As a result of climate change, energy transition requires urgent action. In the period 2010-2019, the Intergovernmental Panel on Climate Change (IPCC) reported that the global average annual greenhouse gas (GHG) emissions reached their highest levels in history. In the absence of immediate and profound emissions reductions across all sectors, limiting global warming to 1.5°C will be impossible. Exceeding this threshold would result in additional severe impacts, not only costly in economic terms but threatening to human well-being and survival. The IPCC warns that between 3.3 and 3.6 billion people already live in settings highly vulnerable to climate change.
Over the last 200 years, the economy and technology have shaped how we produce and use energy. From wood to coal, oil and gas, to renewable energy, we have undergone multiple energy transitions. To prevent climate catastrophe, we need a new energy transition, which is different from all other previous transitions — and it must happen quickly and radically.
While oil and gas prices are soaring to new highs, the war in Ukraine is raising new levels of concern and uncertainty. It is critical to displace fossil fuels and the best way to do so is through electrification. Direct electricity consumption in end-use industries increased significantly over the past decade, reaching around 22,850 TWh by 2019, accounting for 22% of total energy consumption. The number of new electric passenger cars on the road has increased, reaching almost 7 million in 2021. By 2050, there are expected to be 147 million electric cars on the road. This is a 25-fold increase compared to the current level, indicating an urgent need to scale up deployment.
The energy transition will be powered by investments in renewable energy, energy storage, electric vehicles (EVs), electrified heat and green hydrogen. In the last five years, investments in electrified transport have tripled, and electromobility is among the bright lights of the energy transition, with EVs accounting for 8.3% of global car sales in 2021. Annual battery manufacturing capacity is set to quadruple between 2021 and 2025, to approximately 2,500 GWh. Progress in technology — including improved batteries — has greatly improved the economic case for EVs, and the scope of applications is rapidly extending to a broader range of road vehicle segments and types of services.
Energy transition and the mining industry paradox
All of these factors will put enormous pressure on the demand for ores. In the case of cobalt, its burgeoning demand is primarily tied to technological advances in rechargeable lithium batteries, used in everything from cellular phones to cars. In fact, lithium, nickel, cobalt, manganese and graphite are vital to the performance, longevity and efficiency of batteries. Rare earth elements are essential for permanent magnets that are crucial to power wind turbines and EV motors. There is also a huge demand for copper and aluminium in electricity networks, with copper being the cornerstone for all electricity-related technologies, as illustrated in Figure 1.
Figure 1: Minerals used in clean energy technologies
Source: IEA
Even though mining is a major source of raw materials for many industries, mining itself is one of the most energy-intensive industries worldwide (see Figure 2), consuming about 38% of total global industrial energy use, 15% of the total global electricity use and 11% of total global energy use.
Figure 2: Top energy-consuming miners in the world
Source: BNEF, 2019
Note: Energy row represents non-electricity consumption.
Gold production is the most energy and GHG emission-intensive metal per unit produced, and these characteristics are likely to persist along with the depletion of high-grade gold reserves.
Unlike iron and steel production, which use a large amount of fossil fuels for feedstock processing and process heat, gold production uses a much higher contribution of electricity, presenting more opportunities for renewable energy integration.
In the mining industry, energy demand will likely increase as the demand for minerals increases, ore grades decrease and mining activity is increasingly electrified.
Australia’s energy consumption, intensity in mining and mineral processing are increasing at a rate of around 6% per annum, largely due to the declining grade of ore and the growing amount of waste that must be removed to access them. In contrast, the Mining Association of Canada acknowledges that energy intensity is increasing for its members. Their underground mines must develop new production zones at a much greater depth, requiring extra energy for ventilation, pumping, cooling, hoisting and sustaining the infrastructure.
On average, energy accounts for 15-40% of the total operating costs for the mining industry. The mining industry is highly exposed to the volatility of fossil fuel markets because a substantial portion of expenditures go towards energy production and a substantial portion of that energy comes from fossil fuels. As shown in Figure 3, fossil fuel consumption also contributes to large greenhouse gas emissions in the mining industry.
Figure 3: CO2 emissions by commodity
Source: World Gold Council 2018
This is the great paradox of the mining industry: on the one hand, it will be essential to support the energy transition by producing more materials, but on the other hand, it will require even more energy to provide those materials, increasing GHG emissions.
Taking action on climate change in the mining industry
If the mining industry wants to meet commitments that countries have made under the Paris Agreement, the Sustainable Development Goals of the United Nations and individual mining company emission targets, it is imperative to stop burning fossil fuels over the next decade and a half. All major mining companies have established a net zero target by 2050 (see Figure 4).
Figure 4: Commitments and decarbonization strategies to support low carbon agenda
| Fortescue | BHP | Rio Tinto | Vale |
|---|---|---|---|
| Commitments | |||
Net zero emissions 2030: 26% reduction Scope 1 and 2 emissions | 2050: Net zero emissions 2030: 30% reduction Scope 1 and 2 emissions 2022: Maintain GHG emissions at or below 2017 levels | 2050: Net zero emissions 2030: Reduce emissions intensity by 30% and absolute by 15% | 2050: Net zero emissions 2030: 33% reduction Scope 1 and 2 emissions |
| Electricity strategy: renewable electricity is pointed as principal and the first step in decarbonization | |||
|
|
|
|
Both society and investors are now demanding greater transparency when it comes to the triple bottom line — the true social, economic, and environmental impact. For a mine to be carbon neutral, energy must be a core focus of the overall design, operational planning, and execution, during the life of the mine and beyond. Particularly for mid-caps, adding a renewable component to plans for building a new mine or expanding an existing one could unlock barriers in securing project financing.
