Gas giant says bundled renewables in Pilbara will unlock billions in growth

APA Group says its $1.7 billion Pilbara renewables acquisition last year will trounce returns of large-scale grid-connected projects, by delivering bespoke electricity bundles of batteries, solar and wind and to big energy users under long term contracts.

“If I contrast it to on the grid renewable power generation, solar farms, wind farms, I think what the market has seen is that the ability as an infrastructure owner to be able to create a lot of value by buying a site and then building a solar farm or wind farm and plugging it into the grid and hoping that sun shines and the wind blows [is] a lot more challenging,” said APA CEO and managing director Adam Watson during the company’s full year results call. 

“The [on-grid projects] I think will make money, will deliver long term value for investors, are either the ones that have been really disciplined in long term contracts with long term PPAs with high credit worthy customers, or the ones who can make extra money by trading the energy with their trading houses.

“We believe we will get better returns [in the Pilbara] as an infrastructure player… because effectively we are partnering with customers with long term arrangements to effectively provide them with a bundle of solutions.

Watson says on-grid success will likely begin to mirror what APA is planning with its Pilbara Energy acquisition, which is that revenue will come from long term power purchase agreements (PPAs) with credit worthy customers. 

Investment in large scale wind, solar and batteries appeared to return to life in the March quarter after a few zombie-like years, when financial commitments hit a three-year high.

Long way to go before Pilbara delivers

APA bought Pilbara Energy from Alinta in 2023 for $1.7 billion, buying a pipeline of “growth opportunities” that it described on Wednesday as being worth $3 billion.

The Port Hedland 35 megawatt (MW) solar and 35 MW / 36.7 MWh battery project for BHP is expected to be finished this year.

In the company’s earnings call today it says the new division contributed $89 million in eight months to the $1.9 billion underlying EBITDA (earnings before interest, tax, depreciation and amortisation).

While Watson and CFO Garrick Rollason declined to specify exactly how the next two years of spending will be divided, the company is planning to devote $1.3 billion of the $1.8 billion in cash dedicated to capital spending to Pilbara decarbonisation. 

The company expects electricity demand in the Pilbara to rise by 40 times between 2024 and 2050 as miners shift from diesel generators and internal combustion vehicles. APA says this is worth about $15 billion.

Watson said having spent some time in the region, the outlook for the Pilbara Energy business is even stronger than when they bought it – a rosy picture for analysts who were concerned about higher debt levels following the acquisition and flat growth in free cash. 

Calling out transmission capacity

APA is also moving into electricity transmission in New South Wales (NSW), with a deal struck last year with EDF that focuses initially on the New England Renewable Energy Zone (REZ).

Watson was not concerned at the slow pace of the launch of the REZs in NSW, and the New England zone in particular. 

“The New England REZ is potentially going a little slower in terms of the starting gun, but we would hope that that’s because the government is doing the work to ensure that when it does start in terms of its procurement process, that they can move quicker than they did on their first process in New South Wales to get them the right outcome,” he said.

However, Watson also cast some shade on Australia’s transmission line builders, raising the question of whether the country has the right talent to get the job done.  

“Is there enough capability? Is there enough capacity in terms of developers in Australia to meet the requirements of the electricity transmission required over the next decade? It’s not an issue of will there be enough opportunities, it’s just how they are rolled out and making sure organisations like us can focus on the ones where we can create value,” he said. 

Transmission is a market that APA estimates to be worth $57 billion in Australia, followed by contracted power at $21 billion, future energy at $21 billion.

In a tacit admission that even though it is expecting significant revenue from delivering gas from new northern sites such as the Beetaloo basin and talking a big game about the future of gas-powered energy generation, the future is not in gas: it puts the addressable market for gas storage and transmission at just $8 billion.