Eskom and Coal Suppliers on coal supply security and quality of coal supplied to Eskom

Meeting report

Ms Mentor reminded the Committee members that in 2009 they had met with Eskom on site at a power station and from that meeting concerns had been raised around water supply to mines and coal contracts at the power stations. She noted that in the previous tariff hike afforded by the National Energy Regulator of South Africa (NERSA) the issue of the maintenance of coal stockpiles at 40 days supply had been raised. When the Committee had visited the power station this had not been the case and she asked the Eskom team to explain this in their presentation. She wanted to make sure that coal supply was not an issue that was threatening security of electricity supply - given that it was near to winter and the 2010 Soccer World Cup. She suggested that this should be the focus of the meeting. She invited members to raise any further issues and said that if Eskom could not provide answers, a further meeting should be held in 2010.

Mr Brian Dames introduced himself and the team from Eskom. He apologised for the acting Chairman who was not present.

Mr Norman Mbazima introduced himself and his team from Anglo American Thermal Coal.
           
Mr Xolani Mkhwanazi from BHP Billiton introduced himself and his colleague Mr Manie Dreyer.

Mr Mike Russouw introduced himself and the team from Xstrata.

Ms Mentor criticised all parties for the lack of women’s representation.

She consulted the graphs produced by Eskom and asked why they had exceeded the totals that they had set for themselves for January. She had learnt that the national consumption was nine percent above the previous year’s consumption. This was an indication that the economy was picking up and that the issue of coal supply was thus incredibly important. She urged Eskom to include Parliament in the sharing of information on national consumption so that it could be monitored.

Eskom presentation
Mr Brian Dames (Chief Officer: Generation Business) extended apologies of the acting Chairman who was overseas. He agreed to extend the information on national consumption. He agreed that from an energy demand perspective it was clear that there was an improvement in the economy. He noted that they were seeing a demand in excess of 9%. Eskom had contributed to making sure the lights stayed on and would continue to do so.

He said that there was currently a problem of coal supply because there was not sufficient coal production, which increased the costs of production and mining coal. Long-term contracts had run longer than their contractual maximum which had depleted stations and created the necessity for additional coal. The geological conditions had meant that Eskom had received coal of declining quality which would have major implications in terms of coal supply. In addition, new coal sources were further from power stations and thus would have to be transported by truck which would cause damage to the road. This was particularly apparent in Mpumalanga. Two years ago there had been a crisis of supply which Eskom had tried to resolve by buying more coal in order to restore coal stockpiles to 42 days average supply. At present coal stocks were only at 36 days, but they would be at 42 days by May 2010.

Ms Mentor asked for clarification on the issue of the stockpiles. She asked what 40 days supply meant.

Mr Dames said that it meant that the amount of coal at a power station would last 40 days so that if any unforeseen problems in supply or weather occurred, there would not be an electricity shortage nationally. The 42 days was an average across all stations and each station had an expected level which was determined by the risk profile of that station. Secondly, stations that were vulnerable to rain had stockpiles of five days which had been chemically treated to prevent moisture from damaging coal (for example in Mpumalanga).

He explained that the coal stockpiles should ideally be at 42 days supply, and at present they were at an average of 36 days supply. He assured the Committee that Eskom was confident that the 42 day supply mark would be reached. He also assured the Committee that measures had been taken to increase the number of long-term coal contracts held by Eskom to avoid future shortages.

He expressed concerns about the quality of coal that Eskom had received in the past, and noted that geological and climatic issues meant that in some cases this was unavoidable. Other concerns that he noted were the transportation of coal given that most new mines were situated further away from the power stations than was ideal.

He explained that Eskom had developed a long-term strategy for response to the South African power situation which was premised on eight key elements:

▪ Optimum portfolio of long-term contracts and medium and short term contracts.
▪ Prices based on efficient costs plus a fair return from mining industry.
▪ Investment in low cost, flexible coal transport infrastructure.
▪ Quality management and selective beneficiation to reduce TCO (total cost of ownership).
▪ Risk based stock management.
▪ Improved co-operation with major stakeholders.
▪ Investment in long-term infrastructure.
▪ Strengthening the organisation’s capability.

He concluded that stock days had been restored and a clear system had been implemented to monitor these. This had included the consideration of eventualities such as supply and demand. Work was being done with Transnet and Eskom had been working hard to deal with road problems with the support of provincial and local government. Coal was critical for South Africa’s security of energy supply and that Eskom bought 70% of its coal from the mining groups present at the meeting. Coal stockpiles were currently at an average of 36 days supply but that this would be restored to 42 days before the start of winter. The challenges of coal supply and the quality of coal were challenges that Eskom and the country needed to deal with.

