Coal 3: The Choke Point in South Africa's Energy System

By Saliem Fakir · 2 Oct 2013

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Picture: weluvmu.wordpress
Picture: weluvmu.wordpress

You would think we would’ve learnt a lesson or two from total dependence on coal. Ninety percent of South Africa’s electricity comes from coal in addition to 40% of our liquid fuels. Despite our coal abundance, the move towards its greater use for our energy system comes up against several constraints. These include environmental concerns, the carbon tax, the question of poor quality coal, the economics of coal mining and the logistics surrounding the extraction and distribution of coal.

In August this year, Cabinet authorised what most would consider an irrational lock-in. Whilst the Medupi Power Station’s delayed completion and cost overruns are widely disdained, Cabinet has authorised the development of another large coal-fired power station dubbed “Coal 3”.

The rationale behind this senseless lock-in becomes evident when one sees that the coal-mining sector, as a whole, is pervasively dominated by black economic empowerment (BEE) interests and new capital.

Coal plants have always been anchors for the larger political economy of coal. In its heyday when coal was cheap and abundant, coal-generated electricity served as a convenient subsidy for profit-taking ranging from the generation of power for mining and smelting to the various chemical industries linked to the coal-mining sector.

It seems that Coal 3 will do the same for new coal mining interests in the Waterberg. Coal 3 is not about affordable electricity. It is about mining deals that remain unrealisable in the Waterberg without another coal plant taking on the traditional role of being an anchor for contending mining interests. Without Coal 3, the sordid coal mining business in the Waterberg will be unprofitable.

The political economy of coal needs a new lifeline even as the economics of coal and the quality of our so-called “abundant coal” deteriorates with time.

The old claimants to the system want the more lucrative portions of the coal value chain, the high quality coal, to be exported. Coal exports now earn the largest share of coal earnings. In 2012 it stood at 60% of coal revenues. The new claimants, including the new BEE elite, simply want to dig further into the coal-mining energy and industrial complex.

As they vie for control of various parts of the value chain, these two claimants are also increasingly at loggerheads with each other over the issue of coal exports versus domestic supply.

Coal 3 will simply be another “choke point” in the rollout of large-scale power plants. This bias for big bulky machines and capital-intensive projects is ingrained in our energy planning system and it could be our Achilles heel in the future.

Delays, cost overruns and other unpredictable hiccups during the construction of Coal 3 will not only push up the price of coal-generated electricity, but also have knock-on effects for the general economy, which are unaccounted for.

It is true that we desperately need to build power plants as fast as we can. However, modular technologies like renewables are better suited for this. The bidding process for renewables run by South Africa’s Department of Energy is indeed proving to be successful.

Wind costs in Round Three of the renewables bidding process are predicted to be on par with the cost of current coal-generated electricity, not to mention the fact that it is already much cheaper than the electricity to be generated from the Medupi power plant. In Brazil, wind power is already amongst the cheapest in the world.

These truths raise questions about the myth of cheap coal.

To understand the economics of coal, one must look into the future rather than at the present. About 50% of a coal plant’s costs are related to fuel costs and maintenance; the rest is associated with the cost of capital.

Medupi may be the last power plant to receive a cheap loan from the World Bank or for that matter, any western development finance institution. In the future, money that Eskom needs to borrow for coal plants will most likely come at a higher cost than it did for Medupi and Kusile.

If you factor in additional costs associated with carbon capture and storage, coal power becomes a costly prospect. Eskom is already asking for a delay in the implementation of new air quality standards for its coal plants because it claims that costs are too high. Eskom’s estimates put the total cost at approximately R200bn.

By the end of March, Eskom’s financial results showed that the cost of coal for fuel surged by 24% for the 2012-2013 period. The current cost of coal for long-term contracts is on average R200/ton. With the central basin coal supply fast reaching its peak, future supplies of low-quality coal from the Waterberg are estimated to cost twice as much – possibly around R400-R500/ton.

While South Africa lumbers along with large coal plant lock-in, the future of our coal supply remains uncertain.

Experts repeatedly refer to Eskom’s “coal cliff’ by 2015. They project an annual deficit of 60m tons of coal that needs to be brought into production to supply new and old coal-fired power stations. It is not surprising therefore that within the ANC and in government circles there is more boisterous talk of declaring coal a strategic reserve.

This anxiety is not light. Even the state owned company, Alexcor, a failed diamond mining company, has been roped in to suddenly pursue new ventures in coal mining (for which it is ill-equipped) with the other being the African Exploration Mining and Finance Corporation (AEMFC).

In the future there may be a lag between coal supply and demand because mines are not opening fast enough. With delays in transport and water infrastructure, the quagmire only deepens.

Meanwhile Eskom’s coal costs are dependent on who it buys coal from. Large producers that sign long-term contracts with Eskom sell coal to the power utility at preferential rates. Most of these contracts are coming to an end soon.

Export prices are much higher than Eskom’s fees per ton of coal. Thus, the global market for coal provides a far greater incentive for the large coal mining companies to export coal than to sell to the domestic market.

You may even have heard about the absurd situation of Eskom having to import coal temporarily from neighbouring states, or elsewhere, if there is no policy alignment between exports and Eskom’s needs or if there are delays in the opening of new mines.

However, Eskom’s purchase of coal from smaller BEE players has grown significantly. It is now estimated that close to 30% of Eskom’s coal purchases comes from smaller players at much higher cost.

By 2018, Eskom has a target of procuring 50% of its coal supplies from emerging coal producers. These producers face their own difficulties in getting coal to where it is needed. Eskom’s increased dependency on them comes with the danger of facing supply and cost risks.

By 2020 Eskom will have to secure new long-term contracts and ensure a stable inventory of coal for all its coal-fired power stations. Eskom needs four billion tons of coal in the next 40 years. Half of this is still unsecured.

As Coal 3 gets pushed forward and the danger of it being a “choke point” in the system emerges, many mining companies, large corporations and even state-owned enterprises are taking a serious second look at security of supply and seeking ways to fund and manage their own power plants.

The unfortunate outcome is that less affordable energy, as a result of this “choke point” effect and high coal dependence, means that greater numbers of poor people will be pushed off the grid, even as politicians talk-up getting more people onto the grid.

Fakir is an independent writer based in Cape Town.

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