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Coal - old faithful back in favour.

It is dirty, it is cheap, it is nasty - coal is responsible for around half of all carbon emissions globally. But it is also essential. It is used to generate 41% of the world's electricity and that figure looks likely to remain more or less constant for the next 10 years at least. How does this impact Africa's biggest producer of coal, South Africa? M J Morgan discusses.

South Africa produces 98% of Africa's coal. In 2007, it produced about 244 million tonnes (mt), a quarter of which was exported and much of the rest, about 120mt, used for power generation - mostly by the state-owned power utility, Eskom. Eskom is the 11th largest generator of electricity in the world, producing 95% of South Africa's electricity and about 60% of all that produced in Africa as a whole.


Eskom's ability to serve South Africa's power needs has been severely under strain in the last two years, with the mining industry brought to a standstill in January last year when force majeur was declared and rolling blackouts, or load shedding, was introduced as an emergency measure.

The disruption caused was enormous, as were mining losses - mines cannot be simply switched off and on, so even a one-day power cut can result in several days of lost production. Two of Eskom's major coal suppliers, Anglo American and BHP Billiton, forced into a five-day close-down, were among those affected. However, load shedding was discontinued at the end of May 2008, but the downturn in the global economy, leading to the South African economy contracting 6.5% in the first quarter of this year, has led to the mothballing of a number of mines.

Demand for electricity is lower than it was but Eskom itself has forecast that demand is likely to exceed supply until 2013 - by when it hopes to have a number of new coal-fired power stations on line.

Critics have questioned Eskom's explanation for the load shedding, pointing to the unplanned outages - a whopping 24% of available capacity - which may have been caused by the increasing amount of coal now bought on the spot market (20% in 2007) rather than using more reliable fixed contracts. A government report on the topic in January 2008 even cited " problems with coal supply" as a cause.

In fact, an Eskom official admitted that heavy rain in Mpumalanga province, where most of Eskom's coal-fired power stations are located, had turned the coal into mud which needed to be dried before it could be burned. Additionally, reserves of coal appear to have been allowed to run perilously low, exacerbating the problem.

But the prospects of increased supply in the future were boosted this May with the announcement that Eskom had raised [euro]530m ($750m) from a syndicate of seven European banks. "This loan will be used to fund part of the foreign content of the Medupi boiler contract with Hitachi Power Europe, and forms part of Eskom's ongoing funding activities for its investment in infrastructure," a spokesman for the utility commented.

The R100bn ($12.43bn) Medupi coal-fired power station is being built near Lephalale in Limpopo province. It is due to open in 2012 and will provide 4,800MW of electricity. Eskom has contracted with Exxaro to purchase 14.6mt of coal a year for 40 years from the company's Grootegeluk coal mine, the largest coal benefaction site in the world. Exxaro is South Africa's largest black-controlled mining group, created by the split of Kumba Resources into Exarro and Kumba Iron Ore. The government has also approved guarantees worth $21.86bn over the next five years but, despite the likelihood of it agreeing an Eskom-proposed 34% increase in power tariffs next year, the company has warned that a massive increase of 90% this year, and 50% the following year, may be required if additional funding is not forthcoming.


Whether, or to what extent, the government will intervene to ameliorate the situation, given the obvious implications for living costs as well as for industry, is not yet clear. The proposed Kusile coal-fired power station, also with a proposed 4,800MW output, is amongst a number of additional projects to which Eskom is more or less committed - if it is to ensure sufficient power to fuel South Africa's future growth.

Vital Resource for Growth

South Africa possesses 5.7% of the world's coal reserves. That is enough, at the present rate of consumption, for 178 years usage. In fact, in terms of energy, Africa's greatest endowment is its coal. In giga-tonnes of oil equivalent (Gtoe), for ready comparison, Africa possesses 16Gtoe of oil, 13Gtoe of gas and an enormous 34Gtoe of coal. Nearly all of that coal is in South Africa in vast and relatively accessible quantities - making it an essential engine of African growth for many years to come.

European exports have suffered lately due to a credit crunch-related decline in industrial demand there. Meanwhile, Indian demand has taken up much of the slack. India is expected to overtake China by 2013 as the world's largest importer of coal.

South Africa exported over 10mt to India last year. But, driven largely by a $4 price differential against India's favoured supplier, Indonesia, that figure is expected to increase significantly this year. In the first quarter, South Africa supplied 4mt to India, 10% of India's annual forecast total coal imports.

Indian buying is now halted for the monsoon season: that may well cut $10 off current prices, bullish speculation notwithstanding. The conduit for that coal is Richards Bay Coal Terminal, one of the world's most high-tech terminals, which anticipates handling 91mt of coal exports this year, if a repeat of last year's rail problems can be avoided.

