Adoption of the pool-and-share concept by independent power producers (IPPs) and coal miners could lead to more efficient generation of electricity in Southern Africa, says consulting firm Venmyn Deloitte.

“The pool-and-share concept is a legal structure where companies can commercially share the unused coal resources with plant and equipment. The best example of this was between platinum miners Aquarius and Amplats in 2005, through which the companies shared business processes, subsequently leading to growth for both the companies at that time,” notes Venmyn Deloitte MD Andy Clay.

He explains that, should coal producers and IPPs adopt this concept, the basis would be to structure a legal arrangement whereby the IPP infrastructure and the unused mineral resources owned by separate parties would be combined without an exchange of asset value other than within a mutually agreed cash flow model. Therefore, the sum of the parts can be greater than the participating asset.

“In this structure, the cost of coal and power generation, as well as the required revenue pricing, are intimately combined for the mutual benefit of the parties,” Clay states.

Further, through margin management, he notes that the true cash cost of both coal and power can be determined for competitive pricing for a consumer.

As a result, Venmyn Deloitte associate director Chris de Vries adds that supplying coal to local utilities or IPPs is a way of creating a market for landlocked coal reserves. This will enable mining companies to partner with other coal producers and share the risk of operating an IPP or build a small modular generation unit to reduce the risk of a larger power plant.

However, despite the concept being an opportunity for the sector, Clay indicates that some challenges, such as the complexities of coal-fired power stations and the way in which they are managed, might hamper the realisation of the concept. Mining companies are also hesitant to forward-integrate into IPPs, as mining companies do not have the experience to operate power-generating units.

He adds that the current situation is quite unpredictable for the Southern Africa coal sector, as it also has to deal with low export prices and limited transport infrastructure that are crucial for exports.

In South Africa, the demand uncertainty with respect to Eskom, owing to changes in offtake contracts and the requirement for black economic empowerment, has led to a fall-off in investor interest in the sector.

Further, industry is battling with the possible restructuring of the coal industry – with juniors battling to remain profitable and majors deciding to exit certain jurisdictions – as companies are selling noncore assets and are possibly deciding against coal capital expenditure programmes that exist.

“Coal producers are facing low thermal coal export prices and coal prices have dropped from more than $118/t in 2011 to just over $60/t in January this year,” says De Vries.

Moreover, low coal prices have resulted in many junior miners experiencing liquidity challenges, with several of them having taken on debt when commodity prices were higher. Subsequently, several junior miners face limited capital-raising opportunities because of their low share prices.

“Faced with these challenging financial conditions, becoming an IPP, partnering with an IPP or having signed an offtake agreement with an IPP are some of the ways through which the risk of operating in the coal sector can be reduced.

“Of significance is that in many countries and continents, electricity trading is simply the norm but in an overregulated, nationalised environment, private enterprise simply won’t be interested. We await the outcome of the Department of Energy’s request for proposal,” notes Clay.