Energy as Strategic Business
The good news is that renewable electricity costs continue to fall and renewables are now the cheapest power options in most regions. In 2020, a total of 162 gigawatts (GW) or 62% of the total new renewable power generation capacity added globally, had electricity costs lower than the cheapest source of new fossil fuel-fired capacity. The global weighted-average levelized cost of electricity (LCOE) of newly commissioned utility-scale solar photovoltaic (PV) projects fell by 85% between 2010 and 2020, that of concentrated solar power (CSP) by 68%, onshore wind by 56% and offshore wind by 48%. Renewables are now the default option for capacity additions in the power sector, where they dominate investments (see Figure 5).
Figure 5: Global weighted-average LCOW and PPA/auction prices for solar PV, CSP, onshore wind and offshore wind, 2010-2022
Source: IRENA 2022
Today, renewable energy investments can provide cost savings, supply predictability (coupled with storage) and additional revenue (through selling excess generation capacity or reselling stored energy during high-demand periods, even long after mine decommissioning). As well as reputation, license, social acceptability, and health, safety, and environmental (HS&E) benefits. The electrification of mines, including the transition to electric vehicles, can help create a safer and cleaner environment for front-line workers, including better air quality for those working underground.
Figure 6: Renewable projects associated with mining companies worldwide
Source: BNEF, 2019
Therefore, it is no surprise that renewable installations by mining companies have increased from 42 MW of annual installations in 2008 to 3,397 MW in 2019 as shown in Figure 6.
The majority of systems in 2018 and 2019 were hybrids — for example, a combination of wind, solar, energy storage, and other technologies that are generally backed by fossil fuels — to smooth out the variability of the renewable energy generation.
Bloomberg New Energy Finance (BNEF) data shows that solar has the highest installed capacity for single technology applications, followed by wind. Around 85% of these projects are owned by mining companies. The remaining 15% are either contracted through power purchase agreements (PPAs) or other means in which the mining company is an off-taker (Figure 7). Approximately 73% of these projects are located off-site, while 27% are on-site.
Figure 7: Renewable project business model
Source: BNEF, 2019
In addition to the business benefits of having an energy intelligence system, there are also the benefits of adjusting operations to reshape demand and increase energy efficiency. Using an algorithm to control the speed and sequence of the movement of materials is one example, so that trucks use the least amount of diesel fuel possible. Energy-intensive practices could be shifted to the daytime when the sun is shining and when a solar array can generate electricity at its maximum capacity.
In 2021, global energy transition investments reached a new high at US$755 billion, according to market estimates. The largest sectors were renewable energy (US$366 billion) and electrified transport (US$273 billion) as illustrated in Figure 8.
Figure 8: Global investment in energy transition by sector
Source: BNEF, 2022
Investments in renewable energy have thrived in markets with well-established supply chains that have access to lower costs with regulatory frameworks that provide cash flow visibility, and where lenders and financiers are seeking to support sustainable projects in these sectors. New clean energy investments in Latin America reached nearly US$20 billion in 2021 — Brazil was responsible for a record US$13.2 billion. The country is expected to attract US$300 billion in infrastructure investments in the energy sector by 2040, which will increase by 189% of its current capacity. Regulatory frameworks tend to foster self-production and distributed generation.
To reach global net zero by 2025, BNEF estimates that energy transition investments need to average US$2,063 billion between 2022 and 2025 or about three times what they were in 2021.
Figure 9: 2021 full-year performance of clean energy and other equity indices
Source: BNEF, 2022
From an investor’s perspective, it is a low-risk asset with high growth prospects and strong ESG commitments. In fact, the clean energy stocks represented in Figure 9 by the Bloomberg Goldman Sachs Clean Energy Index, posted a 13% gain in 2021. Clean energy equities have gained 112% over the last two years.
Renewable generation assets backed by long-term contracts offer:
- Financial performance that is less correlated with the economic cycle
- Predictable and stable free cash flows
- Cash yields over long durations — lifetime of 20-25 years
- Hedges against conventional commodity price risks, such as oil and gas
It is difficult to track returns since there are too few pure-play companies, with a lack of information and trading histories. A recent study by Imperial College and the International Energy Agency, based on a hypothetical investment portfolio, indicated that renewable power shares offered investors higher total returns relative to fossil fuels and lower annualized volatility, as can be seen in Figure 10.
Figure 10: Risk x return summary
Source: Imperial College and IEA (2020)
Summary
Mining challenges include many difficult operating conditions. Underground mines must develop new production zones at much greater depths, which requires extra energy for ventilation, pumping, cooling, hoisting, and sustaining the infrastructures, as well as supply constraints. Due to future fossil-fuel price volatility, investment in renewables may be a valuable way to manage uncertainty, hedge costs, and leverage profits. Addressing the mining industry’s decarbonization responsibility is key.
Furthermore, there is a real opportunity to create value through energy investments that support the triple bottom line of financial, environmental and social performance. Many investors seek the lower risk and growth perspectives that renewables can deliver. An analysis of renewable power share prices observed over the last decade, alongside an acceleration in observed flows to debt instruments like green bonds, demonstrates clear investor interest.
Achieving the 2050 target by accelerating the deployment of renewables and taking vigorous action to raise energy efficiency is a no-regret strategy that meets climate change objectives. In addition, it offers the benefits of an ethical and inclusive energy transition, such as universal access to energy, job creation, poverty reduction and a fair sharing of the adjustment benefits and burdens.
