Electricity Costs in Australia – What’s Next for Mining Companies?
August 29, 2017
Anyone observing the Australian energy market would be aware of the steep increase in electricity prices over the last few years. The rise has been so sharp that Australia has one of the highest electricity prices in the world today. Numbers show that real electricity prices for business have increased by almost 60% between 2003 and 2013.
Source: Australian Bureau of Statistics http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices
When electricity markets in Australia were deregulated several years ago – it was hoped that deregulation would lead to more competition and would ultimately result in lower prices for consumers. Unfortunately, it hasn’t quite played out the way it was intended, with the three big electricity companies still holding more than 80% market share. In fact, after deregulation, research indicates that margins for electricity retailers are hovering at around 13%, which is more than double the margins they enjoyed when prices were regulated by the government. Needless to say, there has been severe backlash from consumers and the government has been forced to take notice. Recently, Prime Minster Mr Turnbull met the heads of several energy companies and urged them to be more transparent in their communications, in the hope that this would help enable consumers to make informed choices. While some are hopeful that this would be enough to reverse this trend, some others have been very vocal that more drastic steps are needed, such as re-regulation of the energy markets.
Mining contributes about 7% of Australia’s GDP, employing over 200,000 people and electricity costs are a substantial part of mining operations. The sector is primarily export oriented and in recent years has made up for almost 50% of Australia’s export earnings. In other words, mining companies in Australia need to becompetitive within the challenging global commodity market space – unfortunately rising electricity costs are not helping.
Traditionally, electricity costs constitute as much as 15% of total input costs. Couple this with the fact that average ore grades in Australia have almost halved in the last 30 years – Lower grades often need more energy to extract, increasing input costs and squeezing margins. In addition, commodity prices have been mostly subdued during the last few years, adding more stress on profits. This has a quite visible effect on the mining industry. Glencore’s head of copper business recently wrote to the state and federal governments complaining about 100% increase in electricity prices and warning about plant closures and job cuts at their operations. Glencore’s head of coal business also echoed similar sentiments, warning that the government must take steps to cut electricity prices or business will go bust. Rio Tinto cut output and jobs at its Boyne Aluminium Smelting facility, citing doubling of electricity prices. The CEO of the largest single consumer of electricity in Australia, Tomago Aluminium Smelters, has also spoken against ridiculously high energy costs.
Some observers are pushing mining companies to invest in renewable energy sources to tackle rising electricity prices. It is true that most mining companies in Australia lag in investments in renewable energy as compared to other regions. According to data published at the Energy & Mines World Congress in Nov 2016, there’s about 352MW of solar power and 552MW of wind power installed in mining companies around the world. Out of which, the installed capacity in Australia was a meagre 10.7MW of Solar and 9.3MW of Wind. More interestingly the data also indicates that Chile, another country plagued by high electricity costs, has the largest renewable energy installations in mines. An astounding 91% of installed solar power and 25% of wind power projects are in Chilean mines. But renewable projects are capital intensive, which most mining companies are hesitant to undertake due to the volatile nature of the commodity markets in the recent years. Besides, wind and solar power are often notoriously unreliable. Case in point, the recent blackouts in South Australia have been blamed on an unexpected demand surge which could not be fulfilled by wind and thermal power projects. Reports show that this blackout caused losses of up to $150Mn for mining businesses in that region.
There’s also Australia’s commitment to the Paris Climate Agreement. At a recent Senate hearing, it was mentioned that at least one coal power plant has to shut down every year till 2035 for Australia to meet its clean energy targets. In fact, recently one of Australia’s biggest coal power plant, which was estimated to be supplying about 5% of the country’s electricity, shut down. Just before it shut down, energy future prices almost tripled as the markets struggled to absorb the impact. Needless to say, business owners are worried about the impact if such plant closures are expected be a regular annual affair.
While it’s anybody’s guess how this will play out, the fact remains that electricity prices are probably not going to go down anytime soon, at least for businesses. This creates a particularly challenging environment in Australia and mining companies need to be ready for it. Some mining companies are looking at technology solutions to help manage this crisis. A recent survey from Accenture confirms this trend – four out of five mining companies are expected to spend on digital technologies in the next 3 years, with 28% of them planning significant investments. In fact, 54% of survey respondents indicated that automation and robotics will be their top spending area.
It’s perhaps never been more important for mining companies in Australia to invest in technology, such as Eka’s supply chain software, to manage machine and material path movement within mine sites, giving the ability to track product and control equipment. In turn, this would enable mine site operators to tightly control the sequence of equipment movement and operation times with appropriate interlock and timers – saving electricity by optimizing machine operations and automatically switching them off when needed.