The seeds of South Africa’s next power crisis are now being sown. We are facing a "coal cliff" in 2018 when many of the large coal mines will exhaust their resources.
In order to ensure we have enough coal to continue supplying Eskom, we should right now be investing heavily in new mines. But investors have cold feet. An amendment to the Minerals and Petroleum Resources Development Act is being pushed through Parliament now that will allow the mineral resources minister to set prices for coal and control its export. No one in the industry has any idea how these prices will be set. Facing such uncertainty, no one is investing.
The situation is strongly reminiscent of the delays in building new power plants early this century. Government hoped new power suppliers would enter the industry, but the regulatory environment was unclear and prices too low to make new plants viable. So no one built. It was only when rolling blackouts struck in 2007 that anyone realised how vital it was to invest in new generation. We are still paying a heavy price through the rushed, delay-prone, overpriced Medupi and Kusile power-station projects.
The 2007 power crisis was in part due to problems in the supply of coal to Eskom’s stations. Generally, though, the coal industry has been remarkably efficient and is also a major generator of foreign earnings. But in the post-2007 panic over energy security, government’s mistrust of the private sector is driving dramatic interventions.
The industry spent a great deal of time and effort drawing up responses to the bill. Not one of their comments hit home — the bill was pushed through to Parliament substantially unchanged. It talks of "designated minerals" rather than coal specifically, but everyone knows that it is coal that the bill’s drafters have in mind.
The bill is currently being considered by the parliamentary portfolio committee on mineral resources. But the Cabinet has already given its blessing to the legislation, so it’s hard to see the portfolio committee making any significant changes, despite a range of objections being voiced in its hearings last month.
The industry is resigned to the fact that the bill will become law, although there are tricky issues over exactly how it will be applied, considering that some of the legislation it is amending has not even been promulgated. Also, it is not clear that the export and pricing restrictions can be applied to existing mines, as it would amount to a major change to licences which would violate international investment treaties.
The industry is also ready to mount a constitutional challenge to the legislation because it provides the minister with unfettered discretion to make regulations outside of Parliament.
At the very least, then, we are facing severe regulatory uncertainty for the industry. That is directly resulting in a slowdown in investment, which means jobs that won’t be created as well as much other economic activity. Eskom is already pondering contingency plans including possibly setting up mines of its own. Given Eskom’s recent struggles to deliver on large projects like Medupi, that seems like a very bad idea.
It is hard to understand how the governing party can both produce excellent policy like the independent power producer (IPP) procurement programme, which has driven R57bn in investment in green energy, and the Minerals and Petroleum Resources Development Act amendment bill, which will destroy investment on a similar scale. The IPP programme is evidence that parts of government, the Department of Energy in this case, are able to create excellent, evidence-driven policy that works. The Department of Mineral Resources, on the other hand, seems vastly less capable.
For companies with major exposure to the sector, such as Exxaro, BHP Billiton and Anglo American, the uncertainty translates into weaker share prices and therefore a greater cost of finance for all their projects. While coal seems the obvious "designated mineral", iron ore, platinum and others may also be.
So from the view of a diversified mining house such as BHP or Anglo, the South African investment scenario looks dark indeed. Investing here amounts to taking on more risk to the whole balance sheet, which makes things more expensive for all operations. Naturally shareholders would object. The evidence for such an outcome can clearly be provided by any investment analyst, yet the mineral resources department does not want to hear of it. The country will pay a high price.
STUART THEOBALD graduated from Rhodes University
BY STUART THEOBALD
Article Source: Business Day