Déjà vu on transmission project cost blowouts as price of EnergyConnect doubles

The cost of Project EnergyConnect, the interconnector being built between South Australia, Victoria, and New South Wales, has just blown out from $2.28 billion to $4.1 billion.

The recent EnergyConnect Update that disclosed the blowout (for the NSW section) proclaims, bizarrely, that “Transgrid has taken steps to ensure this critical project is delivered in the most prudent and efficient manner … optimising delivery timeframes, minimising costs and maximising long-term benefits to consumers!”

The 900 kilometre (km) long EnergyConnect is split into two sections, each with quite different sagas.

The 200 km South Australian section runs from Robertstown to the NSW border. It was completed by ElectraNet in 2023 on time and within budget ($457 million, approved by the Australian Energy Regulator (AER)).

The 700 km New South Wales section runs from the SA border to Wagga Wagga including a short spur to Red Cliffs (VIC). It is still under construction by Transgrid, with completion delayed to late-2026. 

The Update revealed that Transgrid has re-negotiated the four-year old contract for the NSW section with its Spanish contractor, Elecnor Australia, to a fixed price.

Transgrid has also unilaterally “revised” the budget from $1.82 billion (AER-approved) to $3.6 billion (to avoid confusion the various historical costs have been not been adjusted to real values).

The Update did not mention seeking urgent approval from the AER for the extra $1.78 billion. Apparently Transgrid is assuming that in due course, possibly at project completion, the AER will apply its rubber-stamp and dutifully pass the extra amount on to NSW electricity consumers through higher transmission tariffs, without demanding any contribution from Transgrid for its cost blowouts (two so far).

It will be interesting to hear what the AER thinks of Transgrid’s revision of the AER-approved budget. What sort of precedent does this set if a transmission company can reset a project budget at will?

The Update offered no explanation or apology, just a citing of “unforeseeable factors” such as Covid, labour shortages, inflation, the war in Ukraine, flooding etc. 

In contrast, ElectraNet completed the SA section over a year ago despite facing the same unforeseeable factors.

Surely, if anything like $4.1 billion had been estimated at the outset for providing just 800 megawatts of interstate transmission capacity, the project, as currently designed, would not have progressed beyond the feasibility stage.

A quick recap. 

In 2016 the SA Government announced a feasibility study for a $300 – $700 million interconnector to export surplus renewable energy to NSW that “could drive down power prices”. 

In 2019 ElectraNet/TransGrid submitted Project EnergyConnect to the AER, at an estimated cost of $1.53 billion and a completion date of 2022-2024.

In 2020, after a seven-month assessment process, the AER determined that EnergyConnect satisfied the regulatory investment test. Transgrid commended “the rigorous assessment of the forecast to ensure consumers pay no more than is needed”. 

However, just eight months later further submissions were put to the AER for a 54% increase, mainly for the NSW section, to $2.36 billion and completion by mid-2023. Transgrid claimed “a thorough assessment to ensure the increased cost was prudent and efficient.”

In 2021, after an eight-month assessment process, the AER upped its approval to $2.28 billion, $457 million for ElectraNet and $1.82 billion for Transgrid. That’s a similar amount per kilometre for both sections (ignoring substation costs) – $2.3m/km for SA and $2.6m/km for NSW.

The AER proudly announced shaving $88 million off the submitted amount, “which will reduce the bill impact for consumers … by 4 per cent … helping to ensure consumers pay no more than is needed.”

It was clear that the AER agonised over this increased approval (taking eight months), cautioning that “the net benefits remain finely balanced and there is a significant zone of uncertainty associated with the benefits.”

No doubt the AER was under pressure to approve the increased expenditure by the Australian and SA governments and AEMO. At the time many energy experts contended there was no uncertainty, and that the cost already exceeded the benefits (many of which were questionable).

Transgrid’s latest blowout has rendered the AER’s protracted, ‘thorough’ assessments worthless as well as its $88 million saving for consumers, and also settled the AER’s uncertainty about whether EnergyConnect has a net benefit – it doesn’t. 

No doubt the majority of Transgrid’s revised $3.6 billion budget has already been committed, making a mockery of the regulatory approval process and claims of prudency and looking after the interests of consumers. 

This latest blowout puts the pressure on the AER to protect the interests of consumers this time and require Transgrid to contribute to the blowout. Though it will be far easier to simply pass the extra cost on to consumers, as has been the AER’s practice, rather than have a stoush with Transgrid.

And we should not presume this is the final cost. 

As we have seen with every large energy project (e.g. HumeLink, VNI West, Marinus Link, Snowy 2.0), costs continue to escalate substantially as construction proceeds. 

Also, there is no comfort in the re-negotiated contract being ‘fixed-price’, as Elecnor can simply threaten to return to Spain if not recompensed for its expenditure and profit margin. 

Last year it was reported that Elecnor was walking away from the troubled project, having defaulted on its contractual obligations. In fact, Transgrid engaged a new contractor to complete part of the NSW section. It now seems Elecnor has been persuaded to stay on the job, with a generous financial boost.

This latest blowout has followed the well-established five-stage process being applied by the proponents of major transmission projects:

Stage1: gain government endorsement for a ‘critical’ project based on exaggerated benefits and a ridiculously underestimated cost. 

Stage 2: obtain regulatory approval, after a thorough assessment and a small shaving off the submitted cost, and start construction. 

Stage 3: discover that costs have blown out unforeseeably and re-negotiate the construction contract at a much higher fee to keep the contractor on the job. 

Stage 4: re-emphasise the criticality of the project for the energy transition and get the AER’s rubber-stamp and/or government approval to complete the project. 

Stage 5: repeat Stages 3 and 4 as many times as possible.

Transmission companies have consistently spun the line “there is no transition to renewables without transmission”, and governments, the AER and AEMO have enthusiastically endorsed practically every proposed mega-project, without undertaking proper due diligence.

The beneficiaries of this flawed process are the transmission companies and their contractors, usually foreign-based. The more they build and spend, no matter the amount or the actual benefits, the greater are their profits. All at no risk to the transmission companies, but at the expense of Australian energy consumers. 

Paradoxically, transmission companies have an inherent incentive to maximise the cost of their projects!

When will transmission companies be held to account for woeful cost underestimates, false assurances and poor project delivery? 

When will the AER start performing its role – “the AER exists to ensure consumers are better off now and in the future”?

And when will governments take action to restructure the flawed transmission regulatory approval process and start protecting the interests of consumers from the risks and excessive costs of these over-hyped projects?

Is there any other business in the world where a $1.78 billion budget blowout has no negative consequences for the company, its board, management, or shareholders. 

To the contrary, the extra cost of EnergyConnect (and HumeLink and every other transmission project) results in additional financial returns for the shareholders (largely foreign-based). In the case of EnergyConnect, Transgrid’s profit will now be nearly three times that initially approved by the AER in 2020. 

And it will be NSW electricity consumers providing this windfall over the economic life of the project (30-50 years).

How is this outcome consistent with Transgrid’s claims of prudency, efficiency, minimising costs, and maximising long-term benefits for consumers?

Ted Woodley, former Managing Director of PowerNet, GasNet, EnergyAustralia and China Light & Power Systems (Hong Kong)

https://www.transgrid.com.au/projects-innovation/energyconnect