In Demand

Coal demand has proved extremely resilient. In 1973, 24.5% of the world's total primary energy supply came from coal/peat; by 2006 it was 26%. Over the same time frame, Africa's share of global production rose from 3% to 4.5%. Demand for coal has risen faster than for any other energy source in absolute terms for five years in a row now, increasing by about 2% a year.

The International Energy Agency estimates that by 2030 that share will rise to 29%. Some 85% of that increase in demand for coal comes from India and China. Day rates for Capesize vessels (used for transporting coal and iron ore) have risen from $22,000 to $57,000 since the start of May, pointing to surprisingly strong demand given current economic circumstances.

Whilst some major projects have been subject to licensing delays due to environmental concerns, Canada's Homeland Energy has just received permission to mine at Eloff. The company owns 50% of the project in Mpumalanga with its co-owner a black economic empowerment partner of the site that, it is anticipated, will yield 500,000t a year - catapulting the company into the South African coal mining big league. Also in the pipeline is the $400m Goedgevonden colliery investment by Xstrata-ARM Coal.

New mines are also planned in Botswana and Mozambique. Coal has been, is and seems set to continue to be a major and expanding resource base for Africa both as a useful export earner and an essential source of power. Coal is both much cheaper and much more plentiful than either oil or gas - considerations that are likely to continue to trump environmental concerns for many years to come.


Carbon Capture

There is no doubt that global coal consumption poses an extremely grave threat to the environment. But a resource that was the primary source of 26% of the world's energy needs in 2006 (forecast to rise to 29% by 2030) is a problem to be managed, not wished away. Since the capacity of oil and gas supply to expand, and persist, is much more limited than that of coal, managing this resource, and the impact of its use, is vitally important if carbon emissions are to be managed sustainably.


President Obama recently announced a $3bn investment fund to research and develop carbon capture and storage (CCS) - seen by many as a vital tool in reducing the impact of coal burning. CCS involves capturing the carbon dioxide, thus preventing the greenhouse gases from entering the atmosphere, and storing it deep underground.

Despite a lot of enthusiasm from industry, and some theoretical grounds for supposing such an approach could work, the technology remains largely untested. No full-scale coal-fired power station with functioning CCS technology is likely be in operation for at least two years, perhaps more.

Additionally, costs remain extremely high for CCS, although these can be expected to reduce if it is adopted as standard. Uncertainty, though, remains the order of the day; "One of the plants we are building is CCS ready, although to be quite frank, no one really knows what that is at the moment," says Steve Lennon, managing director of South Africa's Eskom, reassuringly.

'CCS ready' is rather a modest claim - just as the author of this piece is both Pulitzer prize ready, as well as winning lottery ticket ready - but, positive thinking aside, it is not clear what effect this is likely to have on my chances of getting either of those things now, or indeed, ever.

More optimistically, assuming it does work, current estimates suggest CCS power would cost in the region of 50% above the current market price for coal generated electricity - putting it on a par with wind.

One of the main ways in which the impact of coal can be mitigated is via increased efficiency. The average efficiency of coal power stations is around 31%, which means there is a vast potential to both reduce coal consumption and carbon emissions. To that end, China and the EU have entered into an agreement with the aim of building a near-zero-carbon-emissions coal-fired power station by 2020.

Germany's Energie-Fakten considers it feasible "to have 55% efficiency available for the necessary replacement and addition of coal-fired power capacity". Paul Maeder, general partner at Highland Capital, and an expert on clean coal technology, commented whilst addressing the annual National Venture Capital Association meeting in Boston, US: "Increase the efficiency of coal by 1% and you replace all the power from solar by a factor of 30." Since currently both output levels and investment in renewable energy is negligible (compared to that of fossil fuels), the importance of such innovation cannot be discounted. Some progress has already been made. Compared to 1973, it now takes one third less energy to produce a unit of GDP in international Energy Agency (IEA) economies.

Given the IEA estimate that by 2030 coal will be the primary source of 29% of the world's energy, an increased proportion compared to today, it seems clear massive and growing coal consumption is here to stay - consumption that cannot or will not be substituted by gas, oil or renewables.

One could be forgiven for viewing CCS, and perhaps efficiency increases too, as mere window dressing to facilitate the inevitable expansion of coal usage. Most of the growth in coal is set to come from India and China, as well as a smaller proportion from Africa too.

Developed nations must take the lead in reducing their own levels of carbon emissions first, but let us hope that these technologies can deliver on their promise.
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Title Annotation:ENERGY
Comment:Coal - old faithful back in favour.(ENERGY)
Author:Morgan, M.J.
Publication:African Business
Date:Jul 1, 2009
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