R93bn electricity expansion to underpin big coal investment

13th June 2005 By: Irma Venter - Creamer Media Senior Deputy Editor

Coal is, and is set to remain, the dominant source of fuel for South Africa’s power-generation industry, which is on the cusp of a R93-billioncapacity-expansion phase.

Despite ongoing calls for greater fuel diversification, several coal-linked projects are already under way or in the pipeline and, given its cost advantages, it is widely-anticipated that more mega-watts will inevitably mean more coal.

South Africa’s economy has been built on its competitive mineral-and-energy complex, and its coal-fired power stations still provide the world’s lowest-cost industrial electricity – which serves as a lure for international industries to set up shop locally, while also providing domestic business with some competitive advantage over rivals abroad.

But does South Africa have enough coal to remain a significant exporter and still supply the country’s electricity needs? And what shape will any future coal-fired power-generation projects take?

In short, what demand will South Africa’s hunger for electricity place on the local coal industry?

The numbers
South African mines last year produced 242,82-million tons of coal. Of this figure, 178,37-million tons was used locally, at a value of R13,6-billion, with export sales totalling 67,94-million tons, at a value of R14,47-billion.

South African mines export their best-quality coal, often beneficiating it before shipping it abroad, while low-quality, much-less-expensive coal is sent to power stations, explains Department of Minerals and Energy (DME) coal and hydro-carbons chief mineral economist Xavier Prevost.

The low-quality coal Eskom uses carried a price tag of about R55/ton in 2004, while export coal varied around R200 and R400-plus a ton.

“South Africa’s run-of-mine-quality coal is quite suitable for power generation. Most mines can successfully separate export-quality coal from the low-quality coal power stations need,” explains Prevost.

Eskom Generation Division MD Ehud Matya says the power utility last year used 109,97-million tons of coal. (Prevost notes that Sasol is the country’s second-biggest coal user, burning 41-million tons of coal a year, and that Sasol is also expanding rapidly.)

“Eskom’s coal use has been increasing over the past few years in accordance with the growth in electricity demand,” says Matya.

To put this in perspective, demand increased 4,8% in 2001 over 2000, 3,3% in 2002 over 2001, 1% in 2003 over 2002, and 7,1% in 2004 over 2003, to last year reach 34 210MW.

Eskom currently has capacity of between 35 000 and 36 000 MW.

Prevost expects South Africa to burn between 120-million tons and 130-million tons a year for power-generation purposes by 2009.

Matya anticipates the utility’s coal use to keep pace with electricity demand in the coming years.

“As demand increases, more electricity needs to be generated, which results in more coal being burnt.

“The anticipated demand growth rate is approximately 3%, hence the increase in the use of coal would be in the same order.”

Matya says Eskom has long-term supply contracts in place for the majority of its power stations, with the rest being supplied through short-term agreements. In terms of exports, growth is also expected in this market, meaning South Africa’s coal-miners will, in future, have to work even harder to satisfy the seemingly unrelenting demand. (Prevost notes that India has shown interest in procuring large coal tonnages from South Africa to satisfy its own ever-growing demand for electricity.)

Should a long-delayed expansion at the Richards Bay Coal Terminal (RBCT) finally move out of the starting blocks this year, capacity at the terminal will increase, by ten-million tons a year, to 86-million tons a year.

Coal for growth
Public Enterprises Minister Alec Erwin earlier this year said South Africa would require between one and three new coal-mines over the next ten years to ensure supply to its expanding coal-fired power stations.

“South Africa’s coal reserves are sufficient to supply Eskom’s power stations until the end of their lifetime,” assures Matya.

South Africa has around 28,6-billion tons of recoverable coal reserves, making it the seventh-largest holder of coal reserves in the world.

Increasing capacity at South Africa’s coal-fired power station will not jeopardise coal exports.

“Given that the power stations were designed to burn relatively low-grade coal, the electricity industry is not in direct competition with the coal-export industry,” says Matya. Prevost agrees, saying there is no conflict between exports and local needs.

