South Africa’s mining industry is set to benefit significantly from the lifting of the power generation cap, as this serves to relieve companies from the possibility of operational discontinuity.

According to Fitch Solutions, these headwinds are evident due to regulatory changes made to the country’s energy sector. A move which has seen the licence exemption cap for generators from 10MW to 100MW.

The country’s mining industry has been severely affected by frequent and prolonged power outages enacted by its state power utility Eskom due to the country’s ageing coal-fired power stations.

“South Africa’s higher power generation cap will bolster electricity supply to mines and smelters. [This is] to stimulate steady production in South Africa’s mining and metals sector that previously suffered from load shedding and power outages.”
Fitch Solutions

Eskom generates 95 per cent of South Africa’s power and implements staged power outages to cope with breakdowns at its power stations.

The power outages have caused disruptions to mining operations and even impacted production levels in the industry. Some months ago, Anglo American Platinum (Amplats) noted that the company’s operations had been affected by Eskom’s load shedding.

With an electrification rate of only 26.2/100, stable electricity in South Africa remains a key challenge to the mining and metals sectors. Already, the government has explained that energy security was a key aspect of its Economic Reconstruction and Recovery Plan, thus this responsive action.

According to the government, the regulatory changes intend on facilitating more investment into energy intensive industries such as agriculture, manufacturing and mining. Not only that, but it also shows the South African government’s willingness to deregulate the sector, Fitch Solutions asserted.

IPPs to increase power generation

According to Fitch solutions, “the increased threshold will allow independent power producers (IPPs) to enter into the energy market and will lower the cost of generating power in the medium term.” By allowing Independent Power Producers (IPPs) to increase the amount of power that they generate without licence generation restrictions, demands on the national grid will reduce, Fitch Solutions noted.

Consequently, this will alleviate residential, commercial and industrial electricity supply constraints in the country. In addition, this would allow private companies and industries to develop their own generation capacity.

Furthermore, companies can participate more freely in the limited transmission, distribution and sale of electricity.

That said, some of the most important beneficiaries of this regulatory change are large industrial and mining companies with the ability to purchase electricity from an IPP for their power requirements.

Moreover, this development will allow mining and metals companies to lock in long term prices for electricity from an IPP under Power Purchase Agreement (PPA) and hedge against price increases over time.

With growing optimism in the country’s power sector, the government has said the regulatory changes would catalyze 1600MW in new energy as well as projects worth ZAR27 billion from the mining sector.