Old Mutual says SA’s decision to raise the threshold for embedded power production to 100MW is an opportunity for local mining companies to boost investment in renewable energy and ensure their long-term sustainability.
The investment group says the ability of mines to reduce their reliance on Eskom’s carbon-intensive power grid will become increasingly important as the world becomes more sensitive about purchasing goods from countries perceived to be lagging in the transition towards a decarbonised future.
President Cyril Ramaphosa raised the threshold for private companies to generate their own electricity from a previous cap of 1MW earlier in June to alleviate their reliance on Eskom, which has been battling generating constraints for more than a decade. With more than 90% of Eskom’s capacity reliant on coal-fired plants SA could find its exports slapped with tariffs by the EU, which is expected to unveil details in July on penalties it plans to impose on imports from countries with large carbon footprints.
“If you’re exporting to the EU and you have a very high carbon intensity they will stop buying goods from you in favour of less carbon intensive markets,” Peter Brooke, a portfolio manager at Old Mutual, said in an interview.
“This is stay-in-business capex. If SA doesn’t transition its electricity supply we will be in a world of trouble in a decade’s time.”
While Ramaphosa has said he will lobby other countries at the COP26 climate conference in November to grant developing nations time to achieve a fair transition to more sustainable energy systems, economists say SA has huge renewable power potential. Modelling by Meridian Economics shows that SA could reduce the carbon emissions of its electricity system by up to 1,000Mt (megatons) by 2050 at no additional cost — and possibly even cheaper — than the current policy trajectory.
Brooke says that by investing in renewable power generation miners can enhance their environmental, social and governance (ESG) credentials, which is becoming increasingly important for investors’ capital allocation decisions. The investment will also help boost economic growth and job creation.
“Instead of reducing the future return through over investing [in production] they can invest in something that will actually increase their sustainability,” said Brooke. “From an ESG basis it’s an absolute no-brainer and we will be recommending to the companies we invest in that they should be going ahead with this.”
The Minerals Council SA, whose members produce about 90% of SA’s annual mineral output, reckons there are more than 2GW of renewable energy projects waiting to be started by mining companies. Gold Fields said in May it would build a R660m, 40MW solar array at its South Deep mine outside Johannesburg, removing a fifth of its annual indirect carbon emissions.
Pan African Resources has built a 10MW solar plant at its Evander mine and will add another two such plants at Evander and Barberton in coming years. Harmony Gold wants to install 220MW of solar, wind, gas and biofuel energy projects while Anglo American Platinum is considering a large solar array at its Mogalakwena mine in Limpopo to generate hydrogen by electrolysing water.
“If they invest in this it’s a good use of capital — it derisks the business but doesn’t increase supply of their product,” said Brooke. “It also improves the ability of Eskom to deliver power elsewhere so it reduces the risk of load shedding, which is a major positive externality. That would influence our investment process and inform the way in which we allocate capital.”
Nevertheless, Brooke says it will probably take at least two years before private power projects come on-stream as they will require significant planning, environmental approvals as well as construction time.
“But the act of getting it going is positive because you start to order goods, you start to prepare the ground, you start to use contractors, and that gives some employment,” he says. “The next catalyst to improve our growth is to improve our ports. If we start getting private sector involvement in that it would be another material improvement in the ability of the rest of the economy to operate.”
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