December 2016

Can renewable energy lower your cost of production?

  • By Craig Bearsley, Associate Director - Energy, AECOM
degrussa-solar

Renewable energy solutions are becoming more viable for mining operations and have the potential to reduce costs

The ongoing downturn in most commodity prices has led many companies to actively seek out opportunities to lower their cost of production to remain profitable. While many cost-cutting avenues have been thoroughly explored and implemented, the potential for reduced energy costs through the integration of solar photovoltaic (PV) is often either overlooked or put in the too-hard basket.

The resources sector consumes 11.4 per cent (28.2 TWh) of all electricity in Australia (Department of Industry, Innovation and Science, 2015), with approximately 45 per cent (12.4 TWh) of that consumed off-grid. The sector’s energy consumption increased by 75 per cent over the past decade due to its remarkable growth, the growth of more energy-intensive subsectors such as iron ore and coal and the mining of lower-grade ores, which are more energy intensive and complex to process.

The cost of electricity in the mining sector has doubled over the same period (Department of Industry and Science, 2015), so it comes as no surprise that electricity costs make up a much larger proportion of a mine’s operating input costs than in the past. Electricity supply costs have an even greater impact at remote, off-grid operations, where already high energy costs are expected to increase over time.

Despite the high levels of electricity consumption in the sector, the uptake of renewable energy lags significantly behind the rest of Australia, with approximately one per cent renewable generation (Bureau of Resources and Energy Economics, 2013) versus 14.6 per cent for Australia as a whole (Clean Energy Council, 2015). This underrepresentation of renewable energy in the sector is in stark contrast to the availability of renewable resources, particularly solar, with northern and Western Australia enjoying some of the best solar resources in the world (Figure 1). Although not as universally available as the solar resource in Australia, there are numerous sites with reliable wind resources where the installation of wind turbines may also have great potential.

screen-shot-2016-12-06-at-11-12-08-am

Solar PV costs have fallen considerably over the last decade and continue to fall. Internationally, this has been driven by a reduction in equipment manufacturing costs and, more recently, a reduction in margins due to oversupply in some markets. Costs are continuing to fall in Australia as capability and experience within the local industry grows. This has in part been driven by the government support for renewables, particularly the Australian Renewable Energy Agency (ARENA), which has funded numerous off-grid renewable energy projects and had a marked impact on activity within the large-scale solar PV sector as a result of the large-scale solar funding round (awarded September 2016).

The successful completion of demonstration projects such as the 10.6 MW DeGrussa mine solar project in Western Australia have played an important role in closing many of the previous knowledge gaps. These projects provide a valuable benchmark for the real cost of reliable, robust, remote, high-penetration solar systems.

The business case for solar

While mature renewable energy technologies such as wind or solar PV are already competitive with traditional fossil fuel generation in grid-connected applications, they are currently only competitive in off-grid applications at low levels of renewable penetration (ie less than 40 per cent instantaneous penetration). Although generally not cost-competitive today, high-penetration off-grid renewable generation systems utilising enabling technologies such as batteries are certainly technically feasible. These systems are expected to become cost competitive in the near future, with battery costs forecast to fall significantly due to the rapid expansion of the battery industry (eg electric vehicles) and improved economies of scale.

screen-shot-2016-12-06-at-11-14-28-am

When including the federal government’s $0.40/L fuel tax credit, long-term contracting and the buying power of a large mining company, most large mine sites are likely to be paying in the vicinity of $0.80 to $1.00/L for diesel fuel, while communities can pay up to $1.70/L or more for diesel. This equates to $210-$260/MWh for diesel for larger mines and up to $450/MWh for communities and smaller industrial loads (depending upon the efficiency of the diesel unit). In contrast, the levelised cost of energy (LCOE) of a medium-sized solar PV plant in a remote location such as the Pilbara is approximately $160-$200/MWh (without grants or rebates). In addition, the project is able to generate large-scale generation certificates (LGCs), which currently have a market value of over $80/MWh. Therefore, for low penetrations of solar PV, there is a genuine business case for utilising solar PV to offset diesel.

Low-penetration renewable (approximately 10-40 per cent peak instantaneous contribution) hybrid energy projects are usually the most financially attractive because they do not require expensive enabling technologies such as battery storage. However, they may also be considered too small to make a significant difference to the overall site fuel usage.

As the penetration of renewable energy increases, additional enabling technology must be used to ensure the stability of the electricity system. These include communication and controls, energy storage (ie batteries or fly wheels) and load management technologies, which significantly increase the cost of the hybrid renewable project. In addition, the limited experience in Australia of high-penetration enabling technologies typically dictates further cost premiums from the construction contractors and financiers.

screen-shot-2016-12-06-at-11-14-40-am

With falling renewable technology costs and the resource sector’s sustained focus on cost savings and energy security, hybrid renewable power systems are becoming an increasingly attractive proposition. Renewables are widely recognised as a viable means to reducing energy costs while lessening exposure to future fuel and LGC price risk (escalation and volatility).

