Use of resources

Coal
Eskom has long-term coal supply contracts with collieries to ensure a continual supply of coal to its power stations. All coal requirements above those of the long-term contracts are supplied through short- to medium-term contracts, which usually have a road or rail transport element associated with the purchase.

Coal procurement and coal stockpile management have been extremely difficult during the review period, with both coal production and quality issues negatively impacting the supplies to the power stations. Increased international demand for coal, by India and China, creates export opportunities for local suppliers at international market prices. This resulted in increased pressure on both price and quality of contractual and marginal coal requirement. Below specification coal in turn leads to inefficient combustion and increased maintenance requirements.

Coal production and delivery were severely affected during January 2008 as the above factors, combined with wet conditions, led to capacity constraints.

Recovery plans have been agreed with suppliers to normalise the situation, despite the significant increase in production requirements due to growth in demand.

The increased dependency on road transport significantly impacted road infrastructure. Eskom is assisting with the repair of roads where necessary in order to facilitate coal transport and road safety. The transport of coal by rail has improved significantly compared to the previous year.

The increase in demand for electricity, combined with the constrained supply of coal, resulted in coal stockpile levels being significantly lower than targeted levels. Added to this, the abnormally high rainfall, and the resulting wet coal, caused coal handling issues both at the collieries and at the power stations. Coal with a high ash content and a high degree of fines¹ turns to sludge when wet, causing blockages on conveyor belts and in the grinding mills, which restricts the flow of coal to the boilers.

Recovery plan – coal stockpiles

The focus is now on rebuilding coal stockpiles at the power stations to levels of at least 20 days by the winter of 2008. Eskom plans to secure an additional 45 million tons of coal over a twoyear period to supply power stations with additional coal for their normal burn, as well as to rebuild the stockpile. By March 2008, contracts had been concluded for 37 million tons. Eskom and the coal suppliers jointly committed to resolving production and delivery constraints.

Looking ahead – impact on Eskom’s future coal supply

A detailed study is being conducted to ensure that Eskom’s fuel supply agreements are appropriately positioned to ensure a sustainable coal supply at reasonable prices and of acceptable quality. At the same time, optimised and flexible transport solutions are being investigated.

Eskom is totally dependent on the South African coal mining industry to supply it with coal. The changes in the global market are placing Eskom under increasing risk in terms of securing future supplies from the local market, in which the production capacity has not kept pace with increases in both local and international demand. It is critical that local production be facilitated to ensure longterm security of supply for electricity production. (Refer to the market and industry overview on page 24.)

Liquid fuels

Before 2008, Eskom operated only two gas-fired peaking stations. During 2007, two new open-cycle gas turbine (OCGT) stations were built and commissioned. The cost of electricity generated by the OCGTs is high due to fuel costs, so their use is ideally limited to peaking and emergency generation. However, with the power shortages in 2007/8, these plants were used much more than was budgeted. The two new OCGT stations used 318 million litres of diesel during the year.

Fuel procurement for the OCGT plant is particularly challenging because of uncertainty around the timing and extent of usage of the plant. With suppliers requiring long lead times for new orders of liquid fuel, it is par ticularly challenging to meet such production requirements, while at the same time maintaining economic stock levels.

The price of diesel fuel fluctuates with changes in the price of crude oil and the exchange rate. The effect of the increasing oil price combined with a weakening R/USD exchange rate has increased the cost of diesel by 60% during the financial year. The average cost per litre consumed has increased by 34% over the last year. Hedging opportunities for diesel fuel are being investigated.

Nuclear

Two government-authorised contracts for the supply of enriched-uranium were negotiated and signed in 2004. These contracts, along with fuel-fabrication contracts concluded in 2002, ensure that Koeberg power station’s nuclear fuel supplies are secured until the end of 2010. Commercial processes to secure supplies beyond 2010 are in an advanced stage.

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