Discussion
The Chairperson asked if the inferior quality of coal that Eskom had received was as requested from Eskom or if it was simply what they were given.

Mr Dames said that the mines supplied the coal they were contracted to supply. In the past a small portion of inferior coal would not have impacted on energy supply because there was such a large supply of coal. At present the inferior quality coal was affecting their energy output. Eskom had designed burners that could burn lower grade coal and there was a further need to tighten quality to ensure that they got more consistent coal.
 
Mr M Van Dyk (DA) said that in his opinion insufficient time had been given for Eskom’s presentation given that coal supply was a critical issue for South Africa. This issue could have been extended over three days in his opinion.

Ms Mentor said that the Committee had requested a two-day meeting from Parliament, but they had not been granted two days.

Mr Van Dyk said that part of Eskom’s tariff increase was to cover the cost of coal. In the Integrated Resource Plan (IRP) Eskom had proposed to implement hydro, solar and wind renewable projects. The 45% requested increase request was based on the IRP, but it had now been reduced to a request for a 35% increase. He asked if the Integrated Resource Plan had now been put aside and whether Eskom would rely solely on coal.

Mr Dames replied that the IRP had been published before the price application and most of their application was aligned with the IRP in preparation for the price increase. As a country it was his view that coal options provided the best opportunity for Eskom to meet South Africa’s need. In the IRP, options around renewable energies, such as wind, solar and co-generation, had been discussed. In the future there would be more emphasis on these sources. However South Africa had two natural resources – coal and uranium – and as a country it was necessary to use those to meet the energy requirements going forward.

Mr L Greyling (ID) said that the only two natural resources were not coal and uranium, and that this was a lie. The most abundant source of energy was solar energy. It was necessary to have answers about the cost of coal and whether the path that Eskom was putting forward was the right path for the country.

Mr Dames said that South Africa had coal and uranium and an abundance of solar energy. He agreed with Mr Greyling but said that it was necessary to deal with the base load and that uranium and coal were going to meet that base load now, because of the technology available. The biggest opportunity was one of energy efficiency. They had done development on the use of solar energy and how it could be used. Using wind resources was also important. As Eskom they wanted to see South Africa moving towards a mix that reduced their use of coal.

Mr Van Dyk said that the initial application had been for a 45% increase including renewable energy resources. He asked if the reduced application of a 35% increase meant that renewables would be excluded.
 
Mr Dames replied that within the 35% increase they had included wind in their plan but they had delayed it for one year. Solar work was being done with the World Bank to ensure secured funding and investment in that project. It would be necessary when moving forward to make sure that these were aligned. The regulators looked at what a benchmark price should be and measured Eskom’s performance against that.

Mr Van Dyk asked whether the IRP was effectively parked now.

Ms Mentor said that no further discussion of Eskom’s application to NERSA would happen in this particular meeting. In her opinion Mr Dames had answered the questions of pricing adequately. She asked Committee members to ask questions of clarity, and that further questions of engagement should be asked at the end of the meeting. There should be a further meeting on pricing.

Mr P Van Dalen (DA) said it was necessary to decide whether the coal suppliers were overcharging South Africans for coal. If it was decided that there was a problem of overcharging then this should be investigated by the Competition Tribunal to avoid paying exorbitant cost for coal.

Ms Mentor said that there was no basis to say that they were overcharging. The Committee would hold a meeting where the suppliers would supply them with information. She would set the date for that meeting.
 
Mr Van Dyk said that since the 2007 Olsen Report there had been an awareness of a problem with the stockpile, which had led to load shedding. He asked Eskom what measures had been taken since 2004 to overcome this problem, and to ensure that problems listed in the 2007 Olsen Report would not happen in the future.

Mr Dames replied that when the crisis had occurred their immediate response had been to buy emergency coal, and then to restore stockpiles. They had done this. They were now negotiating coal on a long-term contract basis. In his opinion it was not sufficient to deal only with the short term, but the long-term as well. That was what they were doing now. Medium-term contracts were also being negotiated.

Ms Mentor asked Mr Dames to back up his statements with documentation that should be sent to the Committee.

Mr Dames said that the contracts were being negotiated and that when they were ready they would be sent to the Committee.

