Transmission projects in doubt after AEMC rejects revenue rule change

Plans to build a new $2.4 billion transmission line between South Australia and New South Wales have hit a potentially significant hurdle after the market rule maker rejected calls by the project developers to allow for a change of rules government financing arrangements.

Transgrid and ElectraNet had both called on the Australian Energy Market Commission to allow them to accelerate their returns on investment, which they said was essential to their ability to secure debt financing for the project, considered one of the key infrastructure needs for Australia’s shift to 100 per cent renewables.

But in a draft ruling announced on Thursday, the AEMC rejected the proposal, saying it has found no barrier to financing large-scale transmission projects under current energy rules. It said it would keep existing rules in place to “protect consumers from higher up front costs.”

It put those costs at around $6 (six dollars) a year for NSW consumers and $4 (four dollars) a year for South Australia consumers. The AEMC said the benefits from lower wholesale prices as a result of the new links may not be felt until after 2030.

The new link between South Australia and NSW – known as Project EnergyConnect – is considered crucial for up to three gigawatts of new wind, solar and storage projects, most of them in South Australia.

It will not be the only major transmission line affected by the ruling. Transgrid and Elctranet had also sought the changes to help secure finance for new links between Victoria and NSW also considered priorities under the Australian Energy Market Operator’s Integrated System Plan, its 20-year blueprint for a switch to renewables.

“Our draft determinations find nothing in the rules to prevent large transmission projects like those identified in the market operator’s integrated system plan from attracting finance,” AEMC chief executive Benn Barr said in a statement.

“These TransGrid and ElectraNet proposals would cost consumers money and expose them to greater risks.

“Effectively it wants consumers to pay for energy assets as they are being built – like asking motorists to pay tolls on roads before they can be built and used.

“Consumer groups have told us that they are opposed to this, particularly with many families and businesses already stretched by the cost impacts of the COVID pandemic.”

The AEMC said its draft determinations also say the requests would make the regulatory framework more complex, increasing the costs of regulation and reducing incentives for networks to build projects on time.

Both Transgrid and Electranet said they were disappointed with the decision and would seek further talks with the AEMC and other stakeholders to finance the project, which has experienced a blow out in estimated costs from $1.5 billion to $2.4 billion.

The new link is considered essential to South Australia’s plans to reach “net 100 per cent renewables” by 2030, and its longer term plans to use hydrogen and transmission links to reach 500 per cent renewables and become a net exporter to other states and overseas.

“While it is a disappointing outcome, we nevertheless believe these projects are in the best interests of the National Energy Market,” Transgrid’s Paul Italiano said in a statement.

“We will continue to work with AEMC to better understand the basis of its draft decision and explore any opportunities to potentially change the outcome in the final decision. This is only one pathway to deliver these projects and we will work with our stakeholders to explore other ways of implementing the ISP.”

Electranet said it would consider the decision.

“The financeability rule change proposals are about bringing forward the timing of revenue recovery to support the financeability of major projects and importantly, electricity customers were not being asked to pay any more over the life of the project,” a spokesman said in a statement.

“We look forward to working with the AEMC, AER and other stakeholders to further discuss the preliminary decision.”

Dylan McConnell, from the Climate and Energy College in Melbourne, said the AEMC made the right decision and was confident Project EnergyConnect – which has received financial support from the South Australian government – would still go ahead. 

“They were essentially asking to front-load the cost and be paid for it before it was even built,” he said.

“I don’t think (the decision) will change the project  …. the returns are still attractive and very attractive in this low yield debt environment. The AEMC has mainly just said no to rent-seeking – not the project itself.”

The Public Interest Advocacy Centre likewise welcomed the decision to refuse the rule changes, saying the AEMC had avoided approving a rule change that would have ultimately led to higher prices for energy users.

“If this proposal had been accepted, NSW consumers would see bill increases without any benefits,” the Public Interest Advocacy Centre’s head of policy, Craig Memery said.

“The Commission has rightly found there’s nothing stopping transmission businesses from financing large projects now. Australian energy networks continue to be seen as sound investments: if Transgrid or ElectraNet’s current shareholders don’t want to invest in new projects here, they should stand back and let other investors take the lead.”

“The energy system is undergoing a rapid transformation that demands new network infrastructure. This transformation shouldn’t be used as an excuse to lump consumers with the cost of handouts to businesses that don’t result in a cleaner, cheaper or more reliable energy system.”