New generator development in the National Electricity Market (NEM) is extremely complex. However, with a tailored approach and the right planning and expertise, developers can avoid significant project delays and/or additional costs in the connection process.
The key complexities and challenges to be considered by new generation developers in today’s market include:
- seemingly never-ending rule changes;
- navigating the competitive PPA market;
- competing for ever diminishing network capacity;
- wading through the minefield that is negotiating generator performance standards,
- constantly changing energy demand;
- ongoing policy uncertainty from the federal and state governments
- lack of clear investment triggers;
- understanding constraint equations and marginal loss factors and their impacts on generation dispatch;
- integration of rapidly developing technologies such as battery storage;
- resources at networks and AEMO being stretched to meet demand of the volume of new generation projects being developed; and
- appreciating and dealing with emerging technical issues like weak system strength with its causer pays arrangements for mitigation impacting on tight development budgets.
With these obstacles breathing down the neck of developers, successful new generation project development can appear an extremely daunting task.
Despite the plethora of challenges to balance in developing generation projects in the NEM, the area often cited by developers as the most complex and risky element of developing a new generation project is the grid connection process. Grid connection in the NEM can be extremely complex without the required knowledge and experience. Recently in the NEM, an underappreciation of these complexities and the level of focus required has resulted in significant delays to energisation of several projects and cost/revenue impacts. Network connection risks have seen energisation delayed; generation stuck at low hold points as well as losses/constraints biting. The flow-on financial impacts to developers, asset owners and even contractors has been dire.
Like with any complex process, it is crucial to involve an appropriate level of experience and expertise in managing the grid connection process. Projects with more focused network connection planning and strategy tend to find an easier path to connection. As someone who has been involved in grid connections of new generation developments for over a decade, I have often been surprised at how under prepared many generation developers are to tackle the grid connection process. It seems commonplace to employ experts to lead the complex project streams of legal, PPA negotiations, EPC contact negotiations and land access requirements. Strangely though, just as common seemed developers’ expectations that the grid connection would look after itself, with little focus and almost as an afterthought once other key project milestones are locked away. It isn’t uncommon for developers to have spent months planning a development, then engage for the first time with the network to be told their project (as planned) has several network connection challenges. Often at this point the developer has made considerable commitments on the project which can lead to a decision to push ahead despite the network connection issues.
While the traps and considerations for managing a successful grid connection process are numerous and detail around these are outside of the scope of this article, there are some simple traps that are very easily avoided with just a little careful planning and thought. The following are some of those traps that, while they might seem obvious, are mistakes that have been, and continue to be made by new grid connected generation developers.
1. Don’t treat networks like the enemy
When working in a network business, too often I would see developers treat the networks like the enemy. It seemed only by defeating the network can the developer ‘win’. This approach no doubt came about because working with a monopoly network was a necessary evil. Network connections were considered a grudge purchase where the developer had to pay the network a whole heap of money for the connection with no ability to choose a preferred provider. Networks might be a monopoly, and developers might have little choice to work with them, however network monopolies are a double-edged sword. You might have no choice, but neither do they. The National Electricity Rules (NER) mandate networks are to work with all new connections, no matter how blue-sky a project might seem, no matter whether they think the project has a low probability of succeeding. Networks are obligated to work with all comers. This all takes time, effort and brain power. So, with that in mind, it is critical to work closely and collaboratively with the incumbent Network Service Provider (NSP). Treating networks as a critical part of the project team will go a long way to achieving a successful development. And remember, the people inside the networks may have significant experience in new connections and can be a great source of knowledge for developers. Treat them like a true project partner.
2. Early Network Engagement
Further to treating networks like a partner in your project, it is crucial to engage with the incumbent NSP as early as possible. It isn’t uncommon for developers to leave network engagement (and engagement with other stakeholders for that matter) far too late in the development process. They would then impose unreasonable expectations on the network in terms of supporting an aggressive development schedule. Yes networks might charge for their time when they get into the detail of processing connection enquiries applications (because remember they have to deal with developers, so it’s not unreasonable that they charge for their effort) and this might be partly to blame for reservations in engaging with them. Often though you can grab them for a friendly coffee, give them an intro to you project and ask for some friendly advice, at no cost. At worst this early engagement would be at a relatively low cost considering the value that early engagement can provide. Understanding the network connection risks early will give you time to manage/mitigate them. Likewise understanding the timeframes for processing the network connection can assist you to build a more realistic project schedule, aligning the network connection to your key project milestones. This all helps to manage expectations and reduce surprises.