Ms Mentor said that the Committee wanted to see a plan in place.

Mr Van Dalen (DA) asked for clarity on what length of time was denoted by ‘short-term’, ‘long-term’ and ‘medium-term’.

Mr Dames replied that a short-term contract was a one- to two-year contract. Eskom wanted most of their contracts to be long-term but at present they were only achieving contracts from five to ten years. Most long-term contracts had come to an end and that Eskom had thus developed a long-term strategy for replacing contracts to ensure predictable long-term supplies. They were in a process of evaluating those to ensure that a significant amount of coal supply would be generated from long-term contracts.

Mr Van Dyk said that it seemed that eXXaro, Anglo American Thermal Coal and Xstrata had increased their net profits in 2009 by almost 134%. He asked whether these groups had enriched themselves from Eskom or whether Eskom just paid high prices.

Mr Van Dalen said that according to Eskom, coal stocks were at an average of 36 days. The Committee did not have information on each power station and he thus asked if it could be the case that the big power stations had little stock and small stations had big stock. He asked for a report detailing the stock of all stations.

Mr Dames explained that the status for each station was monitored on a daily basis; this was checked and surveyed regularly and was monitored to generate an average. It was important to look at risks per station, and not only look at the averages and each station was considered.

Ms Mentor asked if they could receive that information in a report.

Ms G Borman (ANC) referred to Mr Dames’ statements that stations vulnerable to rain had only a five day stockpile. She asked whether the supply at those stations was entirely dependent on the rain-affected coal or whether extra coal was brought into those mines.

Mr Dames replied that at specific stations Eskom had decided to get coarser coal in cases where the coal was too fine. At other stations they had developed a chemical to spray on to protect the coal because covering the coal was too expensive.

Ms Borman asked if extra coal was brought in to extend the five days to the 36 or 42 days stockpile aims.

Mr Dames said that additional coal was brought in to meet the gap between the 42 days desired stockpile and that the five days were included in this.

Mr M Oriani-Ambrosini (IFP) asked if the trucks carrying coal were required to be covered, and if not how hazards like coal dust were dealt with. He asked how the hazards from the coal stockpiles were dealt with.

Mr Dames said that as far as he knew the trucks were covered and that the type of coal used by the power stations was large coal which did not normally generate coal dust. He added that coal stockpiles were compacted to ensure that there was no coal dust or spontaneous combustion.

eXXaro presentation
Mr Johan Myburgh (eXXaro) said that eXXaro mainly operated in the Mpumalanga area. They currently supplied 36.3 million tons of coal to Eskom. 19.8 million tons were supplied under short to long-term commercial contracts, 16.5 million tons supplied from tied mines. He explained that tied mines, or cost plus mines were mines where Eskom had initially funded the capital and thus eXXaro was only paid a fee on top of operational costs. This fee was fixed and it was not a commercial agreement. Where problems had occurred in the past, procedures were now in place to secure the volumes of coal that Eskom needed.

Anglo American Thermal Coal presentation
Mr Norman Mbazima (Anglo American Thermal Coal) said that 61% of their coal was supplied to Eskom, and that business with Eskom was their core business. Anglo American Thermal Coal had long-term contracts to Eskom and they met all requirements of these. At Kriel, New Vaal and New Denmark, which were the three main collieries, all of the coal that was produced went to Eskom. The lives of these mines varied between 2029 and 2051 and these were tied mines. He noted that they also had signed other short-term contracts with Eskom from which they expect to be able to supply further coal to them. At present the stockpiles at these mines were in line with Eskom targets.

Mr Mbazima explained that there was a wide disparity between the quality of the coal supplied to Eskom and the export coal, and that Eskom could not burn the export quality coal. The two types were thus not inter-changeable. In all of Anglo American Thermal Coal’s contracts with Eskom, the coal quality was agreed upon, and the quality that they supplied was according to the contracts. He added that there were problems like deteriorating geological conditions, and that to mitigate these problems more drilling ahead of mining would be required. Adverse weather conditions had influenced their supplies in the past.

Mr Mbazima stated that Anglo American Thermal Coal was committed to maintaining a relationship with Eskom and they were looking for new coal supply agreements to increase their ties.

