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Latest Eskom outages stress need for alternative energy

But, can renewable energy provide the answer?

(Published in MINING April/May 2014 )

By Stef Terblanche

South Africa’s embattled power utility Eskom recently resorted to electricity load shedding for the first time since 2008, raising the gloomy spectre of revisiting the costly power outages and production shut-downs of that fateful year.

This also rekindled the debate on what needs to be done, or whether enough is being done to prevent future power shortages, especially in the mining and other industries that are heavy users of electricity.

One issue that immediately put up its hand for discussion was the use of renewable energy by the mining industry. Questions arose such as whether this option was being embraced by the industry, or whether it really was an option, one that could offer an alternative source of affordable and reliable energy.

It appears that both the debate and a journey of further discovery may still have some distance to go.

Mining veteran and consultant at Cadiz Corporate Solutions Peter Major was quick to point out that Eskom’s latest round of load shedding would further strain the relationship between government and the big mining companies, while again highlighting the need for South Africa to give much more thought to investing in renewable energy sources.

A renewable future

An emerging school of thought holds that globally rising energy costs, more difficult or remote mining conditions, the pressing need to introduce greater energy efficiencies, and the desire to reduce carbon footprints have raised the feasibility of mines resorting to the use of renewable energy. Judging by what they say in their sustainable mining reports, most South African mining houses seem to support the idea.

Navigant Research, an international market research and consulting firm that provides in-depth analysis of global clean technology markets, recently released a report suggesting that the global mining industry’s use of renewable energy will increase from the current less than 0.1% of total energy consumption to between 5% and 8% in the next eight years.

According to the report titled ‘Renewable Energy in the Mining Industry’ wind power will account for most of the renewable capacity with solar power running a close second. And international consulting firm Frost & Sullivan recently estimated that South African solar installations could be providing grid power for as little as half the cost of coal by 2020.

“The mining industry is under continued pressure from shareholders and external stakeholders to reduce dependence on traditional energy resources. In countries where mining represents a significant percentage of gross domestic product (GDP), it can also be a significant draw on the country’s electricity grid infrastructure. Even through the global economic downturn, interest in the deployment of renewables remained. Now the industry has reached a tipping point and is transitioning from using solar, wind, and other renewable energy technologies in demonstration projects to an increased focus on larger scale deployments,” says the Navigant report.

Arthur Chien, CEO of China-based Talesun Energy, a subsidiary of global solar solutions company Zhongli Talesun Solar that produces crystalline photovoltaic modules, increased adoption of renewable energy practices is the key driver to achieving a sustainable future for South Africa’s mining sector.

According to Chien it should be cause for concern for mining houses that Eskom’s reserve margins remain tight.

“Renewable energy provides stable and reliable electricity generation and investment in renewable energy is the only viable solution for the industry,” he says.

Major seems to agree  with much of this as well as with the 5%-8% forecast, but wishes the percentage could be higher. He also laments the fact that the South African government is, in his view, by far not doing enough to create the appropriate enabling environment for mining companies to more eagerly embrace renewable energy and other new technologies.

Like Chien, New York-based international law firm Chadbourne & Parke which focuses strongly on energy, infrastructure and finance transactions in emerging markets says “renewable energy developers are set to strike gold in the next decade with inside-the-fence facilities at mines”.

“Mine owners are expected to invest US$20-billion in new renewable energy facilities by 2020. Financial and energy security concerns are behind the investments. For project developers, this is good news.”

The firm says mines are now spending 30% of operating costs on energy compared to 23% to 25% a few years ago. Among the many problems they face, and which are adding to their costs, are the frequent blackouts of electricity grids in parts of Latin America, Africa and Asia.

“These cost and security issues make mine owners ready to listen to proposals from independent power producers to supply electricity. There is ample room for (renewable energy) to be used in combination with diesel and other conventional energy sources as a means to reduce costs and mitigate transportation risk.”

Both Chien and Chadbourne & Parke single out as a good example of a successful hybrid solution Cronimet Mining’s Thaba chrome mine in South Africa where Cronimet Mining Power Solutions operates a 1 MW photovoltaic-diesel hybrid electric plant that currently supplies 60% of the energy requirements of the mine by combining solar panels with a diesel generator.

Finding finance

Meanwhile, Chien says, it is still difficult to find finance for renewable energy projects, but new solutions are emerging in the form of power purchase agreements, green banks and green or climate bonds. Green banks are state-sponsored non-profit lenders that provide long term, low-cost financing support specifically for environmental projects. Climate bonds are issued by green banks, corporations, governments, or agencies to finance renewable energy projects and are a feasible way for South African mining companies to raise capital for renewable energy projects, Chien says.

In fact, apart from Eskom’s buy-back programmes such financing options are already available to some degree in South Africa, while investments are steadily adding up.

The Industrial Development Corporation’s (IDC) Green Energy Efficiency Fund has since 2011 already financed projects worth more than R174-million.

In December the Department of Energy (DoE) director-general Nelisiwe Magubane also announced new tax incentives regulations for businesses implementing energy-reduction measures while the National Business Initiative (NBI) announced the launch of the Private Sector Energy Efficiency (PSEE) project to provide support and advisory services.

