Bloomberg News

Eskom Asks BHP, Anglo to Cap Coal Costs to Limit Tariff Rise

January 31, 2013

Eskom Holdings SOC Ltd., which supplies about 95 percent of South Africa’s power, is working on an agreement to cap coal costs as the energy regulator examines the utility’s request for above-inflation tariff increases.

“I had a very good meeting with our four large suppliers who make up 70 percent of coal requirements” needed for electricity generation, Chief Executive Officer Brian Dames said by phone yesterday. “They have committed to work with us on this and we’re hoping that this week we can take that further.”

The utility, which relies on coal for more than 80 percent of generation, is seeking a 16 percent advance in average electricity prices each year until 2018 to avoid a repeat of energy shortages that halted mines in 2008. Inflation was 5.7 percent in December. The National Energy Regulator of South Africa tomorrow concludes public hearings on the application and will make a decision by the end of February.

BHP Billiton Ltd. (BHP), Exxaro Resources Ltd. (EXX), Xstrata Plc (XTA) and Anglo American Plc (AAL) are Eskom’s biggest suppliers of the fuel.

The government considers coal a strategic mineral and regulations will be passed to ensure South Africa has security of supply, Mineral Resources Minister Susan Shabangu said at a conference yesterday. The government doesn’t want companies to lose export contracts and hasn’t decided whether to impose export levies on coal, she said.

Suppliers’ Commitment

An annual 16 percent increase would raise prices to 128 cents per kilowatt hour by 2017 from 61 cents now.

“A lot of work has to go in especially to get their commitment and achieve 10 percent and then if we can do that then surely we can do better than that,” Dames said of a possible agreement with coal suppliers.

Eskom’s proposed tariff increases may hit state hospitals and clinics hardest, Public Servants Association General Manager Danny Adonis said in an e-mailed statement yesterday.

“Health departments are already experiencing problems with paying their service providers,” Adonis said.

The higher power prices may have a negative effect on the viability of many businesses, the South African Local Government Association said in an e-mailed statement today.

The 16 percent tariff increase includes 3 percentage points to support the cost of introducing independent renewable energy producers through a build program of 3,725 megawatts, Dames said.

Coal Plants

The government prevented Eskom from expanding from 2004 to 2008 as it sought to attract investments in the power industry. The utility is now building what will be the world’s third-and fourth-biggest coal-fired power plants, which will produce about 4,800 megawatts each, to halt shortages.

Work at Medupi in Limpopo province, the smaller of the two coal-fired stations under construction, has been suspended for two weeks after Eskom sent workers home after protests, the company said Jan. 29. Construction at Medupi, the first unit of which is due to start producing electricity at the end of the year, stopped on Jan. 16.

“I’m very concerned and it’s really having a material impact,” Dames said during a break from the tariff hearing held in Midrand, north of Johannesburg.

To contact the reporter on this story: Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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