Mining companies have a key role to play in supplying commodities for the energy transition. However, there is a growing expectation that they will decarbonise their own operations. This is due to a renewed focus on 'greening' the supply chain for consumer products, such as phones, computers, cars and many other things in the modern day economy.
Mining accounts for nearly a fifth of Australia’s total energy consumption. Thermal power generation (i.e. diesel and natural gas) still provides most of the energy required for off grid mining operations.
Mining remains subject to high levels of investor scrutiny. Accelerated adoption of renewables uptake in the sector might reduce adverse scrutiny, particularly for commodities that are not greenhouse gas intensive.”
Joel Reid, MinterEllison Partner
Mining companies are increasingly looking for renewable power, including wind and solar, along with batteries and other firming support, to green the electricity used at off-grid mines.
Large scale photovoltaic solar and wind increasingly provide an economically viable route to reducing the reliance of mines on fossil fuels for power generation. Processes directly linked to extraction – which account for around a third of overall energy consumption in mineral operations – are prime candidates for conversion.
Although some of the development considerations for off-grid power developments are the same as those for on-grid developments, there are also unique considerations. For example, overcoming remote site conditions, relying on a single supplier of power when reliability is critical, and the implications of a third party Independent Power Producer (IPP) being embedded within the mining operation.
In light of these considerations, Joel Reid presented on Procuring Renewable Energy for Off-Grid Mines as part of MinterEllison's role as Legal Partner for IMARC 2022. In this article, he reflects on some key points he raised during his presentation including:
- integrating planning for power solutions early in the mine planning process;
- meeting regulatory (including safety) requirements;
- achieving sustainable and reliable energy supply;
- mitigating the risks of delay and poor reliability.
Commonly, a mining company will run a competitive process to procure a build, own, operate and transfer (BOOT) power solution for the mine site. This culminates with the selected IPP becoming an outsourced, but embedded, part of the mining operations. In this context, to give the best chance of success, the contract between the mining company and the IPP should:
- recognise the long-term, integrated nature of the relationship; and
- encourage cooperation and pragmatic solutions, to avoid contractual battle lines to the extent commercially feasible.
Integrating planning for power solutions early in the mine planning process
Mining companies should plan for the concurrent development of the mine and the power solution. Although the development of the power solution by the IPP is only one component of the overall development, it is an important element. While a mining company can use short term construction power for the initial stages of the mine development, the IPP's power solution needs to be ready for key milestones in the mine development that involve a step up in energy requirements. This includes the commissioning of major on-site processing facilities.
Part of the planning should include an assessment of the renewable energy resources (eg solar and/or wind) available at the mine site. Mining companies should look to collect data on these resources as early as possible in the mine development. The more complete the data, the tighter the pricing that IPP bidders will offer during the procurement process. This should provide the mining company with greater certainty around the cost of the potential power solution.
Meeting regulatory (including safety) requirements
The regulatory considerations of the power project will be reliant upon the key regulatory approvals for the mine, and are thus jurisdiction-specific. These approvals include those regarding tenure (e.g. sublease of State land or mining tenure), land clearing, and native title / cultural heritage. In addition to the approvals governing the mine, the power project for the mine may also have its own approvals relating to environmental approvals, import requirements governing imported equipment, and labour / visas.
Although energy regulatory approvals for off-grid power projects are usually more straightforward than grid-connected approvals in Australia, some approvals will be required. For example, depending on the State or Territory, the project may require a jurisdictional generation approval or a state electricity network approval. The Commonwealth's mandatory renewable energy target scheme will apply to large isolated power grids (100MW+).
Jurisdiction-specific laws will determine the safety requirements governing the power project. The ideal arrangement regarding safety usually depends on the stage of the power project. During construction, the IPP will commonly be under the safety direction of the mining company or its principal contractor. During operation, the IPP is responsible for the power station, and the mining company is responsible for the balance of the mine. For example, the mining company usually supplies the emergency response services (e.g. fire, medical) to the IPP at a cost to the IPP.
Achieving sustainable and reliable energy supply
For all mines, the reliability of energy supply is critical. Current off-grid technology does not permit 100% reliable renewable energy supply on a 24/7 basis. However, some mining companies have adopted a hybrid solution in which batteries and thermal firming (i.e. diesel, LNG) support the renewable energy supply. While this hybrid solution addresses the challenge of reliability, to achieve a 100% green electricity supply to the mine, the mining company or IPP may need to secure environmental offsets to offset the thermal energy component.
In discussion on the panel at the IMARC session, it was mentioned that, given the desire to achieve as high a percentage of renewable supply as possible, there is a recent trend for off grid mines to move away from 24/7 operations, and curtail operations when renewable source (wind/solar) is not available.
If history is a guide, renewable energy technology will continue to advance in a way that improves the renewable percentage for off-grid operations. Nevertheless, for long term power supply arrangements, it is worth considering including a 'contract re-opener' term in the contract that allows for the initial technology to be swapped out for new equipment as renewable energy technology advances. Alternatively, the miner may want a term in the contract that provides a buy-out right enabling it to acquire the equipment and manage technology advances.
Mitigating the risks of delay and poor reliability
Two key potential risks that mining companies need to consider for an off-grid power project are delay in the construction of the power asset and poor reliability once it is operating.
Delay in the construction of the power asset by the IPP can be costly for the mining company where it results in insufficient energy for operations. A practical solution for mitigating the risk of delay, is for the miner to separately secure a short term replacement energy supply, such as modular diesel generation. However, this has to be balanced against the time and cost associated with implementing that solution.
After construction, poor reliability of energy supply from the power asset to the mine site can also disrupt mining operations. A practical solution to consider to reduce the impact of this risk should it materialise, is to design in extra capacity / redundancy, and have a spares / replacement parts strategy for the remote site. Careful selection of the IPP, and the technology used, can also help reduce the likelihood of this risk materialising.
For both of these risks, the absence of a readily-available alternative energy supply to continue full remote mining operations means that a mining company can incur significant costs associated with site demobilisation, subsequent site remobilisation, and missed contract dates or market prices. Full recovery of these costs might not be something the IPP is willing to bear on a risk/reward assessment when negotiating the contract. Instead, the mining company may be limited to seeking capped liquidated damages under its contract with the IPP.