And the successful launch of the government’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) under which three bid windows have already taken place, has already attracted investment commitments worth more than R150-billion.

South African-based Exxaro Resources has announced that Cennergi, its clean energy joint venture with Tata Power, had signed Power Purchase Agreements and Implementation Agreements in terms of the government’s REIPPPP for two wind farm projects with investments of about R7-billion in both. The investment in these two projects, Amakhala Emoyeni and Tsitsikamma Community Wind Farm, were funded through Standard Bank, the International Finance Corporation and Nedbank Capital.

And Google, for example, is also investing US$12-million (R126.9-million) in a South African solar farm while Anglo American has already invested over US$180-million (R1.9-billion) in low carbon technology. While there are more examples, more can also be done. Chien points to Canada as a good example.

“Export Development Canada recently issued its first green bond which raised US$500-million (R5.3-billion) from investors including Argentina, USA, UK and Australia.”

Chadbourne & Parke  says the main financial challenge is finding a structure that allows financial participation by the mining company.  It says three main ownership structures have been used for projects at mines.

In one, the mining company only contracts to buy power from a renewable energy project, and avoids putting its own capital at risk. An example is the Pampa Elvira thermo-solar plant in Chile .

Another structure makes the mining company a co-investor entering into a partnership or joint venture in which the financial risk is shared. An example is a project undertaken by Xstrata Copper and Origin Energy Limited in Chile.

The third common structure is for the mining company to take the lead role in developing a renewable energy project.

Government must enable

For all its talk and activities to date, Major believes government is still not doing enough to create the necessary environment to encourage or enable mines to use alternative energy sources.

He says a century of reliable, guaranteed low-cost electricity allowed South Africa to develop mines that were over 4km deep. These days nobody is contemplating deep mines because of the problems with electricity, he says.

That, says Major, is where renewable energy comes in. With South Africa being the third most suitable country in the world for large-scale solar power generation having all the right natural attributes required it should be making much more use of it.

Major says the mines could and would put in the infrastructure for alternative or renewable energy “pretty easily” if only government would realise that it should do more to create the right enabling environment.

“Government has always overrated the strength of the mines,” he says. “Instead of government talking about introducing a super tax for mines, it should be saying we will actually cut your taxes if you do things like introducing more environmentally friendly alternative or renewable power generation options.”

A progressive tax structure similar to what the gold mining industry had in the seventies and eighties is needed to encourage investment in new technology.

Good progress

Both government and the private sector have, however, already launched a significant number of renewable initiatives in respect of bringing relief to the national grid.

Chien also says South Africa has already made huge strides in renewable energy provision and that the financing volumes for sustainable energy projects have risen from US$20-million to the current US$5-billion per year. The country was also recently ranked 9th among the G20 nations for leading sustainable energy investment, up from last place in 2011.

But perhaps arguably, as Major maintains, not enough has been done with regard to the mining sector specifically. Chien’s company recently sent a representative to the Mining Indaba in Cape Town, saying South Africa’s was the first mining industry it was targeting worldwide.

Chien believes solutions like those offered by his company will enable mining operations to reduce the amount of power mines draw from national electricity grids, which will also reduce mining companies’ energy costs in the long term.

As Major pointed out, the country does possess some of the world’s best conditions for producing energy from renewable sources and, adds Chien, especially for the generation of electricity through solar energy.  

The third-window additional 17 renewable energy projects approved under the REIPPPP by the government in November and worth R33.8-billion could, if all 17 passed the further processes, raise to 64 the number of renewables projects to be constructed, with a number of the first-window projects already producing electricity.

Government was also hoping to start receiving bids at the end of March for a 200 MW concentrated solar power-only (CSP-only) bidding round, saying this technology is well placed to assist in alleviating South Africa’s current electricity constraints.

A solar corridor and a solar-themed special economic zone are being planned in the Northern Cape and the DoE has far approved 31 projects for the province under the REIPPPP.

Government is also making progress also on the baseload and cogeneration independent power producers (IPP) programme. There has, however, been some concern that draft legislation critical for creating the necessary conditions for IPP investment, is not being finalised.

Mining sector initiatives

In addition to the examples already mentioned, a number of other South African mines have also already taken their first steps towards doing so.

AngloGold Ashanti has been considering operating a 60 MW solar PV plant with an IPP, while Samancor Chrome was conducting feasibility studies for a joint power generation venture with Exxaro On-Site to establish power plants delivering between 50 and 60 MW at its operations in Middelburg and Witbank. Anglo American says it hopes to run cost efficient, carbon-neutral mines in 20 years’ time and has already invested over $180-million in low carbon technology, among other things.

Sibanye Gold hopes to obtain as much as 1% of its energy from solar and said in February it was completing a study on such a project.

Northam Platinum already makes extensive use of hydropower at its Zondereinde mine while Harmony said in its environmental performance report for 2013 that it was considering a number of renewable and alternate energy projects.

While these are early days and much still needs to be done, it does seem like South Africa’s mining industry is by no means averse to the idea of in future meeting at least some of its electricity requirements from renewable sources.