First IPPs, now coal miners: Mantashe continues his Eskom negotiations

2019-10-03 17:56

Mineral Resources and Energy Minister Gwede Mantashe is in talks with coal firms that supply struggling state-owned power utility Eskom to reduce coal prices in a bid to lower energy costs and boost the mining sector.

Once the largest contributor to South Africa’s gross domestic product, mining has shrunk steadily over the last decade weighed down by higher energy costs and electricity cuts, hard-to-reach deposits, above inflation wage hikes and policy uncertainty which is deterring investment.

“These are discussions about how we reignite our economy and make it grow,” Mantashe said at an industry conference in Johannesburg without adding details.

City Press reported this weekend how Mantashe and Public Enterprises Minister Pravin Gordhan on Friday asked representatives of the renewable energy sector to agree to drop electricity tariffs.

Read: Mantashe, Gordhan beg independent power producers to drop electricity tariffs

Mantashe and Gordhan personally met with representatives of the independent power producers (IPPs).

Analysts were unsettled when news of the meeting was confirmed, as any deviation from previous promises in respect of the IPPs could damage investor confidence.

Stakeholders who attended the conference confirmed to City Press’ sister publication, Rapport, that Mantashe and Gordhan were extremely cautious in their approach to the IPPs and issued no hard order that prices be dropped.

According to Professor Anton Eberhard, an energy expert previously appointed to give advice to Eskom, the weighted average tariff that Eskom pays per kilowatt-hour to providers in the first round of contracts is 202 cents.

In the previous financial year, Eskom sold the same units for 90c/kWh, which includes generation costs and transmission costs.

It therefore recorded a hefty loss on the green power it purchased.

Eskom is bound to these terms for the duration of the agreement. Agreements of this nature usually last 20 years, with only annual inflation-related increases.

Although the unit cost has come down to 70c/kWh in the fourth round, critics argue that the financial burden on Eskom in terms of renewable energy purchases is too high, and something needs to be done about it.

In March, energy regulator Nersa granted Eskom average tariff increases of 9.4%, 8.1% and 5.2% over the next three years.

The mining industry body, the Minerals Council, has said the tariff increase given to Eskom would jeopardise the viability of some marginal mines and accelerate job losses at energy-intensive operations.

Job cuts are politically sensitive in Africa’s most industrialised economy where a quarter of the labour force is unemployed, while power outages and steep price increases by Eskom are set to hurt an already fragile growth outlook.

Eskom owns and operates more than 13 coal-fired power stations and has supply agreements with firms including Exxaro Resources and South32.

The utility supplies more than 90% of the power in Africa’s most industrialised economy, but has been grappling with cashflow and high debt problems, breakdowns at its creaking coal-fired power station fleet.

The minister, who highlighted that power cuts and electricity prices remain a concern, said lowering energy costs would involve discussions with various groups in the sector including coal producers, renewable energy firms and the energy regulator.

- Reuters

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October 13 2019