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EnergyConnect: transformational highway or white elephant?

Last week, the AER delivered their final regulatory approval for Project EnergyConnect (PEC) with total costs of $2.28b. This signifies the end of a process that began back in 2016 when the initial project specification report was released. There was some uncertainty around the viability of the project. However, a $295 million investment from the CEFC helped secure the project.

Over most of the PEC planning cycle, the project’s costs for the preferred option were around $1.5b. When the AER published their RIT-T determination, PEC was expected to deliver $924m in net market benefits. This represented a significant benefit-to-cost ratio (1.6:1) at the time. Most of the project’s benefits are associated with avoiding fuel costs for gas-fired generators in South Australia (SA) and, over the long-term offsetting NSW local energy requirements.

However, in September 2020, TransGrid and ElectraNet put forward their contingent project applications showing cost increases to $2.4b (~60% increase in costs). This meant that the net benefits fell to only $201m. Given that large infrastructure projects can typically overrun budget, the project could be uneconomic if costs increased by a further 10%. Despite this, TransGrid and ElectraNet did not see the cost increase as a material change. Therefore, the RIT-T was not re-evaluated.

Fast forward to November 2020. the New South Wales (NSW) government released their roadmap, which targets ~12GW of new VRE and storage installed in NSW to replace exiting coal capacity. To date, the NSW government have announced plans for ~3GW in the Central-West Orana REZ and ~8GW tender for New England REZ. Both are geographically varied to PEC. Given the correlation of VRE generation in the state, it would directly compete with energy across PEC and SW NSW. It could erode some of the benefits identified in PEC’s cost-benefit analysis. Even without PEC and the new generation that would connect across it, NSW could still become a more regular exporter, which is a fundamental shift in forecast assumptions for NSW.

PEC represents the first major ISP project to go through the RIT process, and therefore its treatment could set a precedent for other ISP projects moving forward. This could be a particularly risky one, whereby significant cost increases and market developments do not trigger a revaluation of large projects and do not get factored into their cost-benefit analyses. There is currently a rule change with the AEMC, which is looking to address this.

Ultimately, consumers will bear the cost of these significant projects, so there is a need to ensure that regulated assets deliver a robust net benefit. For the market to truly trust and support transmission investment processes, there must be confidence that all factors which could have reasonably been considered are considered. With PEC, there was merit in re-evaluating the market benefits since NSW’s outlook has changed significantly from the updated Cost Benefit Analysis (CBA). The re-evaluation may still have landed on PEC being required. However, what if it does not? Could this potentially be a white elephant?

Only time will tell – however, to keep up to date with how the new transmission projects and new generation will impact market prices, our Benchmark Power Curve can help. This includes sensitivities like the one we ran for PEC in a previous update. Get in touch to find out more.