A transformation in energy markets is underway driven by policy and regulation, as well as the falling costs of renewable and battery technologies.
In this Insight we discuss recent drivers and trends in renewable power adoption in the copper mining industry and analyse the potential opportunities for producers to reduce operating costs by adopting green energy solutions. Analysing the illustrative case of an African copper mine, we estimate that large scale deployment of renewable energy and battery storage capacity could reduce mine energy costs by as much as ~50 percent, improving the relative cost positioning of the asset by roughly an entire quartile. CRU Consulting undertake detailed assessments of the market and corporate impacts of green technologies in the mining, metals and fertiliser industries and their implications for investors and producers. To discuss any of these issues or better understand these issues please contact ben.jones@crugroup.com.
Increasing power costs here to stay for miners
Long term power costs are high and rising, given falling ore grades, deeper ore bodies and a shift to more automated and electrified production and processing. The findings of a recent CRU Consulting study on the electricity needs of the Chilean copper industry, for example show that power requirements are expected to increase by more than 50 percent between 2019 and 2025 with the energy intensity per tonne of copper increasing by 20 percent in the same period.
The recent Covid-19-related downcycle in energy markets notwithstanding, the cost of meeting these rising operational demands is set to rise disproportionately. These trends are likely to be exacerbated by a normalisation of energy prices. CRU’s central forecast is for substantial medium-term increases in both thermal coal and oil prices. This will impact industrial producers and power consumers: CRU estimate, for example, that global average Aluminum smelter power tariffs will increase by 10% between 2020 and 2022.
Capital costs are falling in hybrid power systems
Wind and solar generation prices are currently in the range $2–5 /MWh. This represents a fraction of the costs paid by early adopters a decade ago. Moreover, these trends are set to continue: CRU estimate, for example, that solar and wind power generation costs will lower by 33 and 19 percent respectively by 2035 relative to 2017 prices as further scale economies as well as process and deployment innovations take place. The cost of lithium ion batteries, commonly used to extend the loading of renewable installations has also plummeted: CRU Consulting, for example, project ~80 percent reducing in cell costs between 2011 and 2030. These trends could increasingly enable miners and other industrial producers to maintain low cost, stable and uninterrupted green power solutions.
Renewable adoption in copper mining is gathering momentum, particularly in Chile
Miners are increasingly adopting renewable power solutions. The Chilean mining industry has been at the forefront of recent efforts to decarbonise electricity supplies. In 2019, for example, BHP announced a target to supply 100 percent of the energy required for its Spence and Escondida operations from renewables by the mid-2020s. Analysis by CRU Consulting suggests that the commitment on Escondida alone could effectively reduce CO2 emissions by around 2.4-2.5 million tonnes per year. Nor are BHP the only major producer announcing such wholesale changes to their power procurement. Anglo American, for example, have also committed to 100 percent renewables adoption across its Chilean operations by the beginning of 2021.
Assessing the commercial opportunities
What does renewables deployment mean for operating costs and competitiveness? To illustrate these impacts, CRU Consulting analyse the daily power needs of a selected, relatively power intensive, copper mine in Africa, and how these might change in the event of the installation of 60 MW capacity of solar PV (a further simulation in which a backup battery pack is also deployed), sufficient to supply around 40 percent of daily power requirements.
In this illustrative case, operational power demand ranges from around 25,000–38,000 kWh (with demand highest during evening and night-time operations). The charts below highlight the substantially higher costs of peaking power supplies (a premium of more than 200 percent relative to night-time and midday lows). The installation of a battery unit enables excess energy generated at peak radiation times to be stored and used to reduce consumption of high-cost grid power during peak grid hours.
Turning to the operating cost and competitiveness implications, the energy related cost reductions substantially improve the relative (operating) cost positioning of the asset. In the case of the combined hybrid power solution featuring solar PV and battery pack option, in particular, the cost reductions are equivalent to roughly an entire quartile movement. This represents a highly significant improvement in competitiveness, but must be traded off against higher (albeit falling) capital costs.
Low cost renewable and battery technologies present opportunities for cost competitiveness
Mining value chains are energy intensive, and are subject to underlying input cost and volume pressures. Low cost renewable and battery technologies, and the potential of hydrogen as a fuel source, present real opportunities for producers to improve competitive positioning. Many producers are beginning to take advantage of these opportunities, with a notable acceleration of adoption in Chile, for example.
What are the implications of the adoption of these and other technologies (such as hydrogen trucks and logistics) for competitiveness? Our analysis shows that, in the case of an illustrative open pit copper mine, installation of 60 MW of solar power, coupled with a storage unit, could reduce energy costs by more than 50 percent, improving the relative cost positioning of the asset by roughly an entire quartile.
Evaluating and implementing these opportunities will not be straightforward for many operations and will require deeper understanding of a range of issues including competitiveness impacts, capital returns expectations, long terms policy risks, power off-take agreements and other factors. CRU Consulting undertake detailed assessments of green technology deployment in the mining and metals industry and their implications for investors and producers.
To discuss any of these issues or better understand these issues please contact ben.jones@crugroup.com.
