The causes of the “contract failure” that has blighted delivery of a critical new transmission link between South Australia and New South Wales have been detailed in documents shared by the Australian Energy Regulator, as it weighs up whether or not consumers should foot the higher bill for the project.
Project EnergyConnect is a 900 km transmission link connecting South Australia and NSW and Victoria that is considered “nation-critical” for its role unlocking up to 3.5 gigawatts of new renewables capacity in south-west NSW, and to help South Australia get to 100 per cent net renewables by 2027.
The 206 km portion of the project in South Australia was completed in December 2023, by ElectraNet, on time and on budget.
But, the NSW side – a 700 km line from the border to Wagga Wagga and two new substations at Buronga and Dinawan – has faced a series of issues that have blown out total project costs from $1.8 billion to $3.6 billion and delayed delivery.
Such has been the extent of the cost blowouts that network giant Transgrid, which is behind the NSW part of the project, last month applied to the AER for a re-do of its 2023-28 revenue determination, to recover an extra $1.1 billion of $1.5 billion in costs.
It says these have been caused by what it describes as a “contract failure” with the project’s engineering, procurement and construction partner.
In an update published late last week, the AER launched consultation on Transgrid’s request, that if approved would see an increase of $173 million in revenue to be recovered from consumers in 2027-28 – pushing up residential customer bills by an estimated $18 for that financial year.
The AER has also published the full 38-page application from Transgrid, which reveals some candid details of what transpired between the network company and its “competitively procured” contractor, Secure Energy Joint Venture (SEJV), to cause the huge new cost blowout.
As the application notes, in order for the AER to approve the additional costs, Transgrid needs to convince the regulator that the contract failure must not have been reasonably foreseeable by the network company or within its reasonable control.
This is a topic of hot debate, with industry observers and analysts including Green Energy Markets’ Tristan Edis, arguing that management of construction risks associated with building huge new transmission lines should be one of Transgrid’s core capabilities.
In its 38-page application, however, Transgrid argues that the contract failure and issues leading up to it were “entirely outside” of its control and not foreseeable.
“This application is necessary because significant external factors outside Transgrid’s control impacted the contractor’s ability to deliver the project in accordance with the competitively determined contractual terms and conditions,” Transgrid CEO Brett Redman says in a cover letter.
“These factors included floods in New South Wales, labour shortages, project delays and hyper-inflation, all of which combined to severely impact the contractor.”
The application details how, following what Transgrid describes as a transparent and competitive procurement process over 2019 and 2020, and the execution of an EPC contract in June 2021, things did not go to plan for the contractor, SEJV – a 50/50 partnership between Clough and Elecnor.
“Significant challenges affected project delivery which combined in such a way as to severely affect the financial capacity of the contractor to deliver [Project EnergyConncet] in accordance with that contract,” is says.
Transgrid says each of these challenges were “external events that were outside Transgrid’s control,” including the “major flooding events” that hit NSW in 2022 and 2023, causing “significant site access issues, damaged works, and delayed material deliveries.”
Transgrid also points to the impact on the project of labour shortages, which it says have been a persistent issue for the construction sector since the Covid-19 pandemic, “with many migrant workers opting to return to their home countries, fewer young people entering the … industry … and the surging demand for labour.”
Thanks to these two factors, Transgrid says, actual productivity fell short of the expected performance levels, resulting in additional costs and an extension of the construction schedule.
Added to the mix was the “unprecedented inflationary pressures” that drove up cost of materials, labour, and logistics, peaking in 2022 and remaining elevated in 2023 and into 2024.
“As a consequence, the cost impact of a longer project timeframe was further impacted by much less favourable market conditions, adding to the future costs of delivering the project,” the documents say.
“Not only were these factors external to Transgrid and beyond Transgrid’s control, as the project owner under an EPC contract Transgrid had no visibility of how these challenges were impacting the financial position of the contractor.
“In particular, Transgrid had no role in the commercial decisions taken by SEJV to manage its financial exposure to the multitude of external factors that may impact the project financially.”
Transgrid also points to the insolvency of Clough, in December 2022, as resulting in a significant loss of management systems and information, including actual rates of production, that affected the contractor’s ability to accurately forecast the costs of completing Project EnergyConnect.
“These gaps were only fully addressed by mid-2024, which made it difficult for Elecnor Australia to assess the full extent of the financial challenges facing the project,” the application says.
Transgrid says that by the time the accumulation of these “adverse circumstances” became apparent to its board in the second half of 2023, SEJV faced “such significant financial losses” that the project could not be delivered under the terms of the former contract.
At that stage, the company faced a choice between engaging an alternative contractor or to draft a new contract with the existing JV. It decided on the latter as the least-cost way forward.
“Transgrid formed the view that a decision by Elecnor Australia to walk away from the project would be contrary to consumers’ interests as it would lead to extensive project delays and increased costs,” the documents say.
“Instead, Transgrid acted promptly to maintain project continuity to maximise the potential options to address the Contract Failure and achieve the best outcome for consumers.
“In taking action to address Contract Failure, Transgrid has consistently acted in consumers’ best interests, despite the uncertainty and costs in doing so,” the documents say.
“Even after allowing for the financial relief provided by this Application, we estimate that shareholders will face losses in the region of $130 million, through a combination of increased financing costs and potential penalties that may apply under the AER’s Capital Expenditure Sharing Scheme (CESS).
“Furthermore, Transgrid’s Board (with the support of the shareholders) committed to the increased project costs of delivering PEC without first seeking assurance from the AER in relation to the cost recovery arrangements.
“Transgrid’s Board and shareholders adopted that approach because to do otherwise would have led to avoidable delays in the project, higher project costs and appreciably reduced net benefits for consumers.”
The AER is inviting stakeholders to assist in its assessment of Transgrid’s application by making submissions by close of business on April 28, 2026.
The regulator is required to make a decision within 40 business days of receiving the application from Transgrid, but notes that there are extension provisions that can be applied, subject to the complexity of the proposal and whether further information is required to assess the application.
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