Eskom Chairman Looks at "Strategic" Power Pricing and Coal Supplies

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Researched by Industrial Info Resources (Sugar Land, Texas)--Bobby Godsell, chairman of Eskom (Johannesburg), South Africa's power utility, has said that the policy of under-pricing electricity followed by pre- and post-1994 governments had been used as a strategy to attract foreign direct investment in power-hungry industrial sectors such as aluminum smelting. He also said that a perception had grown that South Africans were unable to afford prices for power that would cover the full cost of electricity production.

Godsell said that the problem with this "strategic" pricing was that unless the government made explicit and regular provision for the subsidies implied in under-pricing, the supply of secure and adequate power would be undermined. He told a press briefing in the second week of February that this situation created the uncomfortable joke that South Africa has the cheapest electricity in the world but unfortunately, "we just don't happen to have any in stock." An industry controlled by a regulated price that was deliberately set at below cost could not attract investors and would make it difficult to involve participation by the private sector, he said.

In January Godsell had said that Eskom's immediate challenge for 2009 was to maintain reliable supply. Coal stocks at power stations had improved to 38 days on average, although supplies at 15 locations caused concern. He said that the summer maintenance program had passed its peak planned outage of 9,000 megawatts (MW). Eskom's current operational capacity is 39,100 MW. A power reserve margin of 15%, which currently stands at 8%, was targeted to provide stability of supply.

If the South African economy grew at a rate of 6% per year through 2030 (which was the target before the current economic slowdown) and electricity demand grew at a rate of 4% per year, additional power capacity of 52,000 MW would be required in the period. Saying that such power growth targets seemed unrealistic, Godsell noted that significantly more than the current program of 18,000 MW of power additions would be needed. He added that the country needed to develop a medium-term energy strategy that would reduce the almost total dependence on coal using alternative renewable sources including nuclear power. Currently the National Energy Regulator of South Africa is holding a public hearing on renewable energy grid feed-in tariffs, where the current price proposals have been said to a be a deterrent to private sector investment.

Returning to the immediate problem of Eskom coal stocks, Godsell said that the 2008 supply crisis had been caused by Eskom's mismanagement of coal supply and stocks, which at the height of the crisis had seen some power stations' stocks fall to single digit days.

Ras Myburgh, corporate consultant at Eskom, said that Eskom was planning to spend $10 billion investing in 40 coal mines during the next decade to boost production. He said that the coal mining industry needed total investments of more than $15 billion in the same period. Eskom forecasts that by 2018 South African coal output will increase to 374 million tons per year from the current 266 million tons per year. This increase will be driven by Eskom's demand, Sasol Limited's (NYSE:SSL) (Johannesburg) Mafutha coal-to-liquid project and the expansion of the Richard's Bay coal-export terminal.

Siyabonga Gama, CEO of Transnet Freight Rail (Johannesburg), said that the transport utility could spend more than $4 billion in the 10-year period expanding capacity to move coal from Mpumalanga to Richards Bay. But, he said, this investment would not be made until long term, 20-year agreements were in place with coal mining companies.

Ben Magara, CEO of AngloCoal South Africa (Johannesburg), said that it could cost $125 million to add 1 million tons of annual coal production and 15 million tons would need an investment of $1.8 billion. He said that the coal industry had entered on expansion without the commitment to back up from Transnet.

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