Where'd the cheap coal go?
|Genre||Business and Financial|
|Presenter||Devi Sankaree Govender|
In January this year Carte Blanche exposed that many of Eskom's power
stations had run out of coal stock and that the country's power shortage
was as a result of an undersupply by Eskom, rather than an over-demand by
We highlighted the fact that a lack of skills - due to Eskom's ruthless
Affirmative Action policies - resulted in unplanned breakdowns and
We also reported that Eskom was still exporting electricity to
neighbouring countries while load shedding was in full swing back home.
We showed that despite this complete lack of performance, Eskom's top
brass have paid themselves millions of rands in bonuses over the past few
Since the broadcast Eskom has declined all our requests for interviews.
The same applies to the different government departments that we
approached for this story.
Devi Sankaree Govender (Carte Blanche presenter):
"Eskom's rolling blackouts have
affected the very core of our existence, our way of life, in fact
our complete psyche. It's the worst crisis since 1994 and it's left South
Africans frustrated, angry and despondent. All people want is to get back
to their normal lives."
But at what cost?
All consumers of electricity, including large industrial users like the
mines, are now required to cut down 10 percent on consumption. Parliament
has been given tips on just how to accomplish this by the Minister of
Minerals and Energy. She said people should switch off lights and go to
Buyelwa Sonjica (Minister of Minerals and Energy): "As long as
people do not whinge and whine this can be achieved and we are calling to
all of those positive and progressive South Africans to support
If only it was as simple as that. Two months ago Eskom announced that
they've ordered 45 million tonnes of coal to make up the short fall and
they suggested a price increase of 20 percent for the next five years.
But last week this went up to a gigantic 53 percent. And now we finally
know the reason for this massive increase. The 45 million tonnes of coal,
which Eskom has ordered, will be sold to them at world market prices and
the 53 percent increase is urgently needed to pay for that.
Jacob Maroga (CEO Eskom): "If the cost of the elements that make up
electricity increases, if it increases by a certain percentage, that
percentage has to be reflected in the increase of electricity."
Devi: "To the man in the street the tariff increase may sound like
an April Fools joke or some kind of bizarre economics coming out of
Zimbabwe. But the reality is it's not. The fact is that Eskom's plans to
ease the electricity crisis is going to cost the country billions and the
consumer is going to foot the bill."
Load shedding is once again in full swing, but despite this critical
situation Eskom has continued to export electricity to our neighbours
This confidential document shows that on Wednesday the bulk of exported
energy - around 1400MW - went to Swaziland and the Mozal Aluminium
smelter in Mozambique.
The question is at what price?
Mike Schussler (Economist T-Sec): "I quite frankly think that the
people in our neighbouring country that have got contracts that sell them
electricity at the quarter of our price of our consumers says to me that
there is a political interference with Eskom as well. And we are giving
aid, by way of the electricity bill, to the countries around us."
Economist Mike Schussler says it is against the rules of the World Trade
Organisation to sell anything cheaper in another country than you are
selling it in your own.
Mike: "What Eskom is doing is that it is dumping electricity into
our neighbouring countries, who in some cases they are paying us late,
and in other cases they are paying very cheap rates for it. Eskom is full
of beans about this and telling us all sorts of stories about why this is
happening. The fact of the matter is we are selling electricity illegally
cheaper into other countries."
To add insult to injury another confidential Eskom document revealed this
week just how critical the crisis has become.
Six out of eight units, which were down at power stations around the
country this week, were out because of coal shortages and low coal
deliveries from the mines, while the remaining two were out because of
poor quality coal. This resulted in a capacity loss of 1200MW. The
consequence was the latest round of load shedding, but the country was
told that this was due to pre-winter maintenance.
Mike: "One third of our capacity is just not there. It shows bad
planning, bad maintenance, all these type of things."
