Mining can be a formidable transformative opportunity for Sub-Saharan Africa but measures and regulations are required to strengthen the finances of the local utilities and provide a less uncertain and more secure operating environment. Power–mining integration can create a win-win situation both for the local economies and the private sector. In this paper, the authors show how mining demand can be used to unlock clean energy solutions thanks to concrete measures that policy-makers could apply.
Mining, a vital sector for Sub-Saharan Africa
Mining is one of Sub-Saharan Africa’s (SSA) key economic sectors and accounts for over half of total exports in many countries. Projected mining investment for 2013–20 is US$ 75 billion and represents a huge chunk of regional GDP (figure 1).
Figure 1. Current and forecast mining investment: 2000–2020
Note: The investment figures are averages across a range. For Mozambique, forecast investment excludes natural gas.
Power generally accounts for between 10% and 25% of a mine’s operating costs, depending on the processes undertaken and whether it uses the national grid or self-supply. Power–mining integration can create a win-win situation: mining companies become reliable, anchor customers 1 for utilities, funding investment that benefits all consumers. Grid supply 2 generally costs mines less than self-supply and allows mines to focus on their core business. Such arrangements boost host-country GDP thanks to greater mineral benefits and more local jobs and they make mines more competitive through lower power costs.
For SSA, economic growth needs to be underpinned by a much larger power sector. Installed generating capacity is only 80 gigawatts (GW) at present. Capacity has only risen 1.7% a year over the past 20 years and the region will account for 70% of the world’s unelectrified population if this trend continues. To keep pace with economic development, installed capacity needs to reach 700 GW by 2040 (Eberhard et al 2011).
Proparco’s November 2013 issue investigated how Independent Power Producers (IPPs)3 can help solve Africa’s power problems and looked at a flagship project in the Democratic Republic of Congo that leverages the energy requirements of the mining sector. A World Bank report was used to show how the mining industry’s potential can be unlocked to boost power availability in Africa’s mineral-rich economies (Banerjee et al 2014).4
Demand for power from the mining sector is expected to treble by 2020
Mining demand for power is forecast to reach 23,443 MW by 2020, a 155% increase on the 2012 figure. SSA’s mining sector consumed 7,995 MW and 15,124 MW in 2000 in 2012, respectively, and around 90% came from the grid. Annual mining demand for power through 2020 is expected to grow by 3.5% in South Africa and by a whopping 9.2% average in the other SSA countries.
While South Africa accounted for 70% of mining power demand in 2000 and 66% in 2012, its share is forecast to fall to 56% by 2020. Demand has been concentrated in a small group of metals – aluminum leads in particular, followed by copper, PGM, chromium, and gold – but there has been little new aluminum activity since 2000. Copper and platinum are expected to drive the largest increase (2,150 MW and 2,010 MW, respectively). Refining processes account for about two-thirds of total power demand.
In certain countries, mining demand for power dwarfs that of other sectors: in 2012 it totaled 24% of domestic demand in SSA and is expected to rise to 30% by 2020; in Guinea, Liberia, and Mozambique, mining is expected to exceed non-mining demand by 2020 (figure 2). If grid capacity remains at 2012 levels and if mining demand could account for 35% of total demand by 2020, mining companies will be forced to generate their own power or come up with innovative alternative solutions.
Figure 2. Comparison of mining and non-mining demand
Note: Panel includes 27 countries for which both mining demand and total demand figures are available.
Pioneering intermediate arrangements between self-supply and grid supply
There are at least six intermediate arrangements between self-supply by mines and grid supply (table 1), most notably “self-supply and sell to the grid” and “mines invest in the grid”.
Figure 3. Typology of power-sourcing arrangements
Grid supply is the dominant power-sourcing arrangement among mining projects, but self-supply has risen impressively, from only 6 percent of projects before 2000 to 18 percent in 2020. Among power-sourcing arrangements over 2000–2020, self-supply rose the fastest at 11.5 percent, compared with 5.8 percent for intermediate options and 4.7 percent for grid supply.
Mining demand can be used to unlock clean energy solutions. Four power-sourcing arrangements involving grid-based partnerships (i.e., mines sell collectively to the grid, invest in the grid, serve as anchor customers for IPPs and grid supply), coal-based generation will account for around 69% of the installed capacity by 2020. Hydropower generation will account for about 27%, with the remaining 4% powered by oil (figure 3.a).
Complex factors determine mine power-sourcing arrangements
Three main factors determine power-sourcing arrangements. First, a country’s primary energy source. Hydropower-based grids tend to favor integration: mines are either connected to the grid or part of an arrangement with the utilities that is fully or partially financed by the mine. Second, supply–demand power imbalances and resulting power shortages. When reliability is poor, mines have opted out of the grid and moved into self-supply in South Africa and Tanzania. Third, cost differentials between grid tariffs and self-supply. Self-supply is often based on oil-fuel-based grids where tariffs are lower than the grid tariff—but also on hydropower where mines self-supply at a higher cost because of frequent outages. Mines invest with government in existing or new power assets mainly in countries with hydro-based grids or low-cost electricity. Their expectation is to build a stronger grid to deliver stable and cheap electricity in the medium to long run. Mines are at least as concerned about security of supply as they are about cost. They invest in self-supply even when the cost per kilowatt delivered is much higher to ensure control and continuous power availability.
