The need for a stable, controllable and clean power supply is increasingly being prioritized by mining companies. This problem is particularly acute in regions such as sub-Saharan Africa. Although the region has a weak electrical grid system and a steady flow of electricity cannot be taken for granted, the success of capital-intensive and critical mineral extraction expansion projects depends on the availability of the power needed to run these projects. We are seeing mining companies actively building power supply-focused technical and commercial teams and developing portfolio approaches to power supply. This portfolio could be a combination of developing on-site renewable energy and battery storage projects within mining concession areas, investing in power grid strengthening and expansion, entering into direct power purchase agreements with developers of renewable energy projects, and entering into power supply agreements with traders established to meet the vast needs of mining companies for clean and reliable power supplies.
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As mining companies expand beyond the realm of traditional mining, the renewable energy industry has fundamentally evolved over the past decade to better meet the needs of mining companies. Mining companies will therefore be able to focus on their core business while supplementing it with clean power. However, securing long-term partnerships between clean energy and mining requires careful trading.
The traditional position in Africa is that mining companies obtain grid electricity supply from existing national power companies under conditions that are not well documented, and state power companies are highly protective of mining companies as creditworthy core customers. The balance is tipping, with mining companies increasingly accounting for around 40% of Africa’s electricity demand, making the situation increasingly difficult for national power companies, which typically do not increase renewable generation sources or grid improvements to keep pace with rising power demand. When entering a new jurisdiction, mining companies now need to pay attention to the regulations governing the supply of captive power to industrial consumers and ensure that they have the right to respond in concession agreements, such as ensuring that approvals or exemptions are provided upfront as a condition of investment in the jurisdiction, or solidifying the terms of grid investment projects. Indeed, in Africa there is a patchwork of approaches between jurisdictions with different approaches towards open grid access and multi-player markets, but there is an evolving trend towards liberalization, exacerbated by climate change-induced load shedding and the resulting rise in the cost of grid electricity supply, making direct supply options from renewable energy projects increasingly affordable.
When it comes to renewable power contracts, there is a tension between both project developers and traders between the take-or-pay mechanisms these trading partners need to fund projects and make a profit, and the need for reliable and stable power supplies demanded by mining customers. This market is actively establishing itself and risks will need to be carefully allocated depending on the exact nature of the parties involved, mine details and whether alternative mining or supply is available. Mining companies may be bidding, asking developers to design and deliver solutions to their power needs, such as enabling 24/7 renewable baseload supply through a hybrid combination of renewable energy and batteries, or enabling a renewable power portion of the total power supply threshold. Performance parameters around this and the consequences if the renewable system fails to achieve these parameters must be carefully negotiated. Mining companies are also increasingly interested in the role of renewable energy certificates, ensuring that these accompany renewable electricity and meet the necessary certificates required later in the supply chain.
From an M&A perspective, we see mining companies acquiring operating renewable projects (which they see as adding value to mine sites in addition to securing supply needs) or making strategic investments and partnerships with equipment manufacturers, clean energy startups, and others.
Once mining companies achieve near-term standards for stable renewable electricity supply, the next step will be to electrify the mining vehicles and transport links that transport ore and processed metals from mine sites to ports and from there into the supply chain, with the hope of commensurate scale-up of renewable power.
