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Eskom’s $4 billion coal bill headache largely of its own making

South Africa wants coal producers to help debt-stricken state power utility Eskom Holdings SOC Ltd. tackle its skyrocketing costs of the fuel — a problem that’s largely of its own making.

Eskom traditionally signed so-called “cost-plus” contracts for coal with mining companies that managed and operated shafts the utility helped finance. In 2015 then-Chief Executive Officer Brian Molefe criticized the model, saying the utility wanted to buy “the bread, not the entire bakery” and it increasingly began to enter into short-term supply agreements.

Contract Redux

Eskom’s coal costs have risen almost 22% since 2016 as a result of the shift and rising international prices driven by increasing demand from India and China. The utility now concedes that it erred and says it has approved a long-term coal strategy “including the investment in cost-plus mines where required.”

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Meanwhile the government wants coal producers to consider offering Eskom discounts on the more than 110 million tons a year of the fuel it burns. With supplies constrained and continued demand for exports, they have little incentive to make concessions.

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