From mine site to pumped hydro: commercial considerations for mine owners and project proponents
While Australia faces its energy challenges, there are also proving to be many opportunities emerging for existing industries as a result of technological advancements and the falling costs of renewable energy projects.
One such opportunity which has emerged for the mining industry specifically is the potential to utilise former and abandoned mine sites for pumped hydro energy storage (PHES). This involves the use of a number of generation technologies to convert the energy of moving water into electricity with excess energy generated being released or used to continue passing water and effectively turning the process into a battery. This development has many excited, starting with both the Queensland and New South Wales’ governments at the top of the list, but importantly is a priority for Commonwealth funding arms ARENA, CEFC and NAIF. Not least of all, this is because PHES is seen as part of the solution to the reliability and stability concerns that have arisen as other forms of renewable energy generation have been introduced into the grid.
An often-cited study by the Australian National University identified approximately 23,000 sites across Australia that may be suitable for development of PHES projects. While these sites are predominantly made up of naturally occurring landforms, many of the recent high-profile PHES developments are located on former mines which contain pits or voids capable of conversion into storage reservoirs suitable for PHES. For example:
- Genex Power is currently progressing towards financial close for its 250MW PHES project on the former Kidston Gold Mine in Queensland (which McCullough Robertson has been involved with over the years);
- AGL announced last year that it has secured the rights to develop a 250MW PHES at the Kanmantoo copper mine in South Australia; and
- AGL and Idemitsu have also signed an MOU to undertake a feasibility study for the development of a 250MW PHES project using the void at Idemitsu’s soon-to-be-closed Muswellbrook coal mine and a development application is expected to be lodged this year.
There are good reasons for this. Apart from the potential for ‘ready-made’ storage reservoirs suitable for PHES, these may include the existence of pre-existing transport infrastructure servicing the site, proximity to electricity transmission infrastructure, and the ability to leverage the ‘social licence’ attaching to the former mining operations.
That said, the development of PHES on former mine sites also poses unique challenges that may not be encountered by proponents of other PHES projects. These are considered further below.
Responsibility for rehabilitation
A key attraction of PHES for mine owners is the opportunity to offset and defer the costs associated with final rehabilitation of their mine. However, if the mine owner is not the proponent of the PHES project (i.e. where the mine owner sells the PHES project rights to a third party), a key issue will be who bears responsibility for rehabilitation of the site, both on an ongoing basis (e.g. in respect of contamination issues stemming from mining operations) and at the end of PHES operations (e.g. in relation to remediating the voids created by mining operations and used for the PHES project).
This will need to be the subject of negotiations between the mine owner and project proponent. Clearly, the price a third party is willing to pay for the acquisition of PHES project rights will be influenced by the extent of rehabilitation liability that the mine owner is seeking to pass onto the proponent. It will also be a matter of satisfying the relevant regulator for that jurisdiction that the rehabilitation of the voids will be carried out to the extent required in accordance with the approvals for the mine, with the ongoing provision of financial assurance likely to be required until the rehabilitation is complete.
The approvals pathway for any large project is rarely straightforward. However, a proponent seeking to develop a PHES project on a former mine site may encounter some unique regulatory challenges.
These are primarily associated with the project effectively being the rehabilitation solution for the mine. For example, on the Kidston Project, Genex Power purchased the project company holding the assets of the former mining operations. These included the environmental authority (EA) which contains conditions relating to the rehabilitation of the mine. The EA cannot be surrendered until these conditions have been satisfied, however the Environmental Protection Act 1994 (Qld) (under which the EA was granted) did not provide for mining-specific EAs of this type to authorise and regulate the water releases required for PHES projects. This ‘regulatory gap’ was addressed by invoking the “coordinated project” declaration process under the State Development and Public Works Organisation Act 1971 (Qld), pursuant to which the Coordinator General prescribed the required conditions. However, the coordinated project process can be time consuming and adds an additional layer of complexity to the approvals pathway.
Similar regulatory issues exist in other jurisdictions. More generally, a PHES proponent will be keen to ensure it has sufficient lead time to obtain the requisite approvals prior to construction of the PHES development, however the mine operator may also require the continuation of the approvals relating to its mining activities. Therefore, consideration may need to be given to the implementation of overlapping consents or the timing for surrender of the mining-related approvals.
While steps are being taken to overhaul the regulatory framework in order to streamline the process for converting former mines into non-mining enterprises such as PHES, this is still very much a work in progress with key hurdles to be tackled including responsibility for rehabilitation and financial assurance.
Future mining development
By their nature, PHES projects operating on former mine sites are located on land that (at least in the past) contained economic mineral deposits. As such, if economic conditions change, it may become profitable to mine any minerals remaining in situ. Depending on the tenements overlapping the project site, this may pose a risk to the viability of the project, particularly before construction has commenced (but nonetheless after substantial costs has been sunk into development). By way of example, this has been identified as a key project risk in the feasibility study for a PHES project in the gold mine workings underneath Bendigo commissioned by the Victorian Department of Environment, Land, Water and Planning and the City of Bendigo.
A proponent may seek to mitigate this risk by entering into agreements with the holders of overlapping or adjacent mining interests. However, assuming these can be successfully negotiated, the proponent will still not be absolutely protected as third parties with whom the proponent has no contractual relationship may still manage to acquire a mining interest over the project site in the future.
Interaction with continuing mining operations
A PHES project may also seek to utilise above or underground voids that are no longer required for active mining but are adjacent to ongoing mining operations on the same tenements. Disused voids (both above and underground) may have also been earmarked for other purposes, such as tailings disposal or water storage, thereby necessitating the identification and development of alternative storage areas before the proposed PHES project can proceed.
Interaction issues present a number of challenges, including:
- the partial surrender of mining leases;
- work, health and safety liability if parts of the PHES project will be constructed on land covered by a mining lease;
- responsibility for the completion of rehabilitation works to ensure that the voids are safe and stable;
- ensuring adequate power supply to both the mining operations and the PHES project; and
- sharing of infrastructure and access routes (which may also impact power purchase arrangements).
Relevantly, handover of part of the Kanmantoo copper mine to AGL for its PHES project has been stalled as more copper ore has been discovered nearby by the mine operator (this copper ore can only be accessed via tunnels from the bottom of the mine’s pit which cannot be accessed once AGL fills the pit with water).
Due to historical mining activities, the voids and reservoirs intended for use in PHES projects may contain residual contaminants which pose a pollution risk in the event of water releases during construction or operations. This may result in the imposition of approval conditions limiting the circumstances in which water may be released which could have cost implications for the project. There may also be technical challenges associated with the particular composition of contaminants present. This may impact the technical solution for the project, which could also have cost implications.
As for any project, the risks associated with developing PHES on a former mine site or as part of an existing site should be carefully considered before an investment decision is made. Please contact our experts if you require any advice in relation to your PHES opportunity. Our team can advise on all facets of PHES including project development, commercial contracts, interactions with mining tenements, planning and environmental approvals.
For further information please contact a listed author below.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.