Big coal-miners are aware that Eskom is in need of expanding its power-generation capacity and, therefore, requires more coal.

Diversified mining company Kumba Resources plans to double coal production to 40-million tons a year by 2010, although not solely because of South Africa’s increasing power demand.

As part of its expansion drive, the company’s flagship coal asset, Grootegeluk, in Limpopo, has implemented a R323-million expansion project.

The project will enable the coal-mine, which is South Africa’s largest, to ramp up production by 700 000 tons a year of semisoft coking coal, and 100 000 tons a year of A-grade steam coal.

The mine is also the largest coal-beneficiation complex in the world and currently produces more than 18-million tons a year of coal products at five plants.

Eskom’s Matimba power station is on the doorstep of the Grootegeluk colliery.

The mine currently supplies the electricity utility with more than 14-million tons of thermal coal a year.

Kumba Resources Coal GM Ernst Venter says the company is focusing on increasing supply to the power-generation market, supplying higher volumes into the profitable metals market, and realising downstream opportunities in the reductant markets – specifically for char and market coke.

Aside from Grootegeluk, Kumba has two other coal-producing assets – the Leeuwpan mine, near Delmas, in Mpumalanga, and the Tshikondeni mine, north of the Kruger National Park, in Limpopo.

Leeuwpan is currently being expanded to increase the yield of top steamcoal, enabling the mine to produce a million tons of low-grade steamcoal for Eskom’s Majuba power station.

Another coal-miner, BHP Billiton’s Ingwe, has six operating coal-mines, all of which are based in Mpumalanga, in South Africa.

Ingwe is currently looking to increase its output for export purposes, as well as what it predicts will be ever-increasing local demand, predominantly coming from Eskom increasing its power-generation capacity.

Of Ingwe’s current 56-million-ton-a-year production, 30-million tons is sold to Eskom and the remaining 26-million tons exported.

Ingwe acting COO Darryl Cuzzubo says that, aside from the current demothballing of three of Eskom’s coal-fired power stations, opportunities are expected around Ingwe supplying to new powerstation developments.

BHP Billiton energy coal president Mahomed Seedat notes that the South African government, Eskom included, is planning on spending more than R90-billion on new power-generating capacity. “Clearly, we see opportunities for us to participate in this. We see domestic opportunities growing.”

Seedat adds that “it will depend on its submission to Eskom to deter-mine whether Ingwe clinches any supply contracts, as we’ll be competing against the other major producers in South Africa”.

He notes that he does not wish to hazard a guess as to the margin by which the local coal-supply market may grow.

The existing Ingwe operations are mature businesses that have been operating for a number of years.

The underground operations of Koornfontein and Douglas will close by about 2008, says Cuzzubbo.

Ingwe does, however, have a pipeline of projects to replace declining production levels.

These include Klipspruit, the new greenfields export mine, while other greenfields contenders, Leandra, could be for supply of coal to both existing and new Eskom power stations, and Naudesbank could primarily replace export tonnage.

A new power station in the Waterberg?
Eskom and the DME have been investigating several projects to increase the country’s electricity capacity. These include nuclear power in the form of the pebble-bed modular reactor, and natural gas, as well as open-cycle gas-turbine technology.

Prevost says despite all of these efforts, including the current demothballing project, the main thrust in solving the country’s long-term electricity-generation needs should be to create a new coal-fired power station.

Eskom has also made it clear that coal still has a large role to play in its portfolio.

Kumba CEO Dr Con Fauconnier believes that his company’s exclusive presence in the Waterberg coalfield – which contains the bulk of the country’s untapped resources – could make a significant contribution to supplying South Africa’s future electricity requirements.

Venter says that his company has been engaging national electricity utility Eskom with a proposal to expand the development of the Waterberg coalfield.

Kumba’s properties in the Water-berg have inferred resources to sustain mining for 400 years, and are said to contain some of the richest coal deposits in South Africa. The Waterberg coalfield contains more than 50% of South Africa’s remaining coal resources.