BHP Billiton presentation
Mr Xolani Mkhwanazi (BHP Billiton) said that they had had a long and constructive relationship with Eskom for many years as both a customer and major supplier. He described Eskom’s success and the success of BHP Billiton’s as interlinked, and their futures were interlinked as well. The industry had experienced difficulties since the downturn over 12 months ago and thus safety was a central focus for them. The preceding heated resources boom had resulted in high levels of costs which had not yet come out of operations. They had struggled with very high costs in their operations, and had not made any operating profit in the second half of 2009. This had caused challenges for their company. They were working with Eskom to bring the costs to acceptable levels.

He said that BHP had several opportunities with Eskom to develop supplies that would enable Eskom to grow. He added that going forward BHP Billiton would need better contractual arrangements which reflected the costs and drivers of their operations. They had an MOU in place with Eskom which in his view would facilitate negotiations in the right direction.

Mr Manie Dreyer said that BHP Billiton produced around 50 million tons per annum of coal from the ground. Of that 23.5 million tons was supplied to the domestic market, mostly to Eskom. Twelve million tons were exported. Their reserves in operating mines were one million tons. They had contracts with Eskom at three mines, one of which was a fixed price guaranteed volume contract, two of which were tied collieries. They had experienced problems with meeting the demands of these contracts as a result of heavy rainfall in 2009, and safety concerns at one mine. He stated that the shortfall would be made up in the first quarter of 2010.

Mr Dreyer said that their focus area was improving health safety and environmental responsibility at their operations which he said was an ongoing challenge for everyone in the mining industry. At present they had two major projects for capital investment under way which were at Klipspruit, which was 99% complete, and at the Douglas Middleburg Optimisation project, which was almost 85% complete. These two projects represent the single largest investment of any coal manufacturing company in history. There had been an investment of almost R11 billion into the coal industry.

Xstrata presentation
Mr Murray Houston said that Xstrata was not one of the major coal suppliers into Eskom. Xstrata was born out of a consolidation of a number of small coal mining businesses. Most of these original businesses were supplying coal to other industries like the sugar industry or the paper mills. They thus did not have any tied mines. They had just built a new mine which would be contracted to sell between 50 -60% of its supply to Eskom. Every ton of coal was processed which helped to remove a lot of the impurities which would deliver a consistent product for the future. In addition they had another project which would supply around 40% of its output to Eskom. They were engaged with the Eskom team in long-term negotiations so that they supply quality coal in the future.

Discussion
Mr M Mangena (AZAPO) said that the presentations from the mining companies created the impression that there were no problems with coal supply. Both Mr Dames and Mr Mbazima had mentioned the declining quality of coal and said that there were geological challenges. He asked if this meant that in the future the quality of coal would decline and would be more difficult to mine, and if so whether it would be more expensive. One would have thought that South Africa would have had sufficient supply for the next 100 years.

Mr Mbazima responded that geologists would inform the mining companies about where the coal deposits were. The companies then needed to develop the deposits into resources by drilling. The resource then needs to be developed into a reserve by doing more work and then it could be developed into a mine. The mining companies know that there were billions of tons in the Waterberg and they had to do more preparatory work before building a mine. This required considerable costs and thus companies needed to be convinced that it would be financially sensible before mining there. In his opinion there were sufficient reserves and oil deposits that could be developed in the future.

Mr Mangena asked if the beneficiation of coal meant that new products were bought or if the coal was treated to make it better and cleaner. He asked how this process would fit into their future plans.
 
Mr Oriani-Ambrosini said that he was under the impression that they were dealing with two issues: securing sufficient coal and trying to exercise oversight and investigate allegations of incorrect pricing and problematic “sweetheart” deals which were damaging taxpayers and the consumers through the tariffs. The mining companies’ presentations provided little more information than was on their websites, and did not clarify these allegations. In his opinion the Committee needed to have copies of the supply contracts in order to have a breakdown of what type of coal and which quality of coal was sold to clients other than Eskom, so that the Committee could understand the market price and by what it was determined.

Ms Mentor said that the primary concern of this particular meeting was security of supply. If Committee members felt that there was a need for a meeting on the pricing of coal then they could request a further meeting on this.

Mr Oriani-Ambrosini asked eXXaro what they brought to the table in respect of the tied mines. If all they brought was management skills then in his opinion Eskom could do this themselves, and should not have to pay a management fee.

