Don’t be comfortable . . .
University of Cape Town Energy Centre honorary researchassociate Dr Philip Lloyd says companies have been “mining the cream of South Africa’s coal”. Pressure on Eskom to keep its electricity price low has succeededin keeping the price the utility pays for the coal it requiresequally low, he explains. “This price must go up soon in order to restore our coal reserves. “We are down to our last 20-billion tons plus, and this is shrinking. Our energy future isby no means assured. “At present prices we have enough coal to fire two more Eskom 4 000 MW stations. “We can’t be comfortable with the amount of coal left, especiallysince our electricity demand is growing by more than 1 000 MW a year,” says Lloyd. In 1996, Eskom burnt 85-million tons of coal, whichincreased to around 104-million tons last year. As Eskom prepares to grow its capacity to cater forincreased demand, it will require even more coal. In fact, Eskom’s current installed capacity is around 45 000 MW, but the utility expects this to increase to 65 000 MW by 2024. Lloyd notes that South Africa’s electricity needs, with the countryrunning out of capacity as is punctuated by the energyshortages in the Western Cape and power failures in Gauteng,requires “economic coal at anincreased price”. Lloyd says the price Eskomcurrently pays for coal, roughly at around R50 a ton, is not sufficient. “We need to double this priceif we want to make continued mining possible in Mpumalanga.” Only at an increased price will coal-mining companies find itfeasible to mine the more expensive, deeper coal, and to look for new reserves. Anglo Coal prospectingservices manager Malcolm Spurr believes that coal-fired powerstations “will still be aroundfor some time”, but notes that mining companies are “running out of the easily-exploited coal in the Witbank area”. Witbank, in Mpumalanga, holds South Africa’s largest reserves of coal, at 9,3-billion tons. BHP Billiton chief geologist Peet Meyer says there is little “easy coal” left in Mpumalanga for future, large-scale mines. “The coal is thin and deep, and of low quality, really only suitable for the Eskom-type market, with limited export potential.” (Eskom is able to use low-quality coal in its coal-fired power stations.) Meyer argues that existing Mpumalanga mines must beallowed to be multiproductoperations, for the sake of increased profitability and to not only cater for Eskom. “We can’t sell Eskom coal atR50/t if we can get $50/t from the export market. “Some mines are viable only because of export, and not the coal they ‘give away’ to Eskom.” He says it is too expensive to be a ‘captive’ Eskom mine – as thestrategy the power utility follows is to have a specific coal-mine linked to a certain power station to ensure supply. Meyer also points to a 2003 study which indicates that South Africa has 14 years of export coal remaining in Mpumalanga, but that this could be increased through exploiting the pillars remaining fromprevious mining activity. “In the next 20 years, South Africa will not export coal from Mpumalanga.” The question then, he notes, is whether mines can survive economically without export coal – and if not so, how this will affect the price of coal Eskom will have to pay to keep these mines open. “Mining coal is becoming more expensive,” says Meyer. “Eskom will have to increase the price it pays for coal and, in the end, the consumer will pay.” And this consumer is theelectricity user.
Coal is still the answer
Kumba Resources GM: coal Ernst Venter says South Africais currently facing a crunch time when it comes to power supply, and that the country will be in a similar position in 20 years ascoal reserves deplete and power stations planned now age. “The growth year-on-year in 2004 (in electricity demand) was 2 167 MW, and not 1 000 MW, as predicted. “Should we attempt to grow at 6% GDP this will grow evenfurther.” Government has previouslystated that it is aiming to increase gross domestic product growth from the current level of around 3% to 4%, to 6%. Venter believes hydropower may provide some solutions, in the form of the Inga project, in the Demoratic Republic of Congo,exporting power to South Africa, but that this will only happen 15 to 20 years from now. He considers the pebble-bed modular (nuclear) reactor to be some eight to ten years from implementation. Therefore, coal-fired powerstations are still the best solution. In fact, “it is still the cheapest to use coal to increase (electricity) capacity”. He notes that it is vital that South Africa’s electricity supply remains cheap, as it is a competitive advantage luring investment to the country. Venter believes that even if the country’s electricity price trebles over time, it would still be cheaper compared to the rest of the world, as the demand for, and subsequent cost of, electricity will also rise internationally. Up to 2022, South Africa would require eight new 4 000 MW power stations in South Africa, but where will the coal come from, he asks. “Coal demand for base-load electricity generation will grow from 100-million tons to around 175-million tons by 2025. “This does not take intoaccount depletion of resources.” Venter believes the majority of this additional coal will come from the Waterberg, in Limpopo, where Kumba’s Grootegelukmine – the only mine in the area – is located. This mine produces 17,5-million tons of coal a year, which is exported, sold locally, as wellas supplied to Eskom’s Matimba power station. There is no decision yet from Eskom on expanding Matimba’s current 3 600 MW capacity –a potential project that has been referred to as Matimba B – but Venter says “we can add 8 000 MW with our plans”. “We are busy with studies to do this.” This includes ensuring improvedwater supply to the mine, which Kumba is currently negotiating with the Department of Water Affairs and Forestry, as well as considering opening a new coal-mine – around eight years from now – for export purposes, near Lephalale. Venter says the companyis also currently studyingupgrading the rail link between Witbank and Lephalale, in order to upgrade the capacity of theline from three-million tons ayear to ten-million tons a year by 2015. Meanwhile, Eskom reportsthat the first phase of an environ-mental-impact assessment (EIA) for a proposed new coal-fired power station in Lephalale, Limpopo, has been completed and the second phase is now under way. The new power station, to be constructed in the area formerlycalled Ellisras, is to have apos-sible maximum capacity of4 800 MW and will be located near the existing Matimba power station. Coal-fired power stations have a lead time of about eight to ten years. In 2003, Grootegeluk produced 16,2-million tons of coal. Of this, 13-million tons was supplied to Eskom’s Matimba power station.
