Who should hold “hot potato” of connection costs for wind and solar farms?
Amid the extraordinary boom in large-scale wind and solar projects in Australia – some $25 billion completed and under construction according to the federal Coalition government that tried to stop it – it may be tempting to think that this is nothing but a good news story.
On the face of it, yes. But scratch beneath the surface and it doesn’t take long to find a heap of angst, anger, frustration and – in some cases – recrimination.
Solar and wind projects have hit the grid in a major way, as was planned and forecast by what was a bipartisan policy (the renewable energy target) agreed nearly a decade ago.
But the lack of coherent planning is now having an impact on solar and wind developers, and contractors have also been hit by a wave of regulatory and connection issues. And the result has been painful, and will ultimately hit consumers with higher than needed costs.
As RenewEconomy has revealed in recent days, wind and solar project revenues have been hit by significant de-ratings of what are known as “marginal loss factors”, which decide how much of a power station’s output is credited as delivered to the load.
On top of this, a group of solar and wind farms will be taken off grid for up to 100 days over the next 13 months as networks upgrade grid capacity in the highly congested north-west of Victoria.
To add to this list of woes are multiple delays and cost-overruns caused by changes and problems with connection agreements and final approvals, and a growing list of new requirements that have added costs and time.
Already, some of the biggest contractors have been affected. The listed,multi-billion dollar RCR Tomlinson has gone bust, buried under the weight of cost over-runs and delayed payments which choked its cash-flows (and other issues not related to the renewables industry).
Others, including Downer, UGL, Bouygues, Quanta and many smaller contractors have also been caught up in the cross-fire, hit by damages claims brought by developers seeking redress for lost revenues.
The listed Windlab is the latest to report connection problems, saying it would seek damages against the contractor for the first stage of its Kennedy wind park.
Its issues have been further complicated by flooding in north Queensland, which caused yet more connection delays and forced it to declare force majeure on the project, and to reassess another wind project as yet more new connection requirements were introduced.
“Belts and braces,” observed Windlab’s Roger Price about the new conditions imposed.
There are clearly multiple problems in the management of the renewables expansion, and the blame is being shared around, depending on perspective.
Some point to the sheer scale of the investment boom, others to the nature of the new technology, the lack of planning by regulators, networks and the market operators, and a more conservative regime imposed after the South Australia blackout and load shedding that created so much controversy.
Insiders also point to a lack of resources, both in numbers and quality of the people involved. But the biggest issue for most is how to resolve the connection problem, and the constant shifts that can sometimes demand wholesale revisions even when a project is into its final stages of construction.
Who, then, should carry the risk of connection agreements, given the shifting sands of approvals and requirements? Developers have hitherto left the risk with contractors under what are known as “lump sum” contracting deals, and beaten them over the head with litigation and damages claims when things have not turned out as expected.
But contractors, some of whom admit to having been caught out by the complexity of what they might mistakenly have viewed as a simple construction project, want to pass the risk back to developers, or at least to share it.
It’s a significant problem as the wind and solar industries enter a new construction phase, under yet another connection regime introduced in February, which effectively allows even less flexibility. Any generator performance standards (GPS) that had not been agreed by then had to go back to the drawing board, even for those projects well under way.
There is, however, emerging agreement that greater clarity is needed when initial contracts for construction are signed, to reduce what is seen as the “arbitrary” nature of the process.
They are urging network operators and the market operator to make earlier agreements on modelling, to reduce the risk of late and potentially significant and costly changes.
One contractor says most of the issues come from what he describes as the “double process” – early studies done by the developer and contractor, and given a glance by the market operator and the network owner, to facilitate financial close, and more detailed studies later in the piece as actual connection nears.
“The process could be improved (old rules or new rules alike) if instead of having a two-stage process the market operator and the network agree not only on accepting the GPS, but also that the detailed modelling provided is compliant with it.
“In this process, the NSP/AEMO would commit to validating and not re-opening the modelling silo of the registration process. Outstanding items required in the registration (I/O list, SCADA tests, protection studies, ECM etc.) would need to be provided during construction.
“But at least the riskiest part of the registration would be locked … and this would serve multiple purposes.
“(It would reassure investors and contractors that are now seeing the connection process as the single biggest risk in the way of renewable expansion in Australia.
“It would lower financing costs, EPC costs and ultimately provide a cheaper renewable electricity. It would also free resources from AEMO/NSP that are now doing the due diligence twice : Once during the connection application, once during the construction.”
One expert, Mark Jackson, has worked on several large-scale renewable energy projects that were hit by late-stage changes to connection requirements. He recommends that contractors and developers work on what he calls a “mixed contracting” model, that also requires a lot more front end work and more flexibility.
Jackson, who is now doing a master’s of construction law at the University of Melbourne, has produced a paper on the topic, and looks at specific examples, such as the deliberations of one client that is looking to morph what was to be an 80MW wind project, into a combine wind, solar and storage project and all the uncertainties and variations that that entails.
Hence the need for more flexibility and for sharing the risk.
“The construction of (large scale renewable energy) projects is being buffeted by a storm of change resulting from its own market evolution and growth (project numbers, size and type), coupled with external influences being imposed (policy uncertainty and reducing fossil fuel-based generation),” Jackson writes.
“This means that the ongoing suitability of the current adversarial (lump sump) approaches to contracting, which rely on a high degree of certainty for their success, must be questioned.”
This is particularly the case, he says, as more projects look to hybrid solutions, combining both wind and solar, and various forms of storage, adding yet more complexity and variations to the contract.
“he answer, in light of the change that is coming (or that is already manifesting), must be no. That is not to say that there will never be a time where these forms of contract could again be used, however, the market landscape will need to have settled to a sufficient extent that a move back to those approaches are warranted and/or effective.
“What is therefore being proposed is a move to more flexible modes of procurement that encourage collaboration between the parties where circumstances demand it, before then allowing the process to devolve back into familiar waters where the achievement of certainty in price and time is possible.”