Renewables a renewed resource for resources

Mining is an energy intensive game. It’s generally accepted power represents roughly 30 per cent of a typical miner’s total cost base. And that means energy procurement norms in the sector have been challenged as it grapples with three key challenges: volatile costs, reliability and the pressure to reduce emissions.

"Stand-alone diesel generation is no longer the most cost-effective option for longer life mines without a grid connection.”

With ongoing political debate on energy policy and potential impacts of carbon pricing on fossil fuels, mining companies are increasingly taking matters into their own hands.

In doing so they are constantly looking for ways to reduce exposure to energy price volatility - in particular fossil fuels - over which they typically have limited control.

Renewable energy stands as an increasingly viable alternative.

Intensity

Traditionally mining companies have been heavily reliant on fossil-fuel energy sources (diesel [41 per cent], natural gas [33 per cent] and grid electricity [21 per cent]), with only 2.5 per cent coming from renewable sources.

The mining sector accounts for roughly 10 per cent of Australia’s total energy use, with consumption growing at around 7 per cent a year over the last decade. Energy intensity is expected to continue to rise as ore grades fall, processing complexity accelerates and mines deepen.

Fossil-fuel use in miners

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Energy cost increases in recent years have been intense, particularly on the east coast of Australia where prices have more than doubled in the past two years.

The Australian diesel terminal gate price (linked to global oil prices), has varied from $A0.40/L to $A1.25/L over the past decade. While diesel prices are currently at historical lows, mining companies are concerned about price increases forecast in coming years.

LCOE

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Reliability of energy supply has become a material risk, particularly for new mining investments. The well-documented power outage in South Australia last year significantly disrupted output at BHP’s giant Olympic Dam copper and uranium mine, cutting full-year earnings by $A105 million.

Traditionally mining companies have shied away from renewables given a perceived lack of price competitiveness and reliability issues, as well as generally limited familiarity with available technology.

As renewable energy costs fall materially and technology efficiencies are enhanced, miners are increasingly embracing the benefits of renewables.

Cost

The cost of solar photovoltaic capacity has fallen by about 70 per cent since 2010. Over the same period, battery costs appear to have fallen by 40 per cent, with combined solar/storage solutions expected to decline a further 37 per cent through to 2030.

As a result standalone diesel generation is no longer the most cost-effective option for longer life mines without a grid connection.

The predictable cost structure of renewables is also attractive. Whilst upfront capital costs are higher, ongoing operating costs are minimal due to free sources of energy (solar and wind) fuel and minimal maintenance costs - a significant advantage over fossil fuel power sources.

Two other advances which have significantly enhanced the efficacy of renewable power solutions are much improved technology relating to management of power sources at hybrid systems and the transportable nature of solar panels.

Capital cost

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Wind and solar PV are cost effective but are both intermittent electricity sources which are not fully compatible with a 24x7 requirement of mining operations.

Until battery storage becomes a cost effective alternative, mining companies are relying on hybrid systems to provide reliable electricity supply at reduced costs by combining renewable sources with fossil fuel based generation.

By adopting hybrid systems miners can turn around 30 per cent of typical energy load to electricity, thereby reducing overall demand for coal, gas and diesel. 

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The recent ability to mobilise solar panels (such as those provided by Sunshift to South 32) also allows solar to compete on a more level playing field with mobile diesel/gas fired power solutions.

Mobile solar farms are better placed to match shorter term Power Purchase Agreements (PPAs) offered by traditional fuel sources (five to 10 years). Furthermore these PPAs are cost competitive, as the power asset owner can now amortise the capital cost over multiple mine PPA contracts in line with the longer life of the power asset (typically>20 years), rather than over the shorter life of the initial mine user (typically 10 years).

Transition to a low-carbon future

The mining sector is a material carbon emitter contributing 19 per cent of Australia’s emissions, while accounting for 10 per cent of the country’s total energy usage. Renewables offer a way for miners to meet emissions targets and decrease carbon footprints.

Against this backdrop and country commitments under the Paris Agreement, it is expected mining companies globally will increase usage of renewables from 2.5 per cent to up to 8 per cent by 2022 at an estimated cost of $US3.9 billion, according to Ernst & Young.

In this context South-American mines are leading the charge for the uptake of renewables with many utility-scale renewable solutions already integrated into mining operations. By comparison the uptake in Australia has only commenced in recent years and with the exception of Sandfire Resources (who incorporated a solar farm at its DeGrussa mine) first movers have typically been dominated by larger mining companies with multiple power options and relatively small renewable commitments.

Some examples include BHP’s Lakeland Solar and Storage Project in Queensland; South 32’s 3MW solar farm for its Cannington mine, Sun Metals’ 116MW solar farm for its nickel refinery in Townsville, Oz Minerals’ solar and battery storage facility for its Prominent Hill mine in South Australia and Rio’s 6.7MW solar farm at its Weipa bauxite operation.

At the same time, it’s encouraging to see innovative renewable solutions being considered at old mine sites, turning liabilities into income generating assets.

Solutions currently being considered by Idemitsu in Queensland would see old waste dumps converted into solar farms. At the Kidston renewable energy hub in Queensland old mine pits are being considered for conversion into pumped hydro stations. Energy would be sold into the grid to generate a low carbon income stream.

These are exciting times in the mining sector as miners break from their traditional power providers and seek alternative cost effective, reliable and sustainable power solutions. For those willing to deliver tailored renewable solutions to meet the specific energy needs of miners there will be significant growth opportunities.

Megan Joyce is Head of Loans & Specialised Finance WA & Tsen Wong is Director Utilities & Infrastructure, Institutional at ANZ