Australia Virtual Summit: Pandemic highlights mining’s energy transition momentum

MELODIE MICHEL Reporter, Energy and Mines

We can all agree that the coronavirus has made 2020 a particularly difficult year for everyone, not least the conference sector. The Energy and Mines Australia Summit was meant to take place in Perth in June, but due to flight and gathering restrictions, we decided to make it virtual. This was a first for us, and it took a lot of work, but we are proud of what we achieved: between August 4 and 6, eight live panels, six case studies and 23 presentations were held on our interactive platform.

The Energy and Mines Australia Virtual Summit was attended by 575 people, and we were thrilled to see that networking did not suffer from the move to a digital format: 2,400 contacts were made and 4,700 messages were exchanged. “This is a fantastic platform and really well-structured event considering the difficult times we’re working in,” said Dave Manning, Global Head of Hybrid at juwi Renewable Energies, one of the conference’s Lead Sponsors, along with Aggreko.

What became evident at the conference is that the business case for integrating renewable energy into mine sites is now undoubtable, given that renewable energy is often more economical than traditional energy sources, particularly in Australia. According to Sophie Lu, Head of Metals and Mining at Bloomberg NEF, new bulk solar generation will be cheaper than existing coal generation by 2025 in Australia. Additionally, BNEF expects solar-storage and wind-storage solutions, where the battery pack is sized to hold about 25% of the overall renewable generation load, to be competitive with both coal and gas generation by 2030.

This market is maturing, and the proportion of renewables being integrated into mines’ energy loads is higher and higher, helped by the integration of wind. “If you have a mine with eight years or more mine life, wind can substantially lower your cash operating costs and carbon emissions,” said Amiram Roth-Deblon, Global Head of Business Initiatives at juwi Renewable Energies. According to the company’s modeling of typical electricity costs at a remote mine in Western Australia, a wind-solar-battery solution can bring 23% to 38% savings, as opposed to 6% with just solar and 13% with solar and battery storage. Gold Fields’ Agnew project, which was recently commissioned, is set to increase the mining sector’s confidence in hybrid solutions leveraging wind, solar, storage, and gas or diesel as a cost-effective way to reach at least 50%, and up to 80% of renewable penetration.

It may seem counterintuitive, considering the commercial hit taken by the mining industry throughout this crisis, but Covid-19 actually seems to have accelerated the sector’s energy transition. During the keynote panel moderated by Jo Garland, Partner at HFW, representatives of BHP, Rio Tinto, Newmont Mining, and Strandline Resources all agreed that the pandemic has not had any negative impact on their energy strategy.

“Covid-19 has impacted our suppliers, employees, and communities, so our immediate focus has been on maintaining the health and safety of our employees and keeping the business operating,” said Rio Tinto’s Senior Manager of Energy and Climate Change, Michael Scotton. “But when it comes to our energy and decarbonization strategy, these have been largely unaffected over the last few months. In fact, compared to previous years, we’ve seen a greater business-wide engagement, and earlier this year, in the midst of Covid-19, we announced our 2030 emission reduction targets [15%].”

And as many governments around the world look for a green post-pandemic recovery, miners even see the integration of renewables as a way to increase their resilience, particularly as mining economics become more challenging with the decline in ore grades and increasing mining intensity. “Renewable energy is offering a platform to increase resilience in a low-carbon world, so if we’re able to access low-price reliable renewable electricity, it provides us with an opportunity to strengthen our position on the cost curve in the transition post pandemic,” noted Jessica Harman, Principal, Portfolio Strategy and Development at BHP.

At the same time, the tendency for climate-conscious investors and stakeholders to put pressure on mining companies to decarbonize has also intensified, perhaps partly due to the crisis. “The most discernible difference we have seen in the last 12 months is the pressure coming to senior management and boards from large investors and shareholders, wanting to know what they are doing in the shorter term to have confidence in the long-term emissions targets,” explained Peter Mann, Senior Advisor at Partners in Performance, adding that a concrete decarbonization plan is also key to attracting a younger workforce.

Power purchase agreements (PPAs) remain the most popular option for integrating clean electricity into mine sites. In time, as both independent power producers (IPPs) and miners became more familiar and comfortable with the risks associated with them, these contract structures have improved and matured.

“You don’t want to spend US$100mn in capital costs, so we needed PPAs that could come down from 20 to 15 or even 10 years, and we’re there now: you can get an economical 10-year PPA,” said Mike Aire, Corporate Director, Environment at Newmont Mining. At Rio Tinto, Scotton added that due to the pace at which renewable technology is improving, it is now important to discuss the flexibility of integrating new equipment within the timeframe of the PPA.

For most miners, the ideal solution would be a turnkey, fully financed PPA with the option to upgrade technologies. “We all know how fast technology changes, and in the case of Aggreko new technologies can be brought and replace existing equipment under the same contract, as and when it’s available, which means you’re not stuck with the same capital equipment on site for 10 years as it ages,” explained Rod Saffy, Global Head of Mining at Aggreko.

