Peñoles Invests in Renewable Energy for Self-SupplyMon, 10/21/2013 - 17:30
Mexico’s largest companies have seen their electricity costs more than double over the past decade. The combination of rising energy prices and delayed improvements in power generation capacity has led to an increasing reliance on energy self-sufficiency strategies among Mexico’s most energy intensive companies. Peñoles, one of the country’s leading mining companies, produced 92.9% of the energy it consumed in 2012 and added wind power to its energy mix, through its Fuerza Eólica del Istmo subsidiary.
Peñoles, founded in 1887, is the world’s top producer of refined silver, the largest in the western hemisphere in metallic bismuth, the leading Latin American producer of refined gold and lead, and among the main refined zinc and sodium sulfate producers in the world. Arturo Vaca Durán, the company’s Energy and Technology Vice President, emphasizes the difference between a pure mining company and a mining company that also has electrolytic and smelting processes, with Peñoles, which has integrated operations in smelting and refining non-ferrous metals and also produces chemicals. “In a mining company that has smelting and refining processes, very frequently the most important part of the operating costs is electricity,” Vaca Durán says. Since the company’s operations depend on a substantial and continuous supply of electricity, energy constitutes an important component of production costs for Peñoles. Energy efficiency has therefore been a permanent fixture in the minds of the company’s management team. “We have people working continuously on studies at each of our mines to develop strategies for being as efficient as possible in the use of electricity,” says Vaca Durán. An example of this is the initiative the company took to reduce electricity demand at peak times by increasing the capacity of pumping stations that are responsible for pumping water out of its mines, in order to be able to operate them for 18-20 hours per day and shut them down at peak times when electricity is more expensive. “We were not saving electricity, we were just reducing demand on peak hours to obtain lower electricity cost,” explains Vaca Durán.
When Mexico’s power generation sector was opened to private participation in 1992, a new range of opportunities opened up for Peñoles to pursue its mission of adding value to non-renewable natural resources in a sustainable manner. “We saw this as an opportunity and immediately started looking for hydroelectric projects, since we knew that these projects can generate low cost electricity after the payback period of the initial investment,” explains Vaca Durán. At that time electricity in Mexico was not expensive in comparison to other markets, since the cost of oil came down as low as US$8 per barrel (Mexican mix) and Mexico’s national currency was undervalued, following the Mexican peso crisis.
While the Mexican government tried to attract developers to come to Mexico and build combined cycle plants, Peñoles saw the installed power capacity margin, or the difference between installed capacity and maximum demand. This becomes a problem when plants are in maintenance or being repaired. “In 1996 we were aware that if power generation investment did not come to Mexico we were going to face a period of energy shortages, which would affect our mines and plants since our operations run 24 hours a day, 365 days a year. For example, without electricity a mine can flood in just four hours, which may cause losing the mine for six months, and that has happened in the past. Our main motivation for getting into self-supply then was to avoid electricity shortages in our mines and plants,” explains Vaca Durán.
Peñoles considered combined cycle power plants, but the volatility of the natural gas prices made the company reluctant to invest in this technology. However, in 1998 it saw another opportunity to use pet coke as an energy source when Pemex modernized its refineries, resulting in an excess of pet coke that had to be exported at a loss. “We were able to enter into a 20 year supply agreement with Pemex, since at that time pet coke was considered to be a residue rather than a fuel. The cost savings we made through sourcing pet coke at a competitive cost and burning it in an efficient and environmentally friendly way have been significant, while this agreement provided us with a predictable energy source until 2024,” notes Vaca Durán. In the end the feared energy shortages did not occur, since many combined cycle plants were installed, but the volatility of natural gas prices between 2000 and 2007 created a lot of volatility in Mexico’s electricity market.
