11 minute read
A year of extremes and contrasts
MELODIE MICHEL, Reporter, Energy and Mines
Between a general election that caused uncertainty for months, only to maintain the political status quo, and a particularly long and difficult bushfire season that claimed over 30 lives and displaced thousands, 2019 was a rollercoaster year for Australia. For renewables, it was a year of contrasts. Many Australians came to terms with the palpable impact humans have on the climate and demanded action, but the government refused to link the bushfires to climate change, sticking to existing climate policies (or lack thereof). Solar and wind energy generation reached new records and the country met its 2020 target of 23.5% renewables (up from 15% in 2017), yet investment in renewable energy capacity dropped 21% from the previous year (Graph 1), and a lot fewer renewable power purchase agreements (PPAs) were signed than in 2017 and 2018 (Graph 2).
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GRAPH 1 - Renewable Investment in Australia (Source BloombergNEF)
In the mining sector, a number of landmark announcements were made. Among others: BHP set the ambitious goal of achieving net-zero operational greenhouse gas emissions towards the end of the century, along with launching a US$400mn climate investment program; Rio Tinto said it was looking at a combination of wind, solar and storage to power the US$1bn expansion of the Tom Price mine; Fortescue Metals Group (FMG) signed a deal to build a 60 MW solar plant at the Chichester Hub iron ore operations; and Roy Hill — a latecomer to the energy transition — started recruiting for an alternative energy advisor.
“The last year has seen a fundamental shift in the approach of the mining sector to the opportunity represented by switching to renewable energy,” says Simon Currie, Principal at consultancy Energy Estate. “This has been driven by activity at both ends of the spectrum: small remote mine sites which have started to move from the traditional fossil fuel options to solar/storage hybrids, and the majors which have announced large-scale programs on both sides of Australia.”
Reaching higher penetration: a learning curve
Among the most notable deals signed last year, FMG’s project with Alinta Energy has created much expectation: upon completion, it will allow the company’s Chichester Hub operations to source 100% of its daytime stationary energy requirements from renewables. The first stage of the project consisted of adding 60 km of high-voltage transmission lines to extend Alinta’s network in the Pilbara — powered by a gas station and a 35 MW battery — up to the FMG site. The second phase, which is now under construction, is the installation of a 60 MW solar photovoltaic facility next to the mine. This will allow FMG to displace 100 million litres of diesel annually.
Gary Bryant, General Manager of Asset Strategy at Alinta, tells Energy and Mines: “FMG has an average load of around 40 or 50 MW across two facilities at the Chichester Hub, so when the solar facility is producing at full capacity, there will be a supply of 100% solar and the rest of the solar will build into the rest of our network, offsetting gas generation.”
This level of renewable penetration is rarely seen in the Australian mining market, but some players are starting to specialize in this type of project. EDL’s Coober Pedy and Agnew projects, for exam- ple, are both aiming high at 76% and 50% respectively on average.
“For miners, especially iron ore, the cost of a loss of power quality is unacceptably high. Renewable energy might be cheaper, but getting renewable penetration is complex, and the fluctuations that you see coming out of solar can cause power quality issues. If you want to have meaningful penetration with a larger miner, they first have to see that you can achieve the power quality that they need, and then I think they’ll be in a position to do it,” notes Bryant.
In the case of FMG, the project has a gas-powered grid and a sizeable battery to fall back on, which gave the company the confidence to go ahead with the switch. Without such assets, achieving high levels of renewable penetration can be very challenging, both technically and financially.
“If you only have a solar resource, you can only get to 25 or 30% renewable penetration,” says Warner Priest, Head of Emerging Technologies at Siemens. “If you’re going to try to increase that, you need to put batteries in, and they’re just too expensive at the moment. The modelling won’t work at the current price, and I don’t know that lithium-ion batteries will get down to a level where it will make sense, not with solar.”
According to him, higher penetration is easier to reach with a combination of wind, solar and storage (as in the case of Coober Pedy and Agnew). Solutions like flow batteries or hydrogen storage, used for time-shifting and combined with lithium-ion batteries for spinning reserve and stability, are set to push projects higher up the renewable scale. These are not mature yet, but the Australian government is enthusiastically backing hydrogen development, seeing it as a potential replacement for coal in terms of jobs and export revenue. Studies and pilot projects are happening all over the country and hydrogen production costs are dropping rapidly, so hydrogen as a storage solution and as an alternative fuel for transportation could be a reality sooner than expected.
GRAPH 2 - BRCA Graph Tracker
Variable mining is another option to reach high renewable penetration, particularly on greenfield sites. “What miners could do is design their plant differently: conduct their operations when there is a renewable resource, say 50% of the time, rather than 24/7. It’s a combination of changing the way they mine, increasing the amount of solar and energy storage, and that combination could potentially serve their energy needs 70% to 100%,” adds Priest. But this type of mining will require a tremendous mentality shift in the sector, as most miners remain reluctant to give up their traditional 24/7 operations model.
Still, there are more high-penetration hybrids now than ever before, and each new project provides valuable insights for future developments. Because their project benefited from a loan by the Australian Renewable Agency (ARENA), Alinta and FMG are required to share their learnings with the rest of the market, which should help to raise the industry’s confidence in the quality of renewable energy for mining projects.
EDL is on track to deliver phase 2 of the Agnew project by May 2020, completing the gas, solar, wind and storage combination that will power the mine with 50% renewables, and paving the way for more high-penetration projects. Among those, the market will be watching out for announcements about Strandline’s agreement with the EDLWoodside joint venture for the Coburn mine: details are expected to be finalized in the coming months, including the type and amount of renewables to be used alongside trucked LNG in the hybrid power plant.
