The Australian Energy Market Commission this morning all-but threw out a bid by the EnergyConnect project’s backers – TransGrid and ElectraNet – to be “treated differently under the rules” governing the financing of large-scale transmission projects.
The draft determination throws the financing of the project into disarray, with its backers vowing to explore “other ways” of implementing it – and the Marshall Government refusing to rule out underwriting the cost of up to $2.4 billion.
The project’s proponents had sought “changes to the way they recover revenue for these large capital investments so they can access cashflows from customers sooner”, the AEMC said in a statement.
But the authority determined in a draft decision that there was “no barrier to financing large-scale transmission projects under current energy rules”, opting “to keep existing rules in place to protect consumers from higher up-front costs”.
The decision could have major ramifications for the project’s viability, with TransGrid’s request last September arguing cashflows from the project under the existing rules would be “insufficient” to support adequate debt funding at an “investment grade credit rating”, creating “a significant barrier to securing the funding necessary to proceed with the project and substantially undermining the incentive to invest”.
The business warned it could either see “an uneconomic return to equity investors” or proceed with a “junk” credit rating.
But the AEMC said while the companies had warned the existing rules “will make it difficult for them to attract finance” for the project, it found “the current rules do not prevent these projects attracting finance” – adding that “the changes suggested by TransGrid and ElectraNet would have significant downsides for consumers”.
“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 boss 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 Commission found SA customers would pay an extra $4 a year in the short to medium term under the proposal, with consumers in NSW paying an extra $6 a year.
“Importantly, significant reductions in wholesale electricity prices as a result of Project EnergyConnect are not expected to occur until after 2030,” the AEMC’s statement said.
“This means that consumers now will be paying more for Project EnergyConnect than consumers in the future, despite consumers not receiving the benefits now.”
The decision would also affect other projects including an interconnector between Victoria and HumeLink, connecting Wagga Wagga, Bannaby and Maragle.
SA’s Energy and Mining Minister Dan van Holst Pellekaan told InDaily in a statement that the Marshall Government “welcomes the draft determination of the AEMC and will consider it closely”.
“The AEMC makes it clear this project is important and investible – it’s important that the critical infrastructure needed to secure our grid, drive down electricity prices and accelerate the development of renewable energy is built in a timely and cost-effective manner,” he said.
“Work on Project EnergyConnect is progressing due to the South Australian Government’s early works agreements with TransGrid and ElectraNet to ensure that the swiftest construction schedule is maintained.”
But Opposition spokesman Tom Koutsantonis said the Government “has got to explain now exactly how this is going to be funded”.
“One of the proponents is saying it has a junk credit rating – how’s it going to benefit consumers, when the AEMC say SA and NSW customers would receive no benefit until at least 2030?”
Koutsantonis said the project had gone from a budget of $500 million to $1.5 billion, and now $2.4 billion – “and it’s still rated as junk by its proponents”.
Subject to approvals, the project was expected to be delivered by 2023.
“It’s not going to be built on time – and the Government should rule out underwriting it,” Koutsantonis said.
The minister’s office did not directly answer when asked whether the Government would rule out underwriting the $2.4 billion project, saying only: “The State Government is confident the economics of the project stack up… it’s a crucial project for both states which needs to be built in a timely and cost-effective manner.”
An ElectraNet spokesperson said the company “noted the AEMC’s preliminary decision and we will now take time to consider it in detail”.
“Project EnergyConnect remains an important project for the national electricity grid and a priority project for the Australian Energy Market Operator and federal and state governments,” they said.
“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.
“We look forward to working with the AEMC, Australian Energy Regulator and other stakeholders to further discuss the preliminary decision.”
TransGrid CEO Paul Italiano declared the interim decision “a disappointing outcome”, but said: “We nevertheless believe these projects are in the best interests of the National Energy Market.”
“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,” he said in a statement.
“This is only one pathway to deliver these projects and we will work with our stakeholders to explore other ways of implementing the ISP [Integrated System Plan].”
Premier Steven Marshall said last year the interconnector project would save households “$100 per year on their electricity bills… further easing the cost burden on households and businesses across the state”.
“The interconnector will create hundreds of jobs, unlock billions of dollars worth of investment and deliver cleaner, more reliable and more affordable energy for South Australians,” he said in October.
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