Mr Myburgh replied that the cost plus agreements were agreements that were concluded many years ago. eXXaro would never enter into any similar agreements again because the agreements did not provide any incentives for performance for any player involved. The reasons for them were probably sound at the time of the agreements because the mining companies brought the geological knowledge and mine planning and modelling knowledge - which in his opinion was why Eskom decided to use the expertise of these companies. In order to use that expertise they agreed on a management fee that would then give a return to the mining company for the expertise they employed in the operation. The management fees that were received at some of the mining houses were not attractive to operate the mines. There was not a lot of money in it for the mining company.

Ms Mentor asked if the contracts were signed before or after 1994.

Mr Myburgh said that the contracts were signed in the 1970s or 1980s when the old power stations were built.

Ms Mentor asked if Eskom received any benefit from the transfer of skills from these contracts. She asked why Eskom could not leave the contracts if they were no longer suitable. She would give Eskom an opportunity to answer at a later stage.

Mr Van Dyk asked the mining companies if they had experienced any difficulties when they negotiated contracts with Eskom and if so what they were.
 
Mr Mbazima replied that they had not experienced difficulty in negotiations with Eskom. They had had a long relationship with Eskom and the contracts that were discussed were long-term contracts that required tough negotiations, and were managed on a daily basis. These negotiations were not difficult because each party was transparent. They were cost-plus contracts and thus all the data was available so that constructive negotiations could be held.

Mr Van Dyk asked whether it had caused any delays.
 
Mr Mbazima said that Anglo American Thermal Coal had not had any delays to date. They had had good timetables and had ensured that negotiations were finished in time to build the mines.

Mr Dreyer said that as Eskom was their biggest contract, they often existed as partners. In some instances they agreed and in some instances they had agreed to disagree. Tied collieries were all different contracts but the resource was actually dedicated to the power station and when it was mined out, it was mined out. They were investigating ways to optimise the coal extraction to extend the life of the contracts with Eskom.

Mr Van Dyk asked Eskom about their statements that 17% of the cost of coal was related to the transport of the coal and how this was dealt with in negotiation with the mining companies.

Mr Dames said that there were problems with transport. There was a need to move to lower cost transport and to ensure no further damage to the roads. Eskom entered into contracts where they had a combination of delivered coal and other contracts where Eskom dealt directly with the contractors. They were subject to the prices of diesel as soon as coal was transported by truck, and that this influenced the price of electricity.

Mr Van Dalen said that it seemed that since Mr Maroga had left Eskom there were no further problems. He asked if this should be taken for granted.

Ms Mentor said that Mr Maroga was not there to defend himself, and they should thus engage with Eskom’s current management on the issue of coal supply.
 
Mr Van Dalen said that the Committee meeting had been called because the Committee had thought that there was a problem with coal supply, yet all presenters had assured them that there were no problems. He asked how Mr Dames could say that there was no problem after making statements to the contrary in the Cape Argus. In the Cape Argus Mr Dames had said that the deteriorating quality of coal was affecting Eskom and that there was a problem of supply. Mr Dames had also been quoted as saying that there were no mines that would have the resources to meet long-term requirements. He asked how Mr Dames presentation to the Committee related to these statements and said that the Committee was being misled.

Ms Mentor said that Eskom had raised the problem, but the mining companies had said that there was not a problem. There was a disparity between what Eskom was saying and what the suppliers were saying and this must be rectified.
 
Mr Dames said that there was sufficient supply of coal stocks in the coal stockpiles.

Mr Mbazima said that it did sound as though there was not a problem. The suppliers’ presentations showed that there was a great deal of coal that was tied to Eskom for a long period of time, probably for the life of the mines and power stations. In his opinion there were not difficulties with the quantity and the quality of that coal. Despite the declining qualities, the coal supplied was still well within the quality specified under the contracts that had been entered into. Many of the issues that arose in 2009 were with respect to short-term emergency contracts, rather than the contracts for long-term supply.

Ms Mentor asked whether the better quality coal was exported.
 
Mr Mbazima replied that it was not possible to export the type of coal that Eskom wanted.

Mr Greyling asked Eskom whether that was the case.

Mr Dames said that he had provided specific graphs that showed that the coal Eskom wanted was not of the range of export coal, and Eskom’s stations and boilers could not deal with export quality coal. When he had said that better quality was needed it may have related to things like ash and abrasiveness. Old contracts had quality specifications but when there were problems, Eskom had not picked them up. Eskom wanted to monitor coal quality more frequently to ensure that there was no inferior supply. This would require investment in things like washing the coal.

Ms Mentor said that Eskom should tabulate their problems of coal quality and supply and present this to the mining companies. She requested that both groups return in March to present again to the Committee.

