Energy and Mines Magazine - Issue 29

Renewable energy projects are undeniably growing in popularity in the African mining sector. Among recent announcements, Anglo American revealed its intention to expand solar generation at the Mogalakwena platinum mine from 80 MW to 300 MW, and Gold Fields received preliminary approval for a 40 MW solar plant at the South Deep gold mine, both in South Africa.

In general, the mining sector’s drive to decarbonize energy sources is met with great enthusiasm from lenders, who are also pushing their own sustainability agenda. “There’s a big drive to select green projects, and if you were to come as Gold Fields wanting to do 40 MW of solar PV, there’s not a single bank that would not jump on the chance to finance you,” says Lungile Mashele, Energy Specialist at the Development Bank of Southern Africa (DBSA).

But the reality is that despite this common appetite, the road to bankability is not always straightforward for renewable energy projects at African mines. There are many reasons for this disconnect, among which regulatory inefficiencies and a certain lack of clarity from miners about what is needed for an energy project to reach financial close.

Rentia van Tonder, Head of Power, Corporate and Investment at Standard Bank notes: “In many cases we found that the mining companies themselves have questions related to the power sector, they’re trying to be a power player but it’s extremely difficult for them to be comfortable with the process and risk allocation.”

In its efforts to support the energy transition, Standard Bank conducted 100 stakeholder interviews last year to identify pain points and business opportunities. The resulting customer insights document outlines a few clear concerns for offtakers: regulation, security of supply, and their own lack of education and skills around power projects.

And yet, there is one clear advantage in being a mine wanting to explore self-generation, according to Marco Lotz, Sustainability Carbon Specialist at Nedbank: “The advantage of a mining area is that in many cases it has already had approval for mining and industrial activities and expansion, so it can be easier to do renewable energy projects at mines compared to using land currently used for agriculture. Furthermore many mines have got ample space, so between space and already having some environmental impact approvals in place, it is easier to do some of these renewable energy developments at mines.”

So how can miners overcome this education barrier and make sure they build a bankable project from the start? The first thing is to properly investigate their own power needs and the (often numerous) offers they get from renewable developers or independent power producers (IPPs). “Many mines are enticed by offers from developers but by the time we knock out the tariffs and say: ‘are you aware that you’re going to be paying 40 cents more than what you pay in the grid?’, the mine wants out of the deal all of a sudden,” says Mashele. Electricity costs can make or break a mine operation, she adds, and while some miners are willing to pay a little more for green power, it is crucial that all understand their tariffs in detail.

In the case of a power purchase agreement (PPA), miners, IPPs and lenders should work to align their expectations, which can be a difficult exercise. “One of the stumbling blocks in these discussions is around risk allocation: normally the mining companies want flexibility. From a funding point of view we will require a take-orpay agreement with very clear obligations on the offtaker,” states van Tonder.

Because they allow miners to decarbonize their power sources without taking their attention away from their core business, PPAs are a popular option in the market. But from a lender’s perspective, it may be easier to support a project that is on the miner’s balance sheet.

“As a lender, I would prefer for the mine to own the asset, and with that give me a company guarantee, and that’s only because should something happen to this asset I need access to the mine’s entire balance sheet to be able to get my funds from the other operations” Mashele points out.

In this case, due diligence is rather straightforward, since the lender takes a risk on the overall company. However, issues may arise around ownership: Mashele notes that a lot of mining companies in Africa are either state-owned or owned by a group of politicians, which presents a political risk in case these are not re-elected. “This is why you’ll see a preference for blue-chip mines, because their ownership is straightforward. Small-scale or junior minors might not enjoy that same benefit,” she adds. In any case, transparency around who owns the mine is crucial.

In terms of funding structures, an interesting new development in South Africa is wheeling, whereby the owner of the power project at the mine — whether the miner, IPP or a special purpose vehicle — could sell electricity to a third party, potentially even the lender itself. “What if the lender can become the offtaker,” asks Lotz. “If a mine generates electricity, can one potentially buy it from them when it closes?” While the market is not quite there yet (see box-out on the deregulation of South Africa’s power sector), wheeling could be an interesting way to make a project more viable in the future, from a lender’s perspective.

Of course, not all projects are equal in the eyes of the financier, and some risks are harder to take than others. For instance, it would be very difficult to fund a renewable energy project at a coal mine, since decarbonizing targets often involve getting rid of coal completely. “If you are a coal company that made a decision three years ago to have a renewable energy plant on site, you might not be around for the duration of that PPA. It’s about looking at the commodity of the mine itself and whether that’s a risk you’re willing to take, and of course, different commodities attract different interest rates,” says Mashele.

