Eskom CEO Brian Dames is calling for a "country pact" with the coal industry to limit future increases to the inflation rate, warning that without it South Africa faced even higher electricity tariff increases than the 16% it has asked for over the next five years.
The 16% application has elicited howls of protest from business — including miners — as it will add significantly to their costs and undermine South African industry’s competitiveness.
Mr Dames gave an undertaking in Parliament yesterday that if coal miners made a written commitment to provide Eskom with adequate volumes of quality coal and to limit price rises to inflation, Eskom would adjust its tariff increase application.
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If miners refused to sign up to the "country pact", Eskom could not contain electricity prices, Mr Dames warned during a briefing on the tariff application to the National Council of Provinces’ select committee on labour and public enterprises.
Over the past three years, coal prices have risen by an average of 18% annually, and by 17.7% in the first six months of this year.
However, Eskom’s latest tariff application assumed that its cost of coal — which represents about half of its total operational costs — will increase by no more than an average of 10% annually.
"A lot of work will have to be done to make sure that coal costs get to 10%," Mr Dames said.
He said it was not possible for Eskom to apply for inflation-linked tariff increases when coal prices had risen above inflation.
This would mean that Eskom would be subsidising big coal producers such as Billiton, Exxaro, and Anglo American, Mr Dames told the committee.
Coal represents about 56% of Eskom’s primary energy cost and had a significant effect on its profitability and its ability to finance onerous interest payments on its R213bn debt.
Mr Dames said the double-digit coal cost increases of the past few years were a result of ageing mines and growing competition for South African coal abroad. He said coal miners were able to get higher prices on the international market, particularly in India.
"This is a key issue that the country has to deal with. We do need a pact to contain coal cost increases," he said.
Senior executive of transformation and stakeholder relations at the Chamber of Mines Vusi Mabena asked who will foot the bill for Eskom’s pact.
The chamber is preparing a response to the National Energy Regulator of SA on Eskom’s proposed tariff hikes.
"Electricity is one of the major input costs for the mining sector, and as a result we expect coal prices to rise as well," Mr Mabena said on Monday.
He said Mr Dames’s request for thermal coal price increases to be limited would not be feasible as 70%-80% of local coal was earmarked for the domestic market and Eskom was the biggest consumer of the commodity.
South African Coal Road Map steering committee chairman Ian Hall said the aim of the strategic plan was to maximise the value of the country’s coal endowment to the benefit of South Africa and its people.
"Capital for new mines will need to be raised in competition with other investments, so both the mining investment climate in SA and the price of coal will need to be competitive to enable this," he said yesterday.
Article continues on page two: Eskom's coal demand will grow when its new power stations become operational...