2012 Reports

Leveraging the mining industry’s energy demand to improve host countries’ power infrastructure

Toledano, Perrine

The World Bank estimates that African investment needs in infrastructure would cost US$93 billion per year, only half of which is for the power sector. In the same time, the availability of power lies at the core of a mine’s development strategy; mining operators need to make sure that the energy demand of mining operations is met. This is especially the case in remote areas, where mining companies are developing large projects with little or no connectivity to national grids and very limited options for electricity supply.
To address these energy problems, the mining industry has adopted different solutions depending on the power situation of the country, the projects’ energy demand, and the projects’ distance from the grid: When sourcing from the grid is too expensive or when there is no grid, industry finances and builds its own power generation facilities or sources from a third-party that is
a private power generator. When sourcing from the grid is less expensive than own generation, industry either sources from the grid or finances/co-finances the upgrade of the power assets under various arrangements with the public utility. For a mining company, the goal is to maximize cost-savings. For a host country, the challenge is to maximize welfare gains by leveraging any investment in power infrastructure development for the electrification needs of the country. This could be through connecting the mine to the grid and incentivizing the company to produce extra capacity to sell to the public utility in order to increase supply and reduce the electricity cost, or by requiring that the privately-financed network is open to third-party access, so that towns and populations between the mine and the grid benefit from the privately financed distribution lines as well. Both, cost savings and welfare gains can be met simultaneously if sound regulations and efficient coordination mechanisms are in place. Without appropriate regulation, the opportunity for the country will be missed. Without appropriate coordination mechanisms within the mining industry or between the industry and the government, scale economies will be lost. Therefore to take advantage of the opportunity of the investments of the mining industry in power infrastructure, and make sure that the country benefits from those investments, an appropriate planning, regulatory and commercial framework is needed. If power assets are leveraged and designed to contribute to the development of public infrastructure at the national, regional or community levels, the incremental capital cost of building additional capacity could be reduced and the economic and social spillover effects can extend far beyond the mining sector. The purpose of this working paper is to distill good practice principles observed in power infrastructure development leveraging the mining industry’s energy demand around the world, informed by expert opinion.