To Investors,
As a CFO or COO you may have to consider a variety of operating strategies to use as a financial hedge. One such example is adjusting the production schedule for your operations to minimise energy costs.
Mining titan Sibanye-Stillwater reportedly adopted this strategy, referred to as “load shifting”, by rescheduling machine operations to avoid Eskom’s peak demand periods. During these times, they either halt equipment or run it unloaded, shifting energy-intensive activities like conveyor systems or pumping to off-peak hours.
Eskom tariffs charged to energy consumers consider the time that you are demanding energy, called the Time-of-Use (TOU). During high-demand hours (peak hours) the cost of energy is highest. In South Africa, in the evenings this is from approximately 18:00 to 20:00 in summer and 17:00 to 19:00 in winter; mostly caused by high residential activity during these hours. These peak hours are set by MegaFlex or WEPS tariff structures, which are the industry standards for high-tension users in South Africa.
Have a look at the simplified information in the table below as a hypothetical example…
From the table above we can see that the cost of energy can be 3 times higher during peak hours compared to standard hours. Energy costs are lowest during off-peak hours because the grid has a lot of capacity because demand is low. This is the gist of the load shifting strategy implemented by Sibanye-Stillwater.
So, extending the example, if Sibanye-Stillwater’s operations used 100 MW (or 100,000 kW) of energy over 3 hours, energy costs would look like this:
Cost of energy during peak hours = 100,000 kW x R5.50 x 3 hours = R1 650 000
Cost of energy during off-peak hours = 100,000 kW x R0.90 x 3 hours = R270 000
Daily savings would be R1.38 million!
In winter these savings could be even higher when the peak to off-peak spread is even higher.
However, at times energy savings could be a two way street, where if the national grid is strained, the system operator (Eskom/NTCSA) could request and pay energy traders to find a consumer that is willing to be paid to turn off their operations (demand reduction). This is called the “negawatt” – which is a measure of the amount of energy saved or reduced during extreme grid strain.
As an investor this brings us back to my previous letter mentioning the strong influence of energy traders on the electricity system. When the electricity system operator is desperate, what happens is that they pay energy traders R10/kWh, for example, to find 50 MW of energy demand reduction. The trader will then pay a factory operator R7/kWh to shift/turn off their production for a few hours; while the trader pockets the R3/kWh difference.
As the South African economy grows, energy demand will also increase.
An investment play could be to find and support companies that specialise in Demand Response (grid stability) and Smart Load Balancing (intelligent management of energy use); and South Africa has numerous such companies. Demand response and smart load balancing require Advanced Metering Infrastructure, or Smart Meters. Energy Tech and IoT companies will see a massive influx of capital over the next few years in South Africa.
I hope you enjoyed reading this letter.
On my journey to becoming a master capital allocator, one lesson down, a billion more to go
I hope you all have a great start to your week!
-Mansa Wandile Sithole
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