Harnessing economies of scale can produce cost savings for both mines and local populations. In Guinea, Mauritania, and Tanzania for example, mines can potentially be anchor consumers for local electrification schemes. It is still not economically possible to connect mines to the nascent, unreliable grids of Guinea and Mauritania but contiguous mines wishing to self-supply could join together or contract with an IPP to manage a mini-grid operating at high voltage. This could involve hydropower projects in Guinea or CCGT projects in Mauritania (figure 4).
Different integration scenarios were simulated for the three countries. In Guinea and Mauritania the optimal scenario was shared supply and provision to neighbouring communities. The resulting simulations generated $640 million and $990 million in savings for the mines and provided electricity to 5% and 4% of the respective populations. In Tanzania, the poor performance of TANESCO is forcing many mines to self-supply. In the simulations, integrating a 300 MW grid would generate savings of about $3.5 billion for the mines and provide the rapidly growing regions of Mwanza and Shinyanga with reliable power.
Figure 4. Levelized cost estimates of integration scenarios
Eight pointers for more effective risk management
In many mineral-rich countries, electrification rates remain below 20% and – despite its huge potential – there is little evidence of any great benefit to local populations from power-mining integration. Such arrangements are hampered by the complicated nature of the related commercial arrangements and by the risks and hazards of mining and mining investments. But Cameroon could be pointing the way forward. Here, the government has devised a long-term planning framework that commits large power users to developping the full potential of hydropower resources. Private developers must compete for the right to develop hydro sites based on optimal power-sharing arrangements whereby surpluses are sold back to the grid on a cost-recovery basis.
The private sector has a vital role to play in SSA’s power industry. To create a win-win situation that benefits all stakeholders, policymakers need to focus on the following areas:
- Strengthening power sector finances: regardless of the power sourcing arrangement, utilities need to be a reliable and creditworthy partner for mining companies.
- Enhancing the operating environment for IPPs: mines have the capacity to invest in power generation directly or as anchor customers for private IPPs but appropriate regulations are needed to allow IPPs to operate and to encourage the private sector to invest.
- Factoring mining demand into power sector planning: once agreements with mines are in place, both current and projected mining power demand can be factored into overall power planning. Mining regulations should require new mining projects to quantify and source power demands and dialogue with relevant government agencies should be mandatory. For mines above a certain size that self-supply in remote areas, arrangements that serve local communities could also be considered-.
- Sourcing expertise: governments need to take a long-term perspective when identifying potential synergies and rising demand from non-mining sources needs to be taken into account. Expert advice will help identify those arrangements that can potentially provide the greatest benefits.
- Strengthening regulatory mechanisms: economic regulations setting cost-recovery tariffs that would enable utilities to maintain and invest in infrastructure are frequently inadequate. Potential risks need to be addressed, such as payment default and delays and failure to honor contract obligations in IPPs and Purchase Power Agreements (PPAs).5 Effective regulations are also needed to enforce contracts and strengthen those utilities that cannot provide sovereign guarantees.
- Reviewing mining tariffs on a regular basis: flexible power pricing arrangements and carefully drafted contracts with anchor customers can prevent mines from being subsidized at the expense of the utility – or taxpayer. The clout of the large mines must not be allowed to crowd out non-mining interests and residential consumers who would be willing to pay a higher price for power.
- Carefully drafting CSR contracts: the voluntary nature of CSR policies can undermine local electricity arrangements. To enhance investor certainty and put all mining companies on an equal footing, CSR-based arrangements need to be underpinned by framework concession agreements. These should cover the provision of electricity within a certain radius and seek to build local distribution capacity.
- Using regional platforms: regional coordination of infrastructure and power-sharing policies may be needed in the short to medium-term to optimize power investments.
Mining demand for power in Sub-Saharan Africa is expected to treble to 23,443 MW by 2020 but current total installed generating capacity is a paltry 80 gigawatts and rising by a mere 1.7% a year. As a 2014 World Bank Report has pointed out, mining can be a formidable transformative opportunity for the regional economy but measures and regulations are required to strengthen the finances of the local utilities and provide a less uncertain and more secure operating environment, thus enhancing the attractiveness of the requisite private sector investment.
1 Anchor consumers are high-volume customers that provide a consistent source of revenues.
2 Grid supply is power obtained from the network of transmission lines, substations and transformers, etc.
3 EIA definition: A corporation, person, agency, authority, or other legal entity that owns or operates electricity generation facilities for use primarily by the public that is not an electric utility.
4 The full details of the study, including the data base, simulations and specific country examples can be found in Banerjee et al (2014).
5 World Bank definition: A Power Purchase Agreement (PPA) secures the payment stream for a Build-Own Transfer (BOT) or concession project for an independent power plant (IPP). It is between the purchaser “offtaker” (often a state-owned electricity utility) and a privately owned power producer.
Banerjee, Sudeshna G., Z. Romo, G. McMahon, P. Toledano, P. Robinson, and I.P. Arroyo, 2014. The Power of the Mine: A Transformative Opportunity for Sub-Saharan Africa. Directions in Development. Washington, DC: World Bank.
Eberhard, Anton, Orvika Rosnes, Maria Shkaratan, and Haakon Vennemo. 2011. Africa’s Power Infrastructure: Investment, Integration, Efficiency. Directions in Development. Washington, DC: World Bank.