Thought leadership from our experts

Captive power: a solution for uncertain closure and rehabilitation costs?

The "polluter pays" principle, an internationally entrenched principle underpinning environmental laws the world over, has forced mining companies to seek strategic and innovative solutions when approaching closure and rehabilitation costs.

During the operational phase of a mine, energy consumption can be anywhere from 15% to 40% of the cost associated with running the mine.1 More significantly, is that during rehabilitation, closure and post closure monitoring, energy consumption continues whilst no revenue is being generated. In light of this, captive power facilities are being considered by mining companies to offset operational costs, as well as provide for a sustainable solution during the closure phase.

In recent years, regulators across the world (particularly in African states) have been imposing stricter and more extensive closure and rehabilitation obligations on mining companies. This is due, in part, to the global downturn in economic growth which has resulted in more unplanned mine closures, and greater public awareness around environmental issues. Such obligations have an impact on closure and rehabilitation costs, particularly since obligations such as remediation, continual dewatering and monitoring now extend for longer, and even indefinite, periods of time.

Prior to the implementation of these more rigorous regulatory requirements for closure, indicative closure costs were made without following a holistic approach. New laws are requiring escalating levels of accuracy in estimating costs throughout the life of mine, which are to be informed by detailed closure and risk assessment reports. The introduction of more stringent closure and rehabilitation obligations has, and will continue to have, a direct impact on the balance sheet of mining companies. Closure cost estimates and ensuring adequate financial provisioning for closure is required prior to the commencement of mining activities in South Africa and Australia.2 This means that mining companies are expected to estimate closure cost estimates far into the future. Such financial provisioning is difficult to forecast and even under a conservative estimation results mining companies having to set aside significant funds up-front for long-term closure risks. Although these obligations have been praised as being a positive step for the environment, concerns have been raised over the economic burden to the mining industry.

Recent amendments to environmental legislation in South Africa hold the polluter, in this case the mining company, liable for any residual or latent environmental impacts, including the pumping and treatment of extraneous water post-closure. Mining companies now remain liable for dewatering well after the closure of the mine. During this post-closure phase, electricity consumption continues, to the extent that dewatering must continue (some in-pit, but mostly underground). The dilemma faced by mining companies is how to estimate and make provision for such electricity costs in the face of increasing energy tariffs and without a cash generating asset.

Mining companies are now exploring possible solutions which reduce operational costs and provide for these uncertain future costs. One option is the construction of sustainable captive power plants, energy generating facilities dedicated to providing a localised source of power to an electricity consumer. Captive power plants are able to ensure a constant electricity supply and provide the electricity user with a level of control over its electricity costs. Historically, remote mines with no access to a grid connection would be run off diesel generators and mines generally would have back-up generators during periods of curtailment or load-shedding. However, the increasing price of fuel and difficulties associated with the transport of the fuel are forcing companies to seek alternative power solutions.

Renewable energy captive power plants present a unique and innovative solution to the uncertainty of cost and supply of electricity. The most viable renewable-energy solution for mining sites is a solar photovoltaic facility, as mining sites generally have enough land to install solar farms and in locations with high solar resources, the cost to generate solar photovoltaic electricity is significantly cheaper than buying electricity from the local utility.3 Hybrid solutions are also increasing in popularity to improve the guarantee of electricity supply.

There have been few examples of the use of localised electricity generation solutions on mining sites in South Africa. In November 2012, the first such 1MW photovoltaic diesel hybrid electric plant was constructed by Cronimet Mining-Power Solutions in the Limpopo Province. The captive power plant supplies 60% of the required power at their chromium ore operations. Although there are many arguments in favour of the use of a captive power facility, the most compelling is cost and even more so in the closure and rehabilitation phases of a mine.

The downsides to the captive power model are the same as for any renewable energy system as the initial investment is costly, requiring a shift from operating expenses (such as diesel costs or the cost of buying electricity from the local utility) to capital expenses (purchasing and installing photovoltaic panels and associated infrastructure). However, solar photovoltaic solutions may have a good return on investment in the long term and as the technology is advancing, the cost of solar photovoltaic technology has significantly dropped.4 Mining sites may also recoup costs by exporting surplus power to the local electricity distribution network, subject to meeting any regulatory requirements in the area.

Upon closure and rehabilitation, mining companies seek to direct their attention to new exploration and development projects and accordingly, require efficiencies within existing and closing operations. The continuing expense of electricity consumption well past closure is a pervasive and material expense that could be mitigated by the installation of a solar photovoltaic plant on the mining site to provide for such electricity requirements. Captive power solutions are also attractive for mining operations as the capital cost of installation of a solar photovoltaic captive power plant at the beginning stages of a mine life cycle will reduce the amount of financial provision required, specifically for continuing closure obligations such as dewatering, and the cost-savings may be diverted to installation costs at the start-up of mining operations.

Despite the obvious advantages of self-generation, the shift from operating expense to capital expense can also be challenging and there are several options available to mining companies when considering localised electricity generation apart from self-generation by the mining company itself. Mining companies may allow a third party independent power producer to establish the captive power plant and provide electricity to the mine on a take-or-pay basis (delineated as capacity and availability charges), under a power purchase agreement. The tariff charged by the independent power producer will represent the cost required to recoup the return on investment during the period of the power purchase agreement. Such a purchase requires monthly tariff payments to an independent power producer as opposed to a capital costs at start-up. Under a power purchase agreement, a mining company will agree to an electricity tariff for an extended period, such as a ten or twenty year period, and in this way, the cost of electricity required to comply with closure obligations is fixed.

South Africa is not the only African country exploring self-generation, Mali, Guinea, Tanzania and Liberia already make use of self-supplied power for their mining industries and according to some estimates that there will be a significant increase in the use of captive power by 2020.5

Captive power solutions present a unique and innovative solution to the dilemmas facing industries heavily dependent on electricity. No more so than mining companies which are typically consumers of a large amount of electricity. This coupled with increased closure obligations on mining companies, the extent of which are uncertain, places mining companies in a unique position to take advantage of captive power solutions.


  1. Top 10 business risks facing mining and metals 2016-2017, published by EY (available at http://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf).
  2. Ground Truths: taking responsibility for Australia's mining legacies, C Roche and S Judd, Mining Policy Institute (2016)
  3. Top 10 business risks facing mining and metals 2016-2017, published by EY (available at http://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf).
  4. Top 10 business risks facing mining and metals 2016-2017, published by EY (available at http://www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2016-2017/%24FILE/EY-business-risks-in-mining-and-metals-2016-2017.pdf).
  5. The Power of a Mine: a transformative opportunity fir Sub-Saharan Africa, S Banerjee et al, World Bank Publications (2014)