3. Avoid the 10/50 Rule (10% Cost, 50% effort)
As a general rule, connections costs account for up to 10% of a development capex budget. Managing the connection process itself however can take up to 50% of a developer’s time and effort. This level of effort is disproportionate to the representative value of the network connection. Typically, this significant amount of time invested in the connection process is due to getting the process wrong or starting it too late. Without a clear strategy to navigate the connection process, things do and will go wrong and developers will fall into the trap of having to spend considerable effort to recover the network connection process. By limping through a connection process without enough planning and thought, it is almost guaranteed that this complex process will create a significant distraction for the development team. This distraction comes at a high cost for the project as higher value project streams may be neglected by the developer. Imagine if more time could be channelled into the EPC negotiation and contract management, where saving of a few % in EPC capex can often account for more than the total value of the network connection. Likewise focusing effort on reducing EPC risk or identifying efficiencies in EPC timeframes is where project resources are better focused. In contrast, achieving a small % in savings on the connection process, will deliver only a small fraction of a % in overall project savings and the time delays in achieving these savings could quickly swamp any savings. Executing the correct network connection strategy can often find savings or efficiencies in the network connection without compromising the greater project outcomes.
4. Land is cheap – Well, a lot cheaper than building transmission lines
While a great price on a parcel of land for a development may seem too good to be true, the reality, as is often the case, it probably is. You wouldn’t believe the times I have heard from a developer their father’s, cousin’s, best mate’s sister has a paddock in the middle of nowhere that they have managed to get cheap land and so thought to themselves “I think I will plonk a renewable energy project here”. Great idea, but how far away is the network? You need a network to connect large scale generation. Often in Australia, great plots of land with good wind or solar resource are miles away from the network, and perhaps even further away from any network with decent capacity. Don’t get caught out by low cost land because building expensive transmission lines back to the network or local network reinforcements will quickly swamp any savings you might make on land acquisition. I should point out that by no means am I a land acquisition expert, however I’m aware the cost of rural land is a lot cheaper than transmission costs. Get a map of the NEM transmission lines and substations and find a spot as close to those assets as possible because projects requiring significant transmission line components have rarely been successful. But be careful because the transmission network will need to have suitable spare capacity and system strength at your proposed point of connection. Just because there is a transmission line running across your paddock doesn’t mean you have a cheap connection. I have seen developers having to ignore the nearby transmission line and build a multi km new transmission line to another part of the network where there is capacity. A surprise for the developer at the time which the network could have easily helped to identify with early engagement.
5. Negotiation of connection agreement terms.
Remember when I said monopolies are a two-way street meaning the incumbent, monopoly NSPs also are forced to deal with the developers? It’s because of this fact that NSPs will often only accept terms in connection agreements which are heavily weighted in their favour. For this reason, it’s important not to die in the ditch over relatively minor commercial terms in connection agreements. Time and time again I saw developers arguing a commercial term on and off for months, that ultimately would have very little practical impact and a monopoly NSP would never have budged on anyway. Meanwhile, weeks or months have passed, and the connection of the project is delayed. In line with the 10/50 rule mentioned earlier, this is the low value area of your connection, so get on with it and don’t let this process drain the brain power and time of the development team. It is critical to work out what is worth negotiating, and what isn’t. NSPs might move on some things, and won’t move on others, period. It is sound practice to challenge unfavourable connection agreement terms, but it’s critical to understand what’s worth chasing and what isn’t. This might sound like simple negotiation 101, but it’s not always evident. And at the end of the day, while contractual terms proposed by the NSPs might not be ideal, there are very few connected assets that have been significantly impacted by unfavourable commercial terms.
As I have hopefully made clear, new generator development in the NEM is extremely challenging and grid connections specifically are one of the more complex and risky project development areas. Successful developers are those that acknowledge the difficulties in successfully leading a network connection work stream and appoint specialised personnel with the required level of expertise to plan and execute a robust network connection strategy. This in turn frees up project development resources to deal with the other higher value/ higher risk development areas. Despite the difficulties associated with grid connections however, these simple and quick wins can be realised with some simple planning and thought. Considering these quick wins before and during the project development process will go a long way to achieving a successful network connection, and hopefully, a successful generation development.