Eskom’s $4 Billion-Coal Bill Headache Largely of Its Own Making

(Bloomberg) -- 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.

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.”

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.

To contact the reporter on this story: Paul Burkhardt in Johannesburg at pburkhardt@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Mike Cohen, Pauline Bax

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