SA mining company Northam signs 20-year power deal

From the newsletter

South Africa mining company Northam has finalised a 20-year power purchase agreement (PPA) for a 140 MW Karreebosch Wind Farm. This is their second PPA, following the 80 MW solar agreement signed in October 2024. The independent power producer (IPP) will wheel the power through Eskom's grid. 

• Northam joins other mining companies like Gold Fields and Sibanye-Stillwater that have moved away from the Eskom grid.

• The signing of the PPA comes just a few days after South Africa announced the return of load shedding. This is expected to encourage more self-generation.

More details

• The wind project is financed by Nedbank, Absa, and Standard Bank, and will be developed by a consortium including two renewable energy companies: G7 Renewable Energies and Cennergi Holdings. Construction is set to begin immediately, with electricity supply expected in 2027. The wind project will bring Cennergi's existing capacity to 409 MW, and the company is targeting to reach 1.6 GW of installed capacity by 2030.

• The project is expected to generate 460 GWh of electricity annually, which will be supplied to Northam's three operational sites via the Eskom grid. These combined projects are expected to reduce the company’s carbon footprint by up to 45%. Northam is also planning additional solar and battery storage projects as it seeks to reduce energy costs and improve energy security.

• Moving away from the grid will not only provide Northam with energy security and cost savings but also guarantee access to its export markets, which increasingly demand products produced using sustainable energy. The current regulatory framework in South Africa makes it possible for companies, even those unable to invest in setting up their own energy infrastructure, to sign PPAs with IPPs. This reduces the high upfront costs typically required.

• South Africa is endowed with plenty of wind and solar. It receives winds at average speeds of around 5-7 m/s and 8-10 sun hours per day. Companies need not establish energy plants near their plants but can set them up anywhere there is good wind and solar, and basically wheel through the Eskom grid. This flexibility makes it easier to generate renewables where they are best suited.

• With ongoing Eskom load shedding and annual tariff increases, more companies are switching to self-generation. Residential customers are also participating in this trend. Although there was a temporary slowdown in 2024 when Eskom managed to run the grid for ten months without interruption, load shedding has now resumed. This, combined with the declining costs of renewable energy technologies, will drive the shift. Government policies and incentives promoting renewable energy adoption will further fuel this trend. The increasing acceptance and implementation of wheeling agreements will also enable more companies to take advantage of renewable energy sources.

• The move away from the grid will significantly impact Eskom. Mining companies are essentially their main customers, accounting for a substantial percentage of electricity consumption and revenue. The loss of revenue from these customers will exacerbate Eskom's existing financial difficulties, potentially leading to further instability. To compensate for lost revenue, Eskom may need to increase tariffs for remaining customers, placing a greater burden on smaller businesses and residential consumers.

Our take

• South Africa's economy is expected to rebound in 2025, and electricity consumption is projected to grow by an average of 3% in the next three years. With Eskom mired in debt cycles, it will struggle to generate enough power to meet this demand. Heavy industrial consumers will suffer the most when load shedding continues.

• Fortunately, South African regulations have made it easier for IPPs to generate and sell electricity directly to consumers through power wheeling. However, the challenge of companies raising their own capital remains. Banks have stepped in and are financing these large renewable energy projects. The benefit is that the target customer categories have better revenue flows and guarantee easier repayment.

• There is still a significant opportunity for renewable energy project financing, and more banks and private equity investors are expected to enter the market. This will bring competition that will help lower the cost of power and benefit companies switching to self-generated power.