Commercial finance still difficult to access
Finance has long been seen as one of the hurdles to overcome in order to get a renewable project off the ground, particularly in the mining sector. Though solar and wind energy is now cheaper than power generated from diesel or gas in Australia, the capital investment required for a hybrid power plant can be as much as 10 to 15 times higher than for a diesel or gas power plant — a tough sell in many boardrooms.
While tier 1 miners like BHP or Rio Tinto can afford to spend their own capital on projects that are largely motivated by corporate social responsibility (CSR) targets, for most others driven by cost, support from government agencies has been a key enabler to get projects off the ground. Fortescue is the fourth-largest mining company in Australia by market capitalization (source: ASX), yet its project with Alinta still sought government support, in the form of an ARENA loan. “I think the commercial banks are still a little bit unsure about this, though you can see them investing in renewable projects where they have a high degree of understanding of the market and of the technology,” says Bryant at Alinta.
Just as miners’ confidence in renewable power will increase as more projects come to fruition, commercial banks’ appetite in these deals is also bound to grow. “The trend is towards these types of projects’ economics stacking up more and more convincingly. It’s a great backdrop for renewable power integration in the mining sector,” says Lachlan Shaw, Commodity Research Head at National Australia Bank (NAB).
Many large banks have set sustainable finance targets (NAB, for example, has pledged to lend A$70bn to the renewable sector by 2025), and most are now opting to stay away from thermal coal projects. So it is reasonable to believe that as recent government-backed developments demonstrate their financial viability, bank lending will become more accessible for mining hybrids.
FMG/Alinta Chichester Hub
As for non-bank investment, it’s already there — as long as the mine has the balance sheet to support it. “There’s plenty of money going around that investors want to throw into projects like these,” says Priest at Siemens. “But they need to be sure that the mine will operate for 15 years. The problem with small miners is that if they can’t guarantee that they’re going to be mining that resource over that time, the investors won’t invest. Tier 2 miners like Oz Minerals looking at operations in the billion-dollar range, with enough of a balance sheet for investors to feel comfortable that they will back their operations, can do it. But for the smaller ones, it gets a little tricky,” he adds.
For small players, unity is strength: by linking a number of small operations to one power station, they can reassure developers and investors that the energy will be purchased for long enough to pay off the initial investment. The CopperString project in Queensland is a good example: the A$1.5bn proposal to build a 1,100 km high-volt- age line to connect industrial users in Mount Isa to Townsville’s National Electricity Market (NEM) grid is championed by local miners Glencore, Incitec Pivot, New Century, MMG and Chinova Resources.
“The miners in this province have never been connected to the electricity grid and have faced very high power prices, despite being connected to the East Coast and now the NT gas systems. CopperString will allow them to connect to the NEM and benefit from the build out of new low-cost renewable energy projects along the route such as Big Kennedy [a proposed 600 MW solar PV and 600 MW wind facility, phase 1 of which is currently under development with support from ARENA]” explains Currie.
CopperString has received a funding commitment from fund manager DIF Capital Partners, who will provide about A$5mn in development costs and up to A$400mn in equity funding, but the project’s viability is hinging on a sizeable commitment from the Northern Australia Infrastructure Facility (NAIF), which is yet to be approved. This shows that even with several offtakers (including a mining giant such as Glencore) and private investment, many projects still need government support to reach financial close.
PPA potential
PPAs can be a great tool to help finance renewable projects, by allowing developers to secure financing based on the terms of the contract. But surprisingly, no such contract was signed in the mining sector last year. Jackie McKeon, Program Director at the Business Renewables Centre Australia (BRCA) explains that the uncertainty surrounding the general election meant that many players were reluctant to sign contracts, but she expects a number of deals to be announced this year. For one, Strandline is set to announce its PPA with Woodside and EDL in the coming months. Newcrest Mining also recently put out a tender to source renewable power at its Cadia site in New South Wales, so another mining-renewable PPA could be announced this year.
GRAPH 3: VCI STATE OF PLAY STRATEGY REPORT
“The whole industry is playing catch-up, it’s not specific to mining. There have only been about 60 renewable PPAs signed in Australia to date — some in heavy industry but not much in the resources sector. But they certainly are interested: we’ve had a number of mining companies join as members, including BHP, Newcrest Mining, Bowdens Silver, Anglo American, Centennial and Element25,” McKeon points out. She adds that joining the BRCA is a clear indication that these companies are considering PPAs as a way to reach their CSR, carbon reduction or energy targets, since the organization focuses on providing training and guides on how to build this type of contract.
Renewable PPAs in Australia are often done with an electricity retailer as intermediary, as opposed to North America, where there are more direct PPAs between a buyer and a renewable developer. “Our electricity retailers are quite powerful in Australia and have really come ahead and come up with offerings for corporates, where they sit between the developer and the corporate, but the corporate knows exactly which solar or wind farm that deal is with. When we started out there was only one PPA offering by retailers and now there are nine or ten of those,” McKeon says. As a reflection of this market trend, the BRCA is going to create a guide retail PPAs in Australia.
Despite the government’s reluctance to set policies to combat climate change — even in the face of such real consequences as the bushfire crisis — the industry is making progress and setting precedents for the optimal configuration of renewables on mine sites. (Graph 3) The recent survey The State of Play: Strategy, conducted by consultants VCI, the University of WA and Curtin University, revealed that 78% of Australian mining executives believe that renewable energy will eventually become “the most widely used energy source in the industry” — suggesting that while the integration of renewables in the Australian mining sector might be frustratingly slow at times, it is all but inevitable.