Increasingly, PPAs also include clauses around the end of the mine life, which can be a great way to lower tariffs for the miner and maximize the installation investment for the IPP. This was mentioned during a panel on mid-tier miners’ energy priorities, moderated by Richard Stanford, Technical Director at Crossboundary Energy, where speakers discussed ways to work renewable integration around a shorter mine life. “It’s starting to head towards a hybrid solution, whereby we have access to low-price power during our life of mine, then it turns into a renewable generation site after our operations end for the third party,” said Neal Foster, Group Sustainability Manager at Iluka Resources. “We are somewhat reliant on third parties for their expertise and tech, but we can bring in the land.”

For all PPAs, speakers recommended that miners start engaging with potential IPP partners as early as possible and do extensive due diligence to ensure smooth integration. “On the supply side, you need to understand your power requirements, what is critical and what tolerances you have, as this will flow into design for batteries, control systems, etc. Do your due diligence on system modelling, and truly understand OEMs’ capabilities,” advised Ray Massie, Specialist, Hybrid Energy Solutions at Entura.

Some miners may still choose to own their renewable assets, which are likely to become more and more lucrative as trends such as fleet electrification and hydrogen production intensify over time. “Simply looking at levelized cost of energy (LCOE) is only part of the equation, and can ignore important value drivers. Electrification technologies are not commercial today, but by investing in renewables you are also creating opportunities for yourself in the future, increasing your ability to attract green finance, and potentially to benefit from a green premium on sustainably sourced materials,” pointed out Zoe Von Batenburg, Manager, Business Development & Transactions at the Australian Renewable Energy Agency (ARENA).

And while government agencies such as ARENA and the Northern Australia Infrastructure Facility (NAIF) have become experts at assessing risk to support these types of investments, many renewables projects are now commercially viable without them, as proven by the evolution of ARENA’s funding pattern. In 2014, it provided 53% of grant funding to the DeGrussa project; yet in 2019, its grant funding for both Agnew and the Chichester Hub stood at just 12% of the projects’ overall cost, signaling much greater availability of commercial funding. It is also worth noting that the percentage of renewables delivered by these three projects is proof of the increasing viability of high-penetration renewables in mining: from only 20% for Degrussa, it went up to 50-60% at Agnew and up to 100% for Alinta’s Chichester Hub.

Many speakers highlighted the benefits of integrating renewables, even for grid-connected mines. Grant Cox, CFO at GMA Garnet, spoke of the company’s recent experience negotiating a 15-year renewable PPA with AER for its mine in Port Gregory, Australia. “Decoupling the plant and renewables from the network increases the quality of the electricity supply and ensures continued operations even during network power failures,” he said. Additionally, the agreement is expected to reduce energy costs by 40-50% over life of project and save 100,000 tonnes of CO2 from entering the atmosphere.

At BHP, Low-Emissions Technology Specialist Aidon Thomas spoke of the financial and risk advantages in being connected to the grid when sourcing renewable energy. “The thin copper wire that connects you to the grid is your access to the market as well, and you can access the best value renewable energy projects at potentially the lowest risk, so there is a distinctive benefit to being grid-connected for a mine site accessing renewable energy.”

However, he warned that return on investment (ROI) may not be the right metric to look at in these types of initiatives. “There are savings to be achieved but you might have an energy forecast and an LGC [large-scale generation certificate] forecast and that might be different from your traditional business scenario,” he said.

Additionally, negotiating a private PPA with a renewable IPP involves complexities that miners and financiers used to dealing with utilities may not be familiar with. Among them, Renewable Energy Industry Expert Raj Aggarwal listed the difficulty of including a banking guarantee against any renewable power interruption, and issues around electricity offtake during mine shutdowns for maintenance.

Luckily, the market seems to be moving towards standardized solutions for counterparties to manage these risks. The Renewable Energy Hub is building Australia’s first software platform to deal with some of this complexity. “It is meant to give people access to standardized contracts whereby if an energy user wishes to go into a bilateral contract directly with a generator, you can manage that directly as if you were a portfolio manager and access contracts and solutions to de-risk that arrangement in a financial sense,” said Chris Halliwell, APAC Manager, Energy and Environmental Markets, at the corporate energy consultancy.

In this unprecedented global environment, the Australia Virtual Summit highlighted the maturity of the renewables for mining sector. Speakers moved away from obvious decarbonization drivers and delved into the nitty-gritty of commercial negotiations and cost benefits. There is still a lot to learn and various technologies to develop further before we reach 100% renewable energy in the mining sector, but it is now clear that nothing — not even a global pandemic — can halt the industry’s efforts to reach that target.

Here are HFW Partner Jo Garland’s top tips for a successful PPA, as presented at the conference.

1. Start with the correct structure: in the case of multiple contractors, a microgrid structure with an appointed microgrid manager can reduce complexity.

2. Align commercial drivers with mine life: you could be looking at higher tariffs in the earlier phases to recover the cost in case mine life doesn’t go on.

3. Understand performance guarantees and exclusions: performance may be guaranteed under normal conditions, but what if there are issues: what are the liabilities?

4. Choose the party responsible for integration: integration can be complicated, especially for a brownfield operation, but having one party who is tasked with solving integration issues reduces complexity.

5. Assign new technology risks: what is the party’s approach to new technology risks; is it a real partnership, sharing the risk, or are they only prepared to do this if you take all the risk? This can influence the structure and price of the contract.