The effect of the intended price increase will be profound with huge
implications for economic growth and producer inflation. It will also hit
disposable income and company profits, says economists Goolam Ballim
Goolam Ballim (Chief Economist, Standard Bank): "There's going to be
multiple effects. Firstly, it is going to raise the general level of
inflation in the country, because clearly electricity is a core input
into production, not just into consumption in terms of residential
living. So it will raise the cost of living and within the broad basket
of staple items."
Mike: "It has the same effect of raising interest rates by 1.87
percent on the economy. Remember that this hits a large amount of people
because not everybody is necessarily paying a bond, but everybody is
paying electricity - 87 percent of our households today pay have
electricity and that is going to hit far and wide."
To make things worse there's another extra we have to pay a two-cent per
kilowatt/hour levy announced in February by Finance Minister Trevor
Trevor Manual (Minister of Finance): "A new levy will be introduced
this year on the sale of electricity generated from non-renewable sources
at the rate of two-cents per kilowatt/hour. It will be collected at
source by the electricity generator and it is expected to raise about two
billion rand in the first year and about four billion in the year
And to top it all Eskom wants its latest increase to be backdated.
Mike: "I think Eskom is showing its bad planning again by thinking
that it is going to get a backdated increase because that is going to put
a lot of municipalities under a huge amount of fiscal strain."
Goolam: "Ideally, it would be more palatable if Eskom were to
gradually smooth their increases and consumers were able to plan for it
and better position their personal finances. But at the same time there
is an urgency, there is a dearth of funding and Eskom needs to get the
correct mix in terms of the overall funding programme. In this respect it
is a race against time."
Eskom's expansion plans kicked off last August with the construction of
the R80-billion Madupi coal-fired power station in Limpopo, which will
produce 4800MW when it comes on line in 2013.
During French President Nicolas Sarkozy recent state visit, Eskom signed
a multi-billion rand deal for another coal-fired power station in
Devi: "Eskom plans on building more power stations over the next 20
years. They want to double the current electricity output to 80 000 MW.
The estimated cost of this expansion will be R1300-billion, about 20
times more than the arms deal.
Dr Richard Young (Arms Deal Whistle-Blower):
"R1300-billion is the kind of order of magnitude of the total Gross
National Product of this country for a couple of years."
Dr Richard Young was the whistle blower who exposed massive corruption in
the arms deal. Now semi retired, he questions the financial logic behind
Eskom's proposed expansions.
Richard: "I can't see where we could possibly find the money over 20
years to fund the extra power generation capability. Even the R30-billion
arms deal went to something like R60 or R70-billion. I know there isn't
really even enough money to keep that equipment going. So where they are
going find money from I really do not know."
Devi: "Well at least part of the expansion will be financed
by the massive price hikes that Eskom wants enforced on the consumer. But
will these increases affect all Eskom's customers alike? The simple
answer is, no."
In Richards Bay many of the industrial plants have long term electricity
supply contracts with Eskom and government, often excluding them from
tariff hikes. Some of these contracts were signed many years ago at a
time when the country had surplus energy.
But several deals, such as with BHP Billiton - which operates two
aluminium smelters in Richards Bay - were concluded in the last ten years
after government had been warned about the looming energy crisis. BHP
Billiton's electricity tariff is linked to the aluminium price on the
London Metals Exchange. This means the price is variable and because of
the current high aluminium price they are paying more than before. But
that's not the case with Billiton's Mozal smelter in Mozambique which is
paying a fixed low tariff until 2012.
Devi: "Built-in confidentiality clauses prevent Eskom and clients
like Billiton from revealing exactly how much they pay for their
electricity. But those in the know say it's only about a quarter of what
you and I pay for ours."
Mike: "They probably are only paying around 11c or 12c per
kilowatt/hour. Compared to the average of industry, which will probably
be around 17c per kilowatt/hour. Consumers are probably paying roughly
between 41c and 45c per kilowatt/hour"
This, while the production cost of electricity is an estimated 17 cents
Devi: "That means someone is subsidising big industry's electricity.
