How mis-priced gas power plants blew up Australian mining giant

When the world’s biggest mining group BHP Billiton was drawing up plans for the expansion of the massive Olympic Dam copper/uranium project in South Australia in 2011, it was so unconvinced about the future of fossil fuels that it decided to hedge its bets.  Rather than committing entirely to coal or gas fired generation, BHP drew up plans that could include geothermal and solar thermal energy, which it had identified as relatively cheap ways to reduce emissions from the giant mine.

Most Australian miners, however, have shown themselves to be mighty conservative when it comes to making choices about their energy supply. The need to deliver 24/7 power output – in the most uncomplicated way – has led them all to eschewed offers to even partly power mine-sites with renewable energy sources such as solar thermal systems. But after the experience of Australian mining contractor and construction group Forge, they may want to think again.

This week Forge announced that it would make yet more writedowns because of massive blow-outs in costs for gas-fired generators that it is building for mining operations in Mt Isa and the Pilbara. So far it has revealed cost blow-outs of more than $150 million from the 242MW Diamantina combined cycle gas fired-plant it is building for Xstrata in Mt Isa, and the 80MW open cycle gas/oil-fired West Angelas plant it is building in the Pilbara for Rio Tinto.

It has been a painful experience for the company’s shareholders, who have seen their investment in the billion dollar company (that’s its annual revenues) crumble by 90 per cent, wiping out $600 million in value. The company is now worth just $60 million and has all but run out of cash. It continues in business only because of the indulgence of its bankers and one of its major clients, Rio Tinto.

There is just a little irony in the Diamantina experience, where it seems clear that Forge, or at least the CTEC subsidiary it bought in 2012, had underbid on the gas plant, which had been chosen – possibly based on price – over a competing proposal to build the 1,000km Copperstring transmission line across the northern part of Queensland and provide connections to a number of wind, solar, biomass and geothermal energy projects. The Queensland government thought Copperstring was a good idea, but said and did nothing when Swiss-based Xstrata chose the conservative route.

That decision forced some major renewable energy projects – including the 750MW Kennedy wind project, which might have been Australia’s largest – further on the backburner, meaning that Queensland electricity users will continue to pay a tariff for renewable energy constructed elsewhere in the country rather than in their own state. It also underlines the point that fossil fuel generation is not necessarily a sure bet: the client, or possibly the power supplier, has still to deal with the expected surge in gas prices these coming years that are already starting to impact on households and commercial bills.

The West Angelas project may not have had such a visible alternative, but the Pilbara, and its mining provinces, has long been identified as one of the best and most obvious places for renewable energy to be adopted: if only because the alternative, trucked in diesel of even gas, is hideously expensive.

In 2011, a report by Evans & Peck suggested the mining provinces of the Pilbara and the Mid-West in WA offered the greatest potential for new energy technologies, and the greatest resistance to change. “There appears no better place for renewables to compete on cost,” said the report. But, it lamented, there were “cultural” issues and “the appetite for novelty is low.” Many a solar PV or solar thermal developer that has tried to convince a miner to adopt their technology can attest to this. This is one of the reasons why the Australian Renewable Energy Agency is targeting miners in a program to encourage them to install hybrid systems. Some developers such as the US-based Solar Reserve are so sure of their solar thermal and storage technology they say they will volunteer to take the fuel risk. They – and others – have opened offices in Perth hoping that the mood has turned. The experiences of Forge might just help them along the way.