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Medupi coal weighs on Eskom’s primary energy cost

Coal procurement to be overhauled.

Eskom paid R83.4 billion, which is 19% more than the previous financial year, for primary energy in the year ended March 31 2015. This is far above both inflation and the 8% tariff increase it got for the year.

This comes in spite of a reduction of 3 million tons in the coal Eskom burnt, as the availability of its coal-fired power stations deteriorated to 73.73%, down from 75.13% in the previous financial year.

Eskom acting CEO Brian Molefe disclosed these numbers at the presentation of the utility’s annual financial results at its headquarters in Sunninghill, Johannesburg on Tuesday.

The sharp increase in primary energy costs is largely the result of having to pay R6.7 billion for coal for its Medupi power station that is not yet delivering commercial power, and R9.5 billion (FY2014: R3.2 billion) for independent power producers (IPPs).

Eskom has a take-or-pay coal supply agreement for Medupi, which means even though the power station is not ready to burn the coal due to construction delays, it has to take delivery of it as agreed, or the utility will be held liable for the cost as if it was delivered. Medupi is therefore already a huge operating expense for Eskom, without generating a corresponding income.

Construction of Medupi is years behind schedule and the first unit to be completed is only expected to deliver commercial power in this quarter. The target date for completion of all six units was earlier extended to 2020.

The IPPs were contracted to supplement Eskom’s generation capacity in an effort to avoid load shedding.

Eskom’s diesel bill for fueling its open-cycle gas turbines decreased from R10.5 billion in the previous year to R9.5 billion. Molefe told journalists Eskom is buying diesel at R6 to R7 per litre, which is lower than market value, thanks to a R4 rebate from the South African Revenue Service.

Eskom reported a R3.6 billion net profit, down 49% from R7 billion in the previous year. Revenue increased by 7% to R147.6 billion due to an 8% tariff increase and a 0.7% decline in electricity sales volumes.  

Load shedding led to sales of 548 GWh being foregone, Eskom said.

Other operating expenses, excluding primary energy, increased by only 2% as Eskom managed to realise R9 billion of savings.

The utility’s gearing stood at 70% at year-end and its debt-to-equity ratio at 2.37. Since then this has improved to 67% and 2.03 respectively, thanks to government’s cash injection and the conversion of a R60 billion government loan to equity. Eskom’s interest cover at year-end was 0.47. 

Arrear municipal debt almost doubled from R2.6 billion at the end of the previous financial year to R5 billion – R4 billion of which is outstanding for longer than 60 days. Arrear debts in Soweto increased from R3.4 billion to R4 billion over the same period.

Eskom is experiencing pressure on its liquidity, but is still a going concern, Molefe said. The utility started the year with R19.7 billion in cash and cash equivalents, and ended with R8.8 billion. Molefe pointed out that Eskom was cash positive to the tune of R15.4 billion before its R54.4 billion capital expenditure. It raised R49.5 billion in debt to help fill the gap.

Eskom said in its integrated report for the period it will be operating below the R20 billion liquidity buffer for the current financial year, even if the government cash injection of R23 billion is taken into account.

Coal supply agreements

Molefe said during the briefing that Eskom will be renegotiating all its cost-plus coal supply agreements. In terms of these agreements, Eskom made capital investments in the development in exchange for the specified quality coal at a low price over an agreed upon period.

He said the national energy regulator (Nersa) did not grant Eskom the tariff increase it applied for and the utility does not have money to invest in mines. Eskom does not want to own mines. It wants to buy where it can get the best coal, he said.

The coal industry does not object to this change in Eskom policy, he said.

The mines were initially committed to the cost plus contracts, but exported the good quality coal without sharing the income with Eskom, despite Eskom’s contribution to its capital investment, Molefe said. History will explain that, he said.

He said Glencore’s Optimum mine, that supplies coal to Eskom’s Hendrina Power Station, is one of these cost-plus mines. The original agreement was concluded in 1983 and it was renewed in 1993, he said. 

Eskom has imposed R2 billion in penalties on Optimum as a result of non-compliance with the coal specifications. It has issued summons for the amount and Optimum has since gone into business rescue, which Molefe said it wrongly blames on Eskom’s penalties. He said Optimum’s troubles are the result of the way it managed its mine and the contract with Eskom.

He said Optimum wants Eskom to waive the amount, but it cannot. “They owe it to the tax payer. We cannot waive it, because we are not in the business of rescuing mines. How can we tell poor people in Soweto they must pay, but not Optimum?”

Molefe said Eskom will submit an application to Nersa to claw back the costs that were denied in its earlier application for a partial re-opener of the current tariff determination. He said Nersa did not dispute the principle of passing through the diesel and IPP costs, merely the timing.

Eskom will submit a new application next year and hopes to show the expenditure was prudent in order to recover it from consumers.

He said Eskom’s tariffs are not yet cost-reflective, which impacts on the utility’s financial sustainability.


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Brian, you are a very one sided puppet. i will also levy a penalty on you for supplying a very inferior and erratic procust. And what do you think I should do about all the damage my electrics and electronics suffer due to your loadshedding. Do you really want me to believe that your tariffs has only gone up by 8% this year. What do you take me for? You certainly also cannot expect me as a consumer to prevent yorself from going bankrupt. Get real man!

I bet the next “strategy to tackle this challenge” of lack of electricity and oversupply of coal, will be to deliver coal at every house to use for heating and cooking.
This will be an “African solution for an African problem” and will bring us back where we started off, 300 years ago.

The Guptas are also into coal supplies to Eskom through a “previously disadvantaged” mine that they own. It even listed recently. The mine has been operating without the required water license. Did these stinking rich corrupt friends of Zuma ALSO get help from Eskom to set up their coal mine? If yes, on what basis? They’re not South Africans.

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