Guess who? You and I."
Richard: "The short fall is being made
up by the tax-payers and the consumers."
So, it is possible that the South African consumer is subsidising
the price of electricity that's paid by BHP Billiton, the world's largest
diversified resources company. Electricity represents 40 percent of the
cost of producing aluminium and probably the
only reason the Billiton smelters are here is because they get
electricity so cheaply, as Bauxite - the raw material used to make
aluminium - is imported from Australia
But BHP Billiton can't be blamed. They made this deal on sound
business principals some years ago, says Chairman of the Board, Dr
[Speaking on TALK RADIO 702] Dr Vincent Maphai (CEO BHP Billiton):
"The minute detail must be prepared to close down our business. We
will not entertain that debate. We were born legitimately in the country
and we operate legitimately. We cannot be treated as a problem. It is not
our fault that there is a power shortage in the country."
Last week BHP Billiton terminated it's R2.4-billion annual business with
Standard Bank when, according to news reports, a top executive suggested
at a high level meeting that the smelters should shut down to save
Vincent: "We have rights, we acquired our power legitimately. When
this country had more power than it knew what to do with - this is what
we call stranded power - and when you have stranded power it means you
are producing at a cost and it fizzles away. In fact by building those
smelters at that time, what we have implicitly done is to subsidise other
users in the country. Now when there is a problem you cannot come to
It is however questionable how Eskom and government could have been that
short sighted considering they'd been warned that the country would run
out of electricity in 2008.
Devi: "Why would we sign such deals?"
Richard: "I think the people within
government, DTI, and the Department of Mineral and Energy Affairs, are
really wet behind the ears when it comes to the immediate and the long
term effects of entering into voodoo economic agreements - like the 25
BHP Billiton's two smelters in
Richards Bay and its Mozal smelter in Mozambique are 100 percent powered
The smelters are Eskom's biggest industrial consumers of electricity and
if the proposed Alcan smelter at
comes on line, the combined consumption
will be just less than 4000MW. That's more than Johannesburg's
daily electricity needs and almost 10 percent of the entire country's
peak demand during winter.
The total capacity of the Madupi power station that is currently being
built in Limpopo would be just enough to supply these smelters. Some
analysts suggest that if the smelters were to shut down there would be an
immediate relief of the energy shortage. We would therefore be out of the
critical Brown Stages and out of the hours of load shedding. But such a
step may have far reaching implications.
Economist Goolam Ballim says it's disingenuous to simply compare consumer
electricity prices with those of heavy industry and to infer that
consumers are unfairly subsidising profits.
Goolam: "I think it is impractical. The sheer burden of terminating
a contractual agreement with a firm of such scale, such turnover, would
ultimately be a burden that falls on the taxpayer. You would then have to
ask the taxpayer if they would be willing to take that penalty for some
longer-term benefit. Then there are other additional perhaps subtle
Cascadian consequences: if South African government appears to be
unfriendly to investment and doesn't respect property rights or
contractual agreements, how fertile an environment is South Africa to
future business? So what may appear to be a sound short term decision
over the longer term would effectively undermine investment potential and
then in turn reduce the potential for higher growth."
Mike: "Just closing off the aluminium smelters would probably this
year take away around R17.5-billion in exports because that is our
aluminium exports in total."
Prof Patrick Bond is a Political Economist at the University of
KwaZulu-Natal. He has a different opinion. He says very little is
re-invested in South Africa and the profits are going elsewhere.
Prof Patrick Bond (Political Economist, Univ of KZN): "Now what is
the outcome of that for an economist is what is called a balance of trade
and payments, in other words, a current account deficient. Ours is at
about eight percent of GDP - the highest in the country's modern history
and about the highest in the world. It is making the rand very
Closing down the smelters would therefore
make sense to Patrick.
