Eskom's power struggle

David McKay | Fri, 14 Nov 2008 14:21
[miningmx.com] -- YOU’VE GOT TO hand it to Ras Myburgh: for a man helping tackle South Africa’s chronic power shortage problems he’s highly optimistic.

“Now that I’m on the inside I’ve got a huge amount of appreciation for the effort that’s taking place,” he says. Myburgh was seconded to Eskom from Anglo American’s Kumba Iron Ore earlier this year with the aim of improving Eskom’s coal supplies, crucial in the production of electricity.

Myburgh says stock days of coal are now averaging 30 days for all Eskom’s mines compared to 23,8 days in July – and much higher than the levels in January, when SA’s mines were forced to close for a week to conserve power.

But the trend is that the growth in Eskom’s coal consumption is far greater than the planned growth in coal supply. According to Eskom’s annual report published in July Eskom burned 125,3m t of coal in the year to March but bought only 119,6m t, which means it ran down stockpiles by 5,7m t. There was a similar supply deficit of coal in 2006.

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By January that trend of consumption over supply hit crisis point, with some power stations reduced to only six days or less of coal before they’d grind to a halt. The situation was dire but Myburgh says the response since has been positive.

A number of strategies have been put in place. Burning coal discards has increased and while there are obvious efficiency implications of doing that it’s helped relieve supply problems.

But by far the greater positive impact has been Eskom’s ability to improve supply efficiencies. “We’re working with Transnet to get more efficiencies on the railways, which will affect stock holdings,” says Myburgh. “We’ve also devised a risk-based assessment for each of the power stations.”

That means the State utility now has a much better understanding of which power stations are vulnerable to supply problems. Higher stocks are kept at those with higher risks.

“The risk exposure analysis is based on alternatives of supply certain power stations have and how quickly alternatives can be supplied. For example, risks are higher at Majuba because it’s a more remote station,” says Myburgh.

Over the longer term there are other measures to be met. Obviously, it’s a question of building more coal-producing capacity. In August Eskom estimated supply for 2008 of 246m t, a 9% shortfall on forecast demand of 270m t. It also said if all the new coal projects currently being considered were actually initiated then supply would be 384m t in 2018, providing a slim margin over forecast demand of 374m t.

But Eskom highlighted the potential for a shortfall in that production forecast. To deliver the predicted volumes 43 new mines would have to be opened at a cost of R100bn and 23 of those would be required to supply Eskom’s requirements.

Myburgh believes approval for new mines by Government quickly issuing licences could be speeded up. But there was also a responsibility on mine developers to meet the mine application criteria in time, he says.

Eskom also badly needed to increase the percentage of coal supply to long-term contracts away from the current preponderance of short-term contracts, comprising about 21% of total supply and which tends to be more expensive.

Meanwhile, the export market is applying pressure. Owing to the shortage of coal worldwide, importers overseas are showing more tolerance for lower quality coal at higher prices. That incentivises SA’s producers to seek higher margin offshore contracts. “That’s definitely a threat that we have to deal with,” says Myburgh.

Perhaps only the constraint on export entitlement and rolling stock from inland mines to SA’s ports will help limit that.

“The risk hasn’t changed for the country,” says Myburgh of the prospect that further power rationing could be imposed in the future. “The key is the demand side – and wet conditions and planned maintenance could increase that risk again.” Wet weather dampens coal and makes it difficult to burn. “The fact that SA’s power system is constrained is one of history. The question now is how to tackle it. The sooner we agree on the rules of the game, the better,” he says.