Electricity utility Eskom is lobbying hard for a fundamental overhaul of South Africa’s current coal-mining policy and legislative environment, which it argues is placing future power supply security at risk.

The State-owned utility would like to see the current hands-off policy abandoned in favour of one that recognises coal as a “strategic national resource” to be explored, developed and exploited in a way that primarily guarantees domestic security of power supply, but which also incentivises the development of new mines to supply the domestic and export coal markets.

Eskom estimates that some R110-billion worth of new capital investment in new coal-mines and conveyor systems will be required over the coming decade to ensure that South Africa’s current and future fleet of power stations are adequately supplied with primary energy.

Unless government intervenes to stimulate – and more importantly direct that investment for the so-called “national interest” – Eskom warns that there could be a steady migration towards export parity coal pricing, which would result in an economically destabilising surge in local power prices, which are already rising strongly.

Currently, Eskom, which produces 95% of South Africa’s electricity, mostly from coal-fired stations, in Mpumalanga, purchases about 130-million tons of coal yearly. But it expects that its yearly coal demand will peak at around 160-million tons when the Medupi and Kusile stations are introduced later this decade.

This coal is currently bought at a massive discount to export prices, which have been rising steadily following a sharp, albeit brief, pullback during the global economic crisis.

Primary energy MD Dan Marokane acknowledges that the current pricing dispensation has created little incentive for miners to prioritise domestic demand and says that the utility is prepared to move towards a new pricing model. Dubbed the efficient-costs-plus-fair-return model, the approach seeks to spread the risks more evenly between the miners and the utility, which will also result in higher prices paid.

But Marokane insists that this pricing model alone will be insufficient to ensure that the appropriate investments are made at the appropriate time, given that market power has shifted decisively towards the miners over the last few decades.

This shift has been precipitated by a depleting resource base in the Mpumalanga basin, which means that the next generation of reserves will be more expensive to exploit, as well as by the fact that miners have greater freedom of investment choice, owing to the reintegration of South Africa into the global economy.

Another significant change, has been the fact that there is also now increasing international demand for the low-grade coal that has hitherto been almost the exclusive preserve of Eskom.

In fact, Marokane says that the emerging ‘RB3 specification’ at the Richards Bay Coal Terminal is a direct competitor to the type of material currently being sourced by Eskom. “We estimate that some 520-million tons of coal that would previously have been set aside for Eskom power stations is now at risk to exportation,” he elaborates.

Therefore, Eskom is lobbying for government to bring policy and legislative tools to bear so as to “balance” the need to secure domestic supply, with the desire to support continued, and even expanded, exportation, which earns South Africa valuable foreign exchange and makes South Africa an attractive investment destination.

Such intervention would not be unique, with a range of other countries also moving to shore up energy mineral reserves, but could still draw criticism from miners.

The industry is still weighing its response to Eskom’s proposals, which has reportedly been canvassed through bilateral meetings with the coal companies.

Chamber of Mines (CoM) technoeconomic adviser Dick Kruger tells Mining Weekly that a formal response will be discussed at the Collieries Committee meetings on February 15, 2011, and that a formal position should emerged shortly thereafter.

The CoM’s current stance is supportive of the industry remaining unregulated, which is also the official government position as outlined in the 1998 Energy White Paper.

Kruger acknowledges that the National Energy Act also allows for the strategic stockpiling of energy minerals, but says that the Minister can only pursue such a strategy after thorough consultation with stakeholders.

“It is not a crisis yet,” Marokane insists. But he says that it is still critical, in Eskom’s view, to move swiftly towards a resolution, owing to the fact that many of the current contracts will expire, or have to be renegotiated, during the course of the current decade.