Mr Greyling said that this was an important meeting because the previous price increase which was given to Eskom was solely to meet increased coal prices, which would become an issue with regards to the price of electricity in the future. In addition, in terms of Eskom’s presentation to NERSA they committed South Africa to a coal based future, and the majority of new power in the future would be generated by new coal fired power stations. The issue of whether there would be enough coal for the future and if it would be able to be mined in a cheap manner was an essential issue for the future. Mr Dames had commented that there was not enough investment in coal development to meet the needs of the future, and he thus asked the mining companies if they would make that investment. In his opinion the companies would only make that investment if the price was right.

Ms Mentor said that there was obviously a need for investment in coal supply in order to grow the economy, and asked who Eskom had planned would make this investment. She asked if Eskom planned to seek tied collieries again, and if there was a plan.

Mr Dames replied that Eskom had not planned that Eskom would make that investment but that the mining community would make that investment. The investment in new coal mines would be beneficial to reduce the upward pressure on coal prices. They were in negotiations with the mining companies present on this issue.

Mr Greyling asked if future long-term contracts had been negotiated at a price that would not be significantly higher than past prices. In his view private companies would rather sell coal internationally than to Eskom because they could get a higher price for it internationally. He asked Eskom if they had made these agreements, or would they be making further applications to NERSA for higher tariffs because they had negotiated higher prices.

Mr Dames replied that their long-term coal contracts were either cost-plus, fixed-price which were based on a fixed price indexed annually and the rest were based on investment required and the mining companies achieving a fair return on the capital. Eskom believed that they should pay an efficient cost, based on a detailed cost model. Transport and investment would have an upward pressure in terms of electricity prices and that this had been dealt with in terms of their price application. Regulators were looking at what the cost of coal should be with the coal mining companies.

Mr Greyling asked how many of the cost-plus agreements would expire soon. He asked what the new prices would be in a new arrangement based on the fact that the mining companies did not want to enter cost-plus agreements.

Mr Dames replied that Eskom had increased its ability in terms of negotiating on a mine to mine basis so that they would get a fair return. This was done on a competitive basis and Eskom then negotiated with the best offers that were available.

Mr Greyling asked from where future coal would be sourced, because the Mpumalanga basin would have reached its maximum productive capacity in the next five to ten years.

Mr Dames replied that Eskom had decided to work with the Council of GeoScience to create a thorough inventory of the coal reserves that remained. He agreed that there was concern about whether the Mpumalanga coalfields would be able to meet the coal supply requirements until the end of the power stations. This would mean that the country’s coal requirements would have to be met from further away such as the Waterberg and eventually there would need to be an investment in rail infrastructure to link it to Mpumalanga.

Mr Greyling asked who would bear the external costs of the damage to the water supply and the damage to the agriculture in Mpumalanga in the long-term. He asked if South Africa could deal with that level of coal mining as a country.

Mr Dames said that in Eskom’s cost-plus contracts they had committed to dealing with the environmental impact. This should include land and water issues. How carbon was treated was accommodated for whenever Eskom made investment decisions looking at the costs of coals versus other mechanisms.

Ms Borman said that they had only received one report on the lifespan of the mines, the Billiton report, which had said that they had about a 30 year life span for production left. She asked if it was possible to know if they were getting the best quality coal the deeper that mining went and what was the lifespan of the coal left in the ground. In her understanding the best coal had come out. She asked why eXXaro had put a question mark next to Madupe in their presentation.

Mr Myburgh said that the question mark was to indicate that the contract had not yet been concluded. As there was only a 30 year mining licence it was difficult for the companies to guarantee it after 30 years. Eskom was seeking reserves that were proofed for 50 years and this required a huge investment to do quickly. Normally this was a staged process.

Ms Borman asked Eskom if, when they negotiated short-term contracts, it was with a view to extending those contracts.

Mr Dames replied that the reason they have short-term coal was because they had not had long-term investment.

Ms Mentor asked whether or not there was a coal supply problem in South Africa. Eskom and the mining companies were not saying the same thing. The Committee was aware that there was a coal quality problem. She asked Eskom if there were quality control mechanisms in place to ensure that Eskom was getting the best quality from its suppliers; or whether it was noticed incidentally or accidentally when they were supplied with inferior coal.

