Thursday, February 10, 2011

Interference in coal market is neither needed nor helpful

Recently several newspaper articles reported Eskom as blaming the coal mining industry for supplying poor quality coal for electricity generation, consequently affecting Eskom’s electricity supply capacity.

There is also an accusation that the industry is diverting poorer quality coals, traditionally provided to Eskom, off to the so-called lucrative export markets. These accusations have prompted Eskom to seek the introduction of heavy-handed mechanisms, such as price controls, quotas on exports and restrictions on the export of the types of coal used by Eskom.

There have also been calls for the Department of Mineral Resources to declare coal a “strategic mineral” which would allow Minister Susan Shabangu to apply certain conditions on the production, storage and use of coal in South Africa. However, the Chamber of Mines is relieved that the minister has resisted the calls to declare coal a strategic mineral.

The chamber accepts the minister’s call for the industry to work closely with the government to ensure a growing coal mining industry that provides sufficient coal for domestic electricity generation and which grows its competitiveness in global export markets. The chamber is compelled to clear the air on real issues behind these accusations. It is now important to get the facts on the table.

In relation to coal quality issues, during the 2009/10 year, Eskom burnt 122.7 million tons of coal at an average calorific value of 19.22 megajoules a kilogram (MJ/kg) and an average ash content of 29.56 percent. This is according to the utility’s annual report. The average quality of coal received by Eskom does not appear to have changed much over the past decade. It also complies with the average parameters set out in the supply specifications in the contracts between the mining companies and Eskom.

The chamber is aware of only two power stations affected by coal quality issues and that all other chamber member-tied collieries to Eskom were supplying coal to Eskom at the prescribed qualities in their contractual agreements with Eskom.

In relation to the two affected power stations, agreements between the respective mining groups and Eskom have recently been reached to resolve the quality issues. The entire industry cannot be painted as providing poor quality coal to Eskom if this has just been a problem at two power stations. Where Eskom experiences difficulty with specific coal suppliers it should address the issue with those suppliers as it is a commercial contractual issue and not an industry policy matter.

It is important not to confuse the 2008 electricity crisis with current events. The large load losses in 2008 were due to the failures of Eskom’s own maintenance programmes as well as the failure of its coal stockpile policy. Again Eskom raised the issue of poor coal quality as a major contributor to the load losses when in fact this was due to it using the “mush” that used to be at the bottom of its coal stockpiles.

Its stockpiles had been deliberately run down in 2007 and 2008 due to a policy of not keeping large stocks because of the purported high cost of keeping working capital tied up in the stockpiles. It is interesting to note that the industry, having been first informed of that stockpile crisis on January 24, 2008, has worked tirelessly to help rebuild Eskom’s coal stocks on average to about 40 days.

In some instances Eskom is operating some power stations above their design utilisation rates and is therefore consuming more coal compared with the original specifications. In cases where the tied collieries, planned and built to meet the coal requirements for the designed utilisation rates, are unable to supply the additional coal Eskom is forced to obtain such coal from other sources. This causes increased coal transport, which increases the cost of coal.

On the accusation that the domestic industry is diverting Eskom-quality coals for export, especially to India, this is also a fallacy that will be exposed by the facts. In general, Eskom burns coals with an average calorific value of 19.22 MJ/kg, but in a range between 17 to 22 MJ/kg and with an average ash content of 29.6 percent (within a range of 21 percent to 36 percent).

The traditional European market for South African coal takes coal with a calorific value of 27.5 MJ/kg and an ash content of less than 20 percent. The Indian market typically takes local coal with a calorific value of 25 MJ/kg and a maximum ash content of 20 percent. So in essence, the export market does not take the quality of coals that are traditionally sold to Eskom.

It is key to note that coal exports from South Africa have fallen from 71.4 million tons in 2005 to 63 million tons in 2010, mostly due to inefficiencies in the Coalink railway line. Within this context of falling coal exports, exports to Europe have declined sharply and export volumes of export quality coals have shifted to markets in the Far East, including India.

The percentage of South African coal exports to Europe has decreased from 90 percent of total to about 50 percent over the past two years. About 50 percent of South Africa’s export coals are now destined for India and other Far East markets.

Eskom is not experiencing a shortage of coal at its power stations due to increased exports of coal.

In terms of coal supply, the chamber is not aware of any short-term coal supply problems to Eskom for the existing power station fleet. Eskom has already contracted the coal supplies for the two large power stations under construction – Medupi and Kusile – and the coal mining companies are already investing billions of rand in expansions and new projects at Grootegeluk and New Largo for coal supply to Eskom.

In reality there exists an important synergy, whereby the better coals are exported generating much-needed foreign currency and the lower-quality high-ash coals are used locally for electricity generation and liquid fuel production. Eskom continues to obtain coal from the existing power station-tied collieries on a competitive basis.

Heavy-handed mechanisms to regulate the domestic industry and interference in a voluntary market-based system may well lead to significant distortions and unintended consequences for the country and may well prejudice security of primary energy supply.

One only has to revisit the Californian energy crisis in the 1990s where well-intentioned retail price caps on electricity led to a major shortage of supply in that state. The private sector could not make investment decisions on capped retail electricity prices and a huge shortage of generation capacity resulted.

There is no coal supply or quality crisis. Rather there is an industry that is willing to work with the relevant government, labour and industry stakeholders to facilitate continued security of primary energy supply and the continued growth of South Africa’s world-class coal mining industry.

Bheki Sibiya is the chief executive of the Chamber of Mines.

Source: Interference in coal market is neither needed nor helpful - Opinion - IOL | Breaking News | South Africa News | World News | Sport | Business | Entertainment | IOL.co.za

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