All sites will have different characteristics that will influence the business case for hybrid renewable systems, particularly the site’s delivered cost of fuel. The higher the cost of fuel, the greater the potential to save money by integrating renewable energy.

Figure 2 provides a comparison of the typical cost of energy from diesel and solar PV generation, assuming that all existing diesel generation assets would remain on-site to provide adequate reliability. As such, it is a comparison between the marginal cost of diesel and the full LCOE for solar PV. It shows that the cost of solar PV has dropped dramatically (particularly between 2008 and 2012) and that it became competitive with the operating cost of diesel generation in recent years without subsidies. However, it should be noted that both diesel and solar PV system costs vary substantially from site to site.

screen-shot-2016-12-06-at-11-12-20-am

One of the greatest challenges facing off-grid industrial renewable projects is uncertainty regarding project life. In particular, mines with a forecast short lifespan limit the cost savings that can be achieved by renewables and the effective LCOE is increased. For a particular project example, Figure 3 illustrates the influence and interaction of the three key investment drivers: mine life, diesel cost and solar installation cost. In this example, if the project is in one of the orange areas of the graph, there is a business case for the integration of renewable energy because the LCOE of renewable energy is lower than the marginal cost of diesel generation. While projects in the grey area of the graph are unlikely to cost-effectively integrate renewable energy, they may still seek to invest in renewable integration to provide a hedge against fuel price volatility.

It is important to note that the capital cost of off-grid solar PV can vary greatly from site to site as it is impacted by the location, site conditions, access to labour, construction materials and other site-specific opportunities and constraints.

screen-shot-2016-12-06-at-11-12-27-am

Challenges and opportunities

Renewables offer a reliable alternative to traditional generation in off-grid applications and the potential for significant energy cost savings. However, renewable energy projects face a number of early-mover costs and barriers due to the small number of projects, both globally and in Australia, to draw knowledge, experience and confidence from. Table 1 outlines some of these challenges and opportunities in the current market.

Key technical considerations

Will the integration of renewables such as solar PV or wind at your site lower your cost of production, and what size should it be?

Unfortunately, there is no simple answer to this question as there are a number of technical and commercial considerations to be addressed when conceptualising, developing and delivering a remote renewable hybrid project.

Before attempting to assess the feasibility of an off-grid renewable energy project, it is important to understand the capabilities and limitations of the existing electrical system and the site constraints.

Key inputs include:

  • Detailed load data across the electrical system is critical. This may require additional power monitoring to be installed in strategic locations within the distribution network.
  • Network configuration and parameters, including voltage, frequency and fault currents.
  • Existing diesel plant performance data, ideally including at least 12 months of high-resolution (one-minute interval) generation output data.
  • Renewable resource data may be sourced from publicly and/or commercially available datasets for the feasibility studies, but should be substantiated with site monitoring data prior to any investment decision.
  • Financial information, including operation and maintenance costs for the existing power station and network, information on electricity tariffs and equipment costs.
  • Site characteristics, including topography, geotechnical conditions, environmental features, surroundings and potential shading elements and available land area and rooftops.

Once data has been reviewed, verified and summarised, an iterative optimisation process will generally be required to define a suitable concept design. During the feasibility study, optimisation tools such as HOMER and ASIM can be used. Some companies have also developed their own proprietary optimisation tools (such as ABB’s remote optimisation model or AECOM’s CleanOpt tool).

During the subsequent design studies, network modelling software analyses load flow and system stability. These software packages are not optimisation tools; they are used to confirm the ability of pre-defined concepts to meet certain standards or requirements. Having a complete and thorough understanding of the impacts that a project is going to have on the electricity network is a key activity in the design of off-grid renewable energy systems.

Conclusion

Renewables are no longer a new or expensive technology, and in Australia they are now proven as both robust and reliable, with operating examples in remote, off-grid locations. Now more than ever before, renewables are becoming a viable option to reduce mine operating costs.

In addition, ARENA continues to provide grant funding to support the deployment of renewables and the generation of knowledge within the resources sector.

There are undoubtedly additional challenges to integrating renewables in remote mining environments. However, in our experience, these challenges are not insurmountable, nor do they necessarily detract from
the fundamental and compelling business case for renewables.

References

Bureau of Resources and Energy Economics, 2013. Beyond the NEM and the SWIS: 2011-12 regional and remote electricity in Australia [online], Australian Government. Available from: www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/rare/bree-regional-and-remote-electricity-201310.pdf

Clean Energy Council, 2015. Clean energy Australia: report 2015 [online]. Available from: www.cleanenergycouncil.org.au/dam/cec/policy-and-advocacy/reports/2016/clean-energy-australia-report-2015.pdf

Department of Industry, Innovation and Science, 2015. Energy in Australia [online], Australian Government. Available from: www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/energy-in-aust/Energy-in-Australia-2015.pdf

Department of Industry and Science, 2015. End-use energy intensity in Australia [online], Australian Government. Available from: www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/energy-intensity/EndUseEnergyIntensityInAustralia.pdf

Share This Article