Ms Mentor said that at Copenhagen, South Africa said that it would be using coal to grow the economy for the next 40 years. If South Africa was using inferior coal then this would negatively affect the environment through increased carbon emissions. She asked what the long-term plan was and who would cover the costs of the investment required. It was important for the Committee to be able to inform South Africans that the tariff increase would not be invested for the benefit of mining companies, but would go into production of energy and security of supply.

Mr Dames said that there was a problem with the quality of coal that Eskom was receiving and that better and more consistent coal was needed by Eskom. Part of the investment they were working on was plants that would wash the coal and improve the quality of the coal. He added that Eskom controlled the quality of coal throughout all of its supply and penalties were applied when mines did not conform. This was done throughout all agreements. It was Eskom’s view in terms of their projection that the demand going forward would be significantly higher than their projections. It was true that South Africa needed to invest to meet future demands. South Africans wanted to know from where the coal was coming and that it would meet their demands in terms of quality and supply.

Mr Mbazima said that all mining had geological problems. These were better able to be dealt with by long-term contracts that had adequate planning.

Mr Myburgh said that in general quality was not an issue, but was something that was manageable either by mining method or beneficiation. The contracts that they had with Eskom would be able to be met in terms of quality for the next 30 to 40 years. It was not a problem that could not be bridged.

Ms Mentor said that there should be mechanisms in place that dealt with quality problems. The Committee had a responsibility to safeguard South African coal. It was better to tell the Committee what the problem was and how it would be addressed.

Mr Dreyer agreed with Mr Mbazima. He said all existing contracts would be honoured. The real problem was not 2033 or 2034. Eskom wanted long-term contracts which were 50 or 60 years in the future when these older mines would have been mined out. The biggest risk was logistics and getting rail infrastructure in place. With aging mines you did struggle with quality. It was not the absolute level that was the problem, but rather the variability of quality. BHP Billiton was developing a plant in 2010 that should significantly improve that.

Mr Houston said that the bulk of the business was fine, but the smaller elements of the business remained a challenge. There were a lot of coal reserves in this country which would not run out. The challenge was that the remaining coal reserves where coal mines could be developed were far away from the power stations and it thus became a logistics and beneficiation problem. If you mined the coal and supplied it to Eskom raw then it was cheap. However when you had to beneficiate the coal, it would have a cost impact.

Mr Van Dyk asked if there were any negotiations in place with international companies to import coal when local companies could not meet demand.
 
Mr Van Dyk asked if Eskom was negotiating with Transnet and the Department of Transport to resolve issues of road transport. In his view it should be Eskom’s responsibility to present to the Committee on this.

Ms Mentor said that Eskom had noted that they were negotiating with Transnet in their presentation. She asked Eskom for the results of that negotiation when it was concluded.

Mr Van Dalen said that Eskom was telling stories to justify their price increases, and to infer that the problem was bad coal.

Ms Mentor said that Mr Mbazima had said that there was a problem but it could be solved.

Mr Van Dalen stated that to say that the blackouts were a result of poor quality was a lie.

Mr Greyling said that he shared Mr Van Dalen’s frustration. The problem was the logistics of getting coal reserves to the power stations. The coal supply to Mpumalanga was going to have to come from somewhere else which would require logistical and infrastructure development. The question was then who would pay for it. A study on the externalities of energy in South Africa should be undertaken before NERSA was asked to guarantee our future.

Mr Mangena asked how much meaningful research was being done to mitigate those climatic and environmental issues by companies or Eskom and perhaps in collaboration between other countries that had similar coal reserves. He agreed with Mr Greyling about the undesirability of coal but said that South Africa was probably going to be burning it, and that research should be done. He agreed with Mr Greyling that South Africa had other resources but said that we were not yet in a position to use them.

Ms Mentor said that in her opinion South Africa should not only be burning coal but should be looking at supplying other forms of cleaner energy. Eskom’s presentation had not made a shift yet in terms of their being there to provide the base load from coal. That must be augmented by other forms of energy. There was a need for cross-parliamentary committee communication to discuss new solutions.

Mr Dames said that research was being done with various partners and that it would significantly improve the way that coal was used.

Ms Borman asked if the knowledge that Mpumalanga coal supplies had a certain lifespan and would run out, had been taken into consideration when planning new coal mines and infrastructure.

Ms Mentor agreed with Mr Greyling that the externalities must be discussed and looked into. She closed the meeting and said that in March another meeting should be held to clarify any outstanding concerns about the quality of coal and sufficient supply. The Committee should ensure that other power producers came on board.

Meeting ended.