Kumba believes that the expansion of the nearby Matimba power station could play an important part in alleviating the power shortage forecast for the coming years.

According to Venter, the company’s proposal will result in a win-win situation as the close proximity of the power station to the mine reduces costs for both parties.

The first phase of Kumba’s development plan for its Waterberg reserves entails the simultaneous brownfields extension of the 3 600 MW Matimba power station and the Grootegeluk mine.

Phase one suggests that an additional 1 800 MW of generation capacity be installed at Matimba.

This will enable Kumba to boost its production of coal at Grootegeluk by more than seven-million tons a year, of which 6,3-million tons a year will be delivered to the power station.

The timeframe for this phase of the project is between four years and six years.

The second phase of the development plan involves a greenfields coal-mine and the construction of a new coal-fired power station of 3 600 MW.

It is expected that this phase will allow the company to ramp up coal supplies to the power station by 12,2-million tons a year, and increase supply to other markets by 2,5-million tons a year.

The timeframe for the implementation of this phase is between eight and ten years.

Venter believes that Kumba’s proposal offers Eskom the best value for its money, and the shortest lead time for adding base-load capacity to the grid.

Matya says a new coal-fired power station in the Waterberg is indeed on the cards.

“The environmental impact assessment (EIA) for the station has just started.” Eskom has identified three possible sites, Waterberg included, for future coal-fired power stations, and EIAs will be done for all of them.

“Eskom’s current capacity planning makes provision for the station in the Waterberg, and one other coal-fired station in the foreseeable future,” states Matya.

This means one site will lose out on a multibillion-rand investment.

Prevost says a new joint-venture power station may just be possible in future – and here he refers to a partnership between Eskom and a coal-mining company as a supplier.

He believes the Waterberg is a good choice for the establishment of this power station.

He says exploiting the massive reserves remaining in the Waterberg for export purposes alone is problematic because of the distance to the nearest harbour and the costs associated with this. Should the reserves be exploited for the purpose of local industrial consumption, distance to market remains problematic.

It would only make sense if there is a balance of products and customers – as is currently the case with the Grootegeluk mine – with a large customer nearby, such as a power station, and the beneficiated higher-quality coal being exported.

Prevost says this would mean a second Grootegeluk-type mine for Kumba, as Venter has indicated.

“My view is that such a project (a power station) should be ideal, as it will assist in creating employment in Limpopo, as well as stimulating the regional economy on the whole.

“It will also ensure that no more pollution is added to the already strained central basin, where most of the current power stations are.”

Also counting in favour of the Waterberg is that the reserves reach into neighbouring Botswana. Here, coal has always been neglected in favour of this country’s star export product: diamonds.

Mining Botswana’s coal reserves has never been seen as profitable; for similar reasons the further exploitation of South Africa’s side of the reserves is not being aggressively pursued at the moment.

However, a Waterberg power station would mean that Botswana could export its coal to South Africa, for use by such a power station, which would also mean diversification for Botswana away from its diamond-dominated economy.

Prevost says several international companies have already visited Botswana to investigate the possibility of mining its coal reserves.

South Africa’s central basin is not completely out of the picture for further coal-fired power station development and coal supply, though.

Prevost says there are two reserve blocks amenable to being opened as mines in Mpumalanga, one of these being in the hands of an empowered miner.

As for whether any Kumba–Eskom joint venture is on the cards, Matya comments that coal-supply negotiations have started for the Waterberg power station, “but as yet there is no mention of a joint venture with Kumba or any other mining house”.

The Waterberg power station coal-supply agreement is only expected to be finalised in early 2006.

If South Africa is to develop a new coal-fired power station, now is the time, Prevost adds, before the Kyoto Protocol (to which South Africa is a signatory) increases its demands on the lowering of harmful emissions, ensuring coal can no longer be considered an option.

He says a decision on a new coal-fired power station should be taken later this year, considering South Africa’s power needs and the long lead-time for the construction of such a power station.