Eskom Medupi power station.
Eskom Medupi power station.

THE Department of Mineral Resources is evaluating current pricing mechanisms and structures for coal in light of Eskom’s need to reduce costs, Mosa Mabuza, deputy director-general of mineral policy said on Thursday.

Mr Mabuza was standing in for the minister, Mosebenzi Zwane, who was unable to attend. Mr Mabuza told the IHS Energy South African Coal Exports Conference 2016 that the department’s concern was to ensure that electricity cost increases were contained to avoid undermining the country’s manufacturing competitiveness and development imperatives.

His comments come as the National Energy Regulator of SA (Nersa) holds public hearings around the country into Eskom’s request for an additional increase in its tariffs this year to claw back costs that were not allowed in its previous multiyear pricing allowance. If granted, this would result in a 16% increase in electricity tariffs from July.

Mr Mabuza said that unfortunately most of the early transformation gains in the coal sector, such as the Quattro scheme for emerging black coal producers, had not advanced and some had even eroded over time. This was untenable and had to be addressed, he said.

He said the department was at an advanced stage in its plans to introduce appropriate provisions for strategic minerals such as coal. This should not create negative sentiment, but be seen as an opportunity.

Eskom's senior general manager of primary energy, Vusi Mboweni, told the conference that Eskom started to reconsider its coal procurement policies after its coal costs started to rise by 17% a year. Traditionally it had long-term contracts with certain mines. It realised it had to create a more competitive market, which led to changes in its coal contracting strategy.

It now required suppliers to meet all legislative and regulatory requirements, for example, Eskom would not contract with any company lacking a water use licence. It also emphasised coal qualities, price and volumes. Last year Eskom put out two requests for proposals and would be issuing more.

Some of Eskom’s power stations were designed to use the coal from adjacent mines, but this meant they were almost "trapped" by that mine. By focusing on a more fluid rail infrastructure, Eskom could get coal more cheaply to such power stations from other mines with similar coal qualities, Mr Mboweni said.