Coal planning for future generation was lax Department of Minerals and Energy chief mineral economist Xavier Prevost says that most of South African power stations’ “captive” mines were designed for a 40-year lifespan, and now they have reached mid-life.
Prevost says there are indeed sufficient coal reserves remainingin South Africa’s central basin (the Mpumalanga/Highveld/Ermelo coalfields, to cater for coal-fired power generation for another 40 years to 50 years. He believes these are appropriatereserves for power generation and are not difficult to mine. “As an example, near Delmas there is the Eloff Block, containing reserves of 1,3-billion tons of coal. “It has a high ash content, so it is mainly suitable for use by Eskom, with maybe only a small fraction of better quality coalsuitable for export. “This reserve, owned by BHP Billiton and Total (70/30%), has not been developed yet. There are other blocks like this available in Mpumalanga.” Prevost says current planningindicates that at least two largeadditional coal-fired power plants could be built in South Africa in the near future. And despite reserves being available in the central basin, building one of these stations in the Waterberg will make more sense, he adds, especially from an environmental perspective as Mpumalanga is already producing most of the CO2, SO2 and SO3 emissions. He notes that it is important for Eskom and government to make a decision on the building of new coal-fired power stations in the next few months, because of the long lead times required to final commissioning.
Price increase is likely
Prevost shares Venter’s opinion that low-cost electricity drives economic investment in South Africa, and that it is important that the tariffs do not increase suddenly and rapidly. “If the price of coal goes up, the price of electricity goes up. “If costs go up by 20%, it is still acceptable, but if they double, we’re in trouble. “Also, should this happen, governmentwill not have sufficient funding to provide a minimum amount of free electricity to each household as it does at the moment.” However, Prevost acknowledges that things will have to change. This includes the fact that captive Eskom collieries are no longer financially feasible, with higher-quality export coal, at $57/t,necessary to subsidise lower-quality Eskom coal at R65/t. He adds that the price of coal will, inevitably, rise going forward, and so will the electricityprice. Eskom has indicated that it will procure more coal from small-scale and empowerment miners, which means that these suppliers – not necessarily located close to power stations – will have to add transport costs to their price when selling coal to Eskom. “This can easily increase the price of this coal for Eskom to around R80/t plus,” says Prevost. “Also, we’ll see the coal price steadily increase over the next 40 to 50 years as South Africa’s coal reserves shrink. Hopefully, this increase will be gradual, and not sudden.” As for what happens when South Africa’s economically-viable coal reserves aredepleted, Prevost says importing power from Botswana or other Southern African Development Community countries is the most natural option. Importing coal from further abroad for use in coal-fired power stations is not economically feasible. “This will be too expensive. We mustrather look at other energy sources, such asgas or nuclear.”
Is Eskom diversifying fast enough?
Eskom CEO Thulani Gcabashe says theutility is aiming to reduce its reliance on coal from 90% of power-generation capacity to around 80% by 2012. Plans to diversify include another possible conventional nuclear power plant in the Western Cape, alongside Koeberg, and two open-cycle gas-turbine peaking-powerstations in Atlantis and Mossel Bay, alsoin the Western Cape, as well as longer-term plans which include the pebble-bed nuclearreactor. Gcabashe notes that he expects a coal-supply shortfall soon, and that Eskom would, therefore, have to source more coal, probably from black economic-empowermentsuppliers. He adds that South Africa’s electricityprices are indeed the cheapest in the world – 36% cheaper than Canada, in second place – but that capacity-boosting investments would narrow this gap. He notes, though, that as other countries bring more capacity online, their tariffs would also increase. Eskom earlier this year requested the National Energy Regulator of South Africa (Nersa) for an increase of 6,6%. However, Nersa agreed only to 5,1%, 5,9% and 6,2%, respectively, for the three yearsbeginning April 2006. (In 2004, Eskom received permission for a 2,5% price increase from Nersa, rather thanthe around 10% it requested.) Eskom spokesperson Fani Zulu said at the time that the increases, while not as high as the company had hoped for, were still at “more real” levels than in previous years. “It is clear that the current pricing levels are not sustainable and that there is a need for real pricing determinations,” he warned. How high Eskom prices maygo after the current three-yeardetermination is not clear. What is clear, though, is that there aresignificant longer-term upward pressures on current Eskom price levels, includingaffordable coal supply and finding thefunding for urgently-needed capital expenditure projects in order to expand capacity. It is also an open question whether enough attention is being paid to South Africa’s need to diversify from coal, as it is clearly afinite resource. Will the country, 40 years from now, when coal starts running out, be faced with a similar predicament of insufficient power,as it is now? Or will South Africa have had the vision to have long since diversified its power sources?