Peñoles is following a low-cost producer strategy, meaning that when its revenue decreases as a result of declining commodity prices the company stops investment in order to keep a positive cash flow. “Since the mining industry goes through ‘metal prices’ cycles, smaller companies start having problems very early on in a downward cycle. If Peñoles did not have the low cost strategy (including self-supply scheme) we would be in trouble too, since we could never obtain electricity at the low prices at which the world’s zinc plants can” explains Vaca Durán. Increasing the level of energy self-sufficiency is thus a priority strategy for Peñoles. In 2012, the company’s operations and its subsidiaries required an average of 276MW, with peak demand reaching 316MW, representing an increase of 2.5% over the previous year, despite having improved overall energy efficiency. Of its total electricity requirements 92.9% was provided through self-supply, 86.1% by the company’s pet coke plant in San Luis Potosi, 3.7% through wind power supplied by Fuerza Eólica del Istmo, and 3.1% from internal cogeneration initiatives. The remaining 7.1% was purchased from the CFE.
As part of its Vision 2020 growth strategy, Peñoles estimates that electricity demand will grow to 480MW in 2015 and 580MW in 2020. When thinking on a longer time horizon, Vaca Durán would like to recommend Peñoles an energy mixture of 60% natural gas and 40% renewable energy by 2030. “We need to have at least 80% of firm power for peak times and we should design our mines and plants to rationalize the energy demand at peak times. Should we need to reduce the natural gas price volatility, we may have to decide whether to enter into a strategic alliance with natural gas companies in USA to secure a natural gas price below US$6 dollars, for example,” says Vaca Durán. “However, the cost of wind power would be lower if we consider that natural gas prices will be at US$6. While energy cost is very important, you also have to consider security of supply, taxes on emissions and the Mexican legal framework certainty.”
Following the completion of Phase I of the Fuerza Eólica del Istmo wind farm, with 50MW installed capacity located in the La Ventosa region of Oaxaca, Peñoles has added another 30MW in Phase II. This brings the company’s total wind power investment to US$175 million and enables the company to generate up to 15% of its annual consumption. The process of constructing these wind projects has met with relatively little operational issues or social resistance, since Peñoles gave careful attention to these issues, and was able to apply certain skills that it had developed as a mining company. “Our company has acquired skills in engineering and construction; we do not actually execute the construction of the project but we closely supervise it,” states Vaca Durán. “Peñoles has also people fully devoted to negotiate land access, since this is needed to deal with ejidos and comuneros for the mining projects, and these land owners do not always have their papers in order and sometimes they inherit or sell their land through verbal commitment. Our negotiators are very gentle and offer these people important benefits with a view to developing a good relationship with the community, even though costs are an ongoing concern. The land negotiators and the engineering department at Peñoles were the key to the success of this project.”
Photovoltaic has also become impressively competitive, compared to what it cost three years ago, and Peñoles is exploring the possibility of installing this technology. “A photovoltaic power plant currently produces energy at a cost of US$10-11 cents per kWh, which is not yet good enough for us to develop it on a commercial scale, but we may start with pilot facilities of 1 to 15MW,” says Vaca Durán. “Solar plants are easy to build and maintain, making this type of energy a good option for mid-sized companies, since they get their energy at higher prices, making solar an economical option for them. Unfortunately, the best solar resource is not always available where the minerals are located. We have one project where this is the case, at one mine in Sonora. We may construct a pilot plant there, and if costs continue improving, we may consider a larger plant afterwards. Some open pit mines require large amounts of diesel fuel for their off-road mobile equipment, which at today’s natural gas prices may open significative saving opportunities. If they can replace the use of diesel into LNG they could save tenths of millions US dollars per year and simultaneously reduce their CO2 emmissions. That could be the best energy efficiency project I have ever seen.”
The expertise of the mining industry has proven to be an important asset when developing renewable energy projects. However, given the lack of transmission infrastructure in Mexico not every mining company has the financial strength to participate in these projects, since putting in transmission lines can represent up to 15% of the cost of the project. “The government should actively develop transmission infrastructure, and private investment will come,” Vaca Durán adds. “By reducing the costs of renewable energy projects (no subsidies), an increasing number of companies will be able to participate in self-supply schemes, reducing their energy expenses and increasing the competitiveness of the Mexican industrial sector.”