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Flagship NSW-SA power cable hits debt hurdle

One of the country’s flagship electricity interconnector projects intended to help keep the lights on amid soaring wind and solar generation has run into trouble, as backer TransGrid advises it cannot be financed under existing market rules.

The NSW transmission grid owner has appealed to the rule-making body for a rapid change in the regulations to allow the $2.4 billion plan to build a long-distance power cable between South Australia and NSW to proceed.

ElectraNet, the South Australian grid owner and TransGrid’s partner in the EnergyConnect project, has also submitted an urgent rule change proposal to the Australian Energy Market Commission.

Without the change, the project – which would be the first interconnector cable built between Australian states in 15 years – would have a “junk” credit rating and would not attract debt funding, said TransGrid, which is overseeing the $1.9 billion NSW part of the cable.

Project EnergyConnect is one of the priority projects identified by the Australian Energy Market Operator, which is assuming the 900-kilometre high-voltage cable is online by 2024-25. It is seen as critical to smooth out variable renewable generation across the grid, help reduce forced curtailments of wind and solar power and keep the power system stable.

In a letter to Merryn York, the acting chairman of the AEMC, the industry’s rule-maker, TransGrid chief executive Paul Italiano describes the rule change as “urgent” to ensure financing for projects such as EnergyConnect.

Mr Italiano said a final investment decision on EnergyConnect was needed no later than January 2021 and for other transmission projects such as HumeLink also to be completed on time.

The issue involves the delay in the timing of revenue recovery under existing rules, which means that for a project such as EnergyConnect the cash flows are insufficient to support 60 per cent debt funding at a BBB+ credit rating – or an investment grade credit rating at all – for an extended period of time, according to TransGrid.

The company, which is partly owned by ASX-listed Spark Infrastructure, wants the rules amended to be able to adjust the timing of revenues to help match financing requirements.

Under the present market rules, TransGrid’s analysis “shows a project such as EnergyConnect would be given a junk credit rating and be unable to attract debt financing”, a spokeswoman said.

Similarly, ElectraNet said its analysis “shows that there is an inconsistency in the current revenue setting process which adopts a BBB+/Baa1 benchmark credit rating, but provides a revenue stream that is insufficient to sustain that rating”.

As the rules now stand, it is understood that the project would not meet the minimum criteria for an investment-grade credit rating for more than 30 years.

The issue, which is understood to have been the topic of discussion between the two partners and regulatory bodies for some time, comes after a significant increase in the cost of building the project, which was originally budgeted at about $1.5 billion. The blowout has raised worries among heavy energy users of the costs to be borne by consumers, although an analysis carried out for TransGrid found considerable benefits to customers from the project, including $180 million a year for NSW consumers.

RBC Capital Markets James Nevin noted TransGrid’s position that it could not achieve an investment-grade credit rating for the circa $2 billion project using the 60 per cent gearing benchmark used by the Australian Energy Regulator.

“The implication here is that TransGrid shareholders (including Spark Infrastructure, which holds 15 per cent) would need to contribute more than 40 per cent equity to these projects so that TransGrid could achieve an investment-grade credit rating,” Mr Nevin said in a note.

ElectraNet and TransGrid said they were looking forward to constructive discussions with the AEMC, the Australian Energy Regulator and other stakeholders to quickly resolve what appears to be an “unintended consequence” of the existing rules.

Source: Financial Review