Prof Bond: "Look, it will look smart. If you look at what is
going on with mining houses and big smelters, we are taking resources out
of the ground, they are non-renewable, coal, gold, platinum, titanium,
diamonds. Now when you take the resources out of the ground you don't
have them anymore. Our children won't have those resources. Now our
economists will say we are losing GDP because we are slowing down
extraction. That is not really true because when you take the full
environmental costs - the fact that those are natural assets that are
taken out - they should be debited against our national natural wealth.
And they are not. That is the problem with economists' logic. They can't
think through the full environmental costing."
Devi: "What would be the most responsible thing for the South
African government to do now?"
Prof Bond: "To shut it down and to really rethink what those
relationships were all about that made us so fossil fuel addicted. This
used to be controversial before January. Even in his budget speech Trevor
Manuel announced that we have really been on an apartheid induced, and
post-apartheid amplified, addiction to cheap energy for export purposes
with very few jobs and the profits going abroad. It is not the right way
The price tag of load shedding should also be considered. It's estimated
that the economy loses between one and two billion rand a day when Eskom
cuts the power.
Richard: "There are 250 working days in
a year. So Brown Stage One could cause losses to the country of
R250-billion in a year. Whereas Brown Stage Two could cause double that.
The damage, I won't say it is permanent for forever and a day and the
next thousand years. But certainly it is permanent in terms of our life
Devi: "A few days ago BHP Billiton announced that they were
scaling down their operations at their Bayside smelter and that about 600
employees were going to be retrenched."
But seemingly not for the reasons Patrick and Richard argue. The company
says it is unsustainable to operate their three smelters on the 10
percent reduction demanded by Eskom. They have therefore decided to take
the bulk of the power cut at their Bayside smelter. Meanwhile, BHP
Billiton has offered to help Eskom rebuild its depleted coal stocks as
the company's coal operations have been minimally affected by the energy
crisis. The question is at what price?
Mike: "One of the reasons that Eskom is asking for a price hike is
because it is the same company that is selling them the coal that is
receiving electricity their electricity at a very cheap rate at the other
end. So for them it must be a win/win situation.
They put coal into the machine and they buy
it cheaper at the other end."
These huge coal stockpiles are nowhere near Eskom's embattled power
stations. This is the Richards Bay Coal Terminal and these vast mountains
of coal are awaiting export. South African coal is in high demand across
the world and we export to Europe, the Far East, India, Africa and South
America. The smooth operation here is a far cry from Eskom's disastrous
ventures with BEE coal transporters, which we exposed in January. The
irony is that if Eskom had managed its coal supply as efficiently as
this, the country's energy crisis could have been avoided.
Richard: "One of the recommendations
that I am making publicly is that there needs to be a forensic audit,
done by an independent body into the whole reality. It is beyond any
reasonable doubt that Eskom is a public company - they are founded by the
government and by our tax."
With acknowledgements to Carte Blanche.
The proposed Alcan
smelter at Coega was to be the anchor tenant.
The proposed Alcan smelter at Coega was part of the NIP offsets of the
Not only did it not come about because it was a bullshit NIP offset in
every which way, but it would have gobbled another 2 000 MW of power.
That would have caused another series of catastrophic loadsheddings after
2008 until the present, indeed until Medupi comes online in a year or
Effectively, if Coega had happened Eskom would need an entire new 4 500
MW coal fuelled power station to supply Billiton's aluminium smelters.
As it is, Billiton's three existing aluminium smelters (Bayside, Hillside
and Mozal) already gobble up about half the capacity of a modern large
coal-fired power station.
By way of comparison, Billiton's three existing aluminium smelters are
using about the total nominal output of the Koeberg Nuclear Power Station
of 1 800 MW.
Today it would cost some R150 billion to build a new nuclear power
station of 2 000 MW. Maybe more.
It's simple: Eskom must immediately stop supplying power to Billiton at
anything less than standard price and without compromising grid
Then Billiton must build its own nuclear power station(s).
That'll give its beancounters and some migraines.
As well as its project managers.
And don't use our coal to make that Aussie aluminium.