Insecurity of electrical supply forces a move towards greater private sector participation.
CAPE TOWN, SOUTH AFRICA: Africa’s largest economy faced yet another critical power crisis earlier this month, the first since the devastating rolling blackouts South Africa encountered in 2008 when the country’s largest mines halted production for five days and were placed on a rationed supply of electricity there afterwards. The result was a loss of billions of rands as South Africa failed to capitalize on the global commodity supercyle coupled with significantly diminished output and a loss of worldwide investor confidence in the mining sector, one of the greatest contributors to the nation’s GDP.
Eskom, South Africa’s national power utility, produces 95% of generation. Delays in the construction of new coal fire generation plants, 4,800 MW Medupi and 4,800 MW Kusile, maintenance of old power plants and weeks of heavy rainfall in March 2014 resulting in wet coal reserves forced South Africa to re-entered a short-lived electricity crisis. Key industrial users were asked to decrease electricity usage by 10% and in some case 20% while periodic power cuts “load shedding” were made to shops, restaurants, and residences. The probability of these energy intensive users recouping their losses is unlikely and, although the power emergency has subsided, reserve margins are slim. There is little doubt the situation will reoccur as the winter months approach and demands increase.
The unreliability of power supply comes at a devastating time as strikes continue to plague South Africa’s mining industry, compromising their ability to meet production and project targets resulting in the loss stakeholder confidence.
After the 2008 shortage, the mining sector was forced to kickstart a drive towards energy efficiency and self-sufficiency. Until the recent years, investing in your own power generation facilities was not a viable option as the economies of scale for alternative energies were not present in South Africa. However, wind turbine and solar manufacturers are now available and affordable alternatives as a result of South Africa’s successful Renewable Energy Independent Power Producer Procurement Programme. As companies face global pressure to reduce their carbon footprint along with escalating electricity hikes year on year by Eskom in conjunction with a lack of a stable and reliable supply, mining companies are inevitably turning to both wind and solar supply options.
This situation is, of course, not unique to the most developed country on the African continent. North of the rainbow nation, power cuts are characterized by often long and frequent interruptions and industrial investors are forced to rely on costly diesel electricity which can easily render a project economically unjustifiable. In fact, South Africa’s lack of supply halted exports to regional neighbors including Mozambique, Namibia and Zambia, Zimbabwe and Botswana and their need for self reliance has become even more imminent.
Recently Africa’s largest copper producer, the energy-hungry Democratic Republic of Congo, informed the nation’s mining sector that new projects or project expansions that required state electricity were to be placed on hold. In DRC’s mining hub, the Katanga region, mining companies rely on power from the Inga hydro plants despite an average of 19 interruptions in power each month. As a result approximately 40% of mining companies own and operate thermal generators as a costly alternative energy resource. As the nation enters into a more severe electricity shortage, which is predicted to last years, parliament passed a law allowing private investment in new power generation, it is the only plausible alternative if they hope to continue along their path of mining development.
Across Africa the public sector still controls and dominates power investment: an often-political portfolio. However, there is a shift towards further involvement of the private sector: as in the aforementioned case of South Africa. Nigeria‘s privatization of Power Holding Company of Nigeria’s (PHCN) 11 distribution and 6 generation companies has received significant attention in recent years, as has Cote D’Ivoire’s CIPREL and AZITO, and in Zambia the Copperbelt Energy Corporation (CEC) and several privately developed power projects are already coming online, a trend we should expect to continue.
Above and beyond electricity, mining companies must adapt and prepare for supply risk management including, political and economic risks, globalization of supply chain, human resources: including access to skilled labor as well as innovation and technology. Profitability, sustainability, longevity are dependent on how companies address and effectively manage these risks.
This article was written as part of the research conducted on African mining jurisdictions by Global Business Reports (GBR) as part of our partnership with African Mining Indaba LLC. The aim of this partnership is the production of the single most comprehensive intelligence report on the continent’s mineral sector. The Second Official Mining in Africa Country Investment Guide, will be launched next February 2015, as the only official publication providing country-specific information at Africa’s top mining event, the 2015 Investing in Africa Mining Indaba™ held in Cape Town, South Africa. You can view the 2014 Official Mining in Africa Country Investment Guide here.