business during 2015.

The three-month Dentons investigation was launched in 2015 in an effort to determine reasons behind load shedding across South Africa at the time and reasons for the delayed infrastructure build, among others. It also followed the suspension of four Eskom executives in 2014.

READ: Dentons report sheds light on why Eskom fell behind on Medupi, Kusile

The Dentons report pointed out that South African electricity price increases may continue for years. But this bucks the global trend of falling prices.

“South Africa cannot isolate itself from international prices and competition,” the report read.

Among other findings picked up by Dentons was Eskom’s increasing primary energy costs. Dentons endeavoured to find out if the costs were driven by market forces or contractual agreements, and if they were commercially supportable.

Given the excessive pricing of coal, one of Dentons' recommendations was for individual coal contracts to be further investigated to determine the commercial viability of coal prices.

Questions are raised in the report about why the power utility failed to benefit from the 50% decline in international coal prices between 2011 and 2015.

READ: Eskom lifts lid on Dentons report

“Given Eskom's buying power in the industry, the alleged competitiveness of the coal market and declining international prices, it would be reasonable to expect Eskom's marginal coal prices to have decreased during this period,” said Dentons.

The weaker rand may have had an effect, it added.    

For the four years leading up to 2015, coal had traded between R880 and R720 per tonne. This export price of coal in rands had not decreased to the extent of dollar-based prices, given the depreciation of the rand from R7 to R12 to the dollar over the period. Essentially, Eskom's average price of coal has been increasing over time.

Average annual prices paid by Eskom increased on average by 18% per annum from 2006 to 2014, compared to the period between 2000 and 2006 where it increased on average by 9% per annum.

For the same periods the export prices increased by 12% and 12.4% respectively.

"The Eskom price has therefore been increasing over the last number of years more rapidly than the export prices."

Coal pricing

Historically, Eskom coal prices in its long-term contracts were comparatively low, which is why electricity prices were lower during the 1980s and 1990s, explained Dentons.

However, as demand for electricity increased, coal consumption also rose. Eskom had to purchase greater quantities of coal. Long-term fixed price contracts then had to be supplemented with medium- and short-term contracts.

Traditionally, collieries supplying coal under 'Cost Plus Contracts' were developed as joint ventures between Eskom and the mining company. Both parties invested capital.

As these mines are situated next to Eskom's power stations, with supply dedicated to Eskom, transport costs should not be significant. Exceptions were made for Majuba and Tutuka power stations as they did not have collieries close by.

The coal price was based on mining costs, plus an agreed profit consisting of management fees and a return on capital invested by the mining company.

ALSO READ: BLACKOUT: 10 things in Dentons report Eskom has kept hidden

Long-term contract prices increased according to an agreed composite escalation index. Mines supplying coal to Eskom under these contracts also supplied the export market.

The supplies for medium- and short-term contracts are transported by road and rail. These transport costs have contributed to higher coal prices, the report implied.

Transport costs would add R300/t for the total price of coal, according to 2014 figures available for short-term contracts.

Further, Dentons said that importing coal from international sources would increase the price of coal “by a large margin”.

Transport costs for medium-term contracts are also “a significant driver” in the increased coal costs experienced in the last number of years, said Dentons.

The amount for the average price across the long- and medium-term contracts - including transport costs - was blacked out by Eskom. According to the report, this price is about 50% of the export price of higher quality coal before transporting it to Richards Bay Coal Terminal, for example.

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