Another potential issue is country risk: mines located in countries or regions that are currently experiencing conflicts, such as Northern Mozambique, will find it hard to get support from lenders. Similarly, a country with political or financial instability, such as Zimbabwe, may not be the most attractive market for

lenders. “In places where there are conflicts or political issues you may not be able to get your money out of the country, which is a big problem for lenders. That’s why you see that certain territories are not really supported for certain technologies,” she adds.

Then, there is the issue of tenors: renewable energy projects, whether on or off balance sheet, generally require long-term financing, but regulations introduced since the financial crisis of 2008 have imposed strict capital requirements on commercial banks, making it more difficult to offer long tenors.

At Standard Bank, van Tonder explains that tenors are an issue both for on balance sheet projects — corporate loans tend not to exceed five or six years — and for PPAs. “The ability of the developer to secure a longer tenor debt offering will immediately have a positive impact on the PPA tariffs the developer can offer to the mining company. But it’s very difficult for commercial banks to offer long tenors due to Basel compliance and obligations, so for us it’s been critical to understand the underlying mining company. We’ve also developed an approach where we look at partnering with development finance institutions like DBSA, the International Finance Corporation, the African Development Bank and others to support tenor extensions to these debt structures.”

As is often the case in mining decarbonization, partnerships can make all the difference. While banks partner with development finance institutions to solve the tenor issue, miners can partner with consultants and their own lenders to make their project as solid as possible, from the start.

“You need to have clarity about the key drivers and objectives: is the project driven by ESG goals, reliability or sustainability of the power supply, cost security, or a combination of these? It’s critical to define those objectives upfront and involve partners as funders, technical solution providers, and consultants that can assist in running a credible transparent process upfront,” says van Tonder.

For Mashele, the biggest benefit in involving financiers from the beginning is that it makes it easier to build a bankable project. “Some of the projects we receive are not funding-ready: as soon as you ask questions about load profile or irradiation studies, they haven’t done that yet. Lenders come with a suite of technical specialists who are able to advise you and set everything up for funding. It also helps in terms of risk: if the project doesn’t work out, we both take a knock,” she notes.

There is no perfect recipe for renewable project success in the African mining sector, but a few considerations can really tip the balance of bankability: clarity about the mine’s technical requirements and renewable resource; transparent information about electricity tariffs and mine ownership; and the early involvement of funding partners.

When thinking about electricity in South Africa, the only name that generally comes to mind is Eskom, the state-owned utility that controls about 95% of the domestic market. But over the past few years, the government has taken steps to open up its power sector to new players. One such measure is the Renewable Energy Independent Power Procurement Program (REIPPP), which allows renewable IPPs to submit bids to design, develop and operate large-scale generation facilities across the country.

The program has been very successful in attracting private investment to develop the renewable sector: Nedbank alone has supported 42 transactions for a total of R37bn (US$2.42bn) since the initiative started in 2011. At the same time, the National Energy Regulator of South Africa (NERSA) is attempting to streamline the licensing process for self-generation: anything below 1 MW doesn’t require a license, and for larger projects, the process is meant to take no longer than three months.

The reality may be slightly different: the application for Gold Fields’ South Deep generation license, granted in February 2021, was submitted in June 2020. “There’s been quite a lot of criticism in the media around the government not being open enough in creating an enabling environment to fast-track these types of projects and generally the slow processes in awarding licenses. Regulation is still a key consideration, but most mining companies in South Africa remain bullish that the market will open up and licenses will be issued,” says Rentia van Tonder, Head of Power, Corporate and Investment at Standard Bank. She recommends looking for advisers that can assist with the process since it can be difficult to understand exactly what NERSA requires.

This market opening is creating new questions for miners wanting to selfgenerate electricity in South Africa. “The big talking point becomes whether mines will be producing renewable energy on their own site for own use only or whether (or when) electricity will be added to the Eskom grid to export to the rest of the country,” notes Marco Lotz, Sustainability Carbon Specialist at Nedbank.

Because electricity generation for the national grid is still heavily regulated, miners currently tend to prefer using their own isolated microgrids to avoid extra regulatory hurdles. But mining companies need to remember that their operations have an end date, which often comes sooner than their power assets’ end of life. “What if we build a plant now to serve the mine’s needs but that is connected in such a way to the national grid that when the mine life ends, it becomes a small little power plant or utility as opposed to a mining site? All of a sudden, mine closure becomes a much different ballgame,” suggests Lotz.