13 February 2012 – Mining companies’ concerns over electricity supply in South Africa are fuelling a drive towards self-sufficiency, with some mines on the point of investing in their own power generation facilities. “The feasibility studies have been completed and the first of such projects, using alternative technologies such as wind power and heat conversion, have commenced” says Dave Walker, corporate mining, energy law specialist and director at Werksmans Attorneys.
He believes that both the technology and the timing are ripe for mines to start reducing their reliance on Eskom, along with their carbon footprints. “Prior to the 2008 electricity crisis, self-provision was seen to be prohibitively expensive and risky, but that is changing. There is a better local understanding of the available technologies and, because of Eskom tariff increases, alternative strategies are now seen to be more affordable.”
Walker says that until recently, the manufacturers of wind turbines, commercial solar plants and other alternative energy technologies did not see South Africa as a viable market. “No independent companies were considering any large scale electricity investments and there were no economies of scale to leverage, hence manufacturers of smaller power generation facilities were quoting prices loaded for low volumes and related risks. South Africa has become a viable and sustainable market, with scope for reduced prices.”
The upsurge of interest in alternative energy sources among South African mining and industrial players is attributable to three main factors. “First, the electricity crisis of 2008 forced companies in general to look around for ways to reduce their electricity consumption and their dependence on Eskom,” he says. “Second, everyone is feeling the pinch of the national utility’s year-on-year electricity rate hikes. And third, there is huge pressure on companies everywhere to reduce their carbon footprints by using renewable energies such as wind or solar power.”
The mining sector, although not currently experiencing a power crisis, is leading the charge towards greater self-reliance, says Walker. “Mines were severely affected by the 2008 crisis, when their dependence on one supplier was starkly highlighted. There is no immediate crisis now but the mines are well aware that, because of their heavy consumption, Eskom will look at them first for electricity savings in the event of a supply crunch.”
As a result, the bigger mines particularly are actively exploring other power supply options. “For those with furnaces or smelters, heat conversion projects could make good business sense,” he says, referring to the conversion of heat from furnaces into energy. “Other attractive options that some mines are considering include wind power and various forms of solar power, which are quick to get up and running. There are also companies looking at coal power, although these strategies can be costly and difficult to implement.”
Supplier diversification will also help mines secure their power supply, Walker says. “Government has implemented mechanisms to bring independent power producers on board. The good news is that legal processes aimed at facilitating investments by independent power producers are under way and a great deal of progress has been made.”
Independent power producers must be satisfied that they will be able to compete effectively with Eskom,” he says. “The final hurdle to be overcome is allowing them to operate without being required to sell their electricity to Eskom, or negotiate with Eskom for access to its electricity distribution network."
To overcome this stumbling block, the plan is to carve the distribution network out from Eskom and put it in the hands of an independent agency, probably a state-owned entity. Eskom and other producers would then sell their power to the independent agency at agreed tariffs and on an arm’s length basis, thereby ensuring a level playing field.
“We don’t yet know when the new distribution model will be 100% up and running but government has realised that there is a need to diversify electricity generation by facilitating the introduction of alternate electricity producers,” says Walker. “This, together with the investments that some mining companies are considering in their own power plants, should reduce the risk of the mining industry (and the country as a whole) being left in the dark again.”