Power solutions for mines in Sub-Saharan Africa – diesel generators, captive power plants and cross-border power trading

Mines in Sub-Saharan Africa typically use diesel generators as a back-up for when supply from the utility is interrupted. However, in some circumstances, mines utilise diesel generators as the primary source of supply, including where the location of the mine is such that a grid connection is not feasible or reliable, or otherwise due to prolonged uncertainty of supply from utilities.

One of the key advantages of diesel generators is that they can be deployed to site in a matter of months, particularly where generators can be sourced from existing stock from a number of suppliers, such as Aggreko, Caterpillar, Cummins, etc. Diesel gensets can also be scaled up (and down) to meet fluctuating power demands of the mine.

Generators can be purchased but are more commonly leased or rented from, and operated by, the supplier of the generators. The most common contracting structures are:

• a pure rental arrangement, which is often deployed as a temporary power solution at a mine. Once the rental term expires, the supplier removes the gensets from site.
• a rent-to-purchase arrangement, where the gensets are leased to the mine for a fixed term (usually 1-5 years), with a purchase option at the end of the rental term. Occasionally, the mine can negotiate an earlier buyout option. This arrangement is often deployed for emergency / back-up power solutions at mines, in circumstances where a mine cannot afford the up-front capital costs of a generator fleet.
• an EPC/O&M arrangement, where the mine purchases and owns the gensets, and the supplier agrees to supply, install and operate the gensets at the mine for an agreed term. This arrangement may be deployed where the supplier does not wish to assume the financing or ownership risk (for example, because the mine is in a high-risk country with a risk of expropriation).

Across all contracting options, it would be customary for the mine owner (the “MO”) to take responsibility for sourcing the diesel for the generators.

A key disadvantage of diesel generators is that they are costly to run and, in circumstances where the MO is responsible for fuel, expose the MO to commodity risk.

It may become increasingly difficult for a mine to reconcile the use of diesel generators with its (and its stakeholders’) ESG and energy transition agenda, as well as the Net Zero goals of the country the mine is situated in.

In this regard, the mining industry is making significant steps in energy transition, by moving from diesel to alternative, cleaner types of fuel, and implementing renewable energy or hybrid solutions. This opens up a number of opportunities for the power industry. We discuss a couple of key trends below.

Captive power plants are generally only appropriate for mining operations with an extended mine life and significant long-term power demand, given the time and expense to develop, construct and finance such plants. The term “captive” refers to the fact that all or most of the output of the power plant will be used to supply the relevant mine. A captive power plant will typically, therefore, be located close to the mine which it is intended to supply (perhaps at the mine mouth), in order to reduce the need to build transmission infrastructure / reliance on the grid and to mitigate transmission losses.

Captive power plants may be developed by the MO in which circumstances, the generation assets would be owned by the MO. Operation can either be carried out by the MO or outsourced to an operation and maintenance contractor with appropriate experience. It would be customary for the power generated by the MO to be supplied free-of-charge to the mine and treated as a mine operating expense.

Alternatively, a captive power generation solution may be provided by an independent power developer (the “IPD”) and depending on the life of the mine, the generation assets may be permanently installed and power sold by the IPD to the MO pursuant to a power purchase agreement. If the generation assets are of a type that can be relocated or used to supply other off-takers at the end of the mine life, the IPD may instead consider leasing the plant to the MO, in a structure not dissimilar to that employed for diesel generators.

Captive power plants serving mines have historically been thermal, particularly coal mines where the mined coal can be used as a fuel source for the power plant. Gas and HFO may also be used as cheaper alternatives to diesel. However, as MOs are increasingly taking into account ESG and energy transition considerations in their operations, there has been a move towards renewable energy power solutions, such as solar PV with battery storage, or hybrid renewable/thermal generating solutions.

More complex technical / generation solutions increase the likelihood of the power plant being installed and operated by an IPD, as MOs may be reluctant to assume responsibility for a significant power project and associated capex, which is not part of their core business competence.

The owner of a captive power plant (either the MO or the IPD, as applicable) may consider utilizing limited recourse project finance so that the capex of the plant is off the balance sheet and also take advantage of cheaper long-term debt, particularly if the mine's requirement for power exceeds 10 years.

It should be noted that if a project finance option is used to finance the capex of a power plant, it is likely to take several months if not years before the financing is ready to be drawn down, due to lenders' due diligence, as well as the negotiation of a complex finance and security package. It is for this reason that project finance is generally not suitable for a captive plant that is required for a period of time that is lower than 10 years. Furthermore, following financial close, the construction period of the power plant must also be taken into account – this could be in excess of 12 months, depending on the type of technology deployed.

Where the plant is owned by the IPD, the debt will be repaid from the tariff earned by the IPD under the PPA. In circumstances where the plant is owed by the MO, as the power would customarily be supplied to the mine free-of-charge, the project finance debt would need to be serviced through the sale of the commodity that is being mined, over the life of the mine. This has resulted in an increase in the number of MOs seeking to outsource captive power generation to third party developers.

Given the shorter lead time, it is common to see diesel generators or similar temporary power solutions being sourced and implemented as an interim measure, pending the completion of a captive power plant.