Review your content's performance and reach.

Become your target audience’s go-to resource for today’s hottest topics.

Understand your clients’ strategies and the most pressing issues they are facing.

Keep a step ahead of your key competitors and benchmark against them.

Questions? Please contact [email protected]

A consultation by the Clean Energy Council (CEC) in December 2021 has revealed that developers find the process of connecting to the Australian electricity grid and the technical requirements for doing so are the most significant challenges when developing clean energy projects in Australia. The second and third most challenging factors are also related to grid connection risk.

In line with what is happening in the solar space and our experiences in the renewables sector, it is unsurprising that grid risk presents the greatest challenge for developing clean energy projects in Australia.

The Australian electricity grid is long and thin. There is a real challenge in transitioning from synchronous to inverter-based generation, in the numbers required, to meet state and federal renewable energy targets.

Projects are being curtailed and delayed in connecting to the grid, including well-known solar projects in the West Murray, based around the so-called ‘rhombus of regret’. These projects have faced significant issues connecting to the grid.

Among the projects in which we act for, or our clients are involved, we have seen the following issues:

In the last few years, raw material and inverter costs (such as steel, polysilicon and copper) have all increased in multiples. Currently, supply chain costs related to grid connection are escalating significantly. In addition, changes in the scope of reactive support late in a project’s construction phase are necessary due to grid limitations. However, this is impacting significantly on completion costs.

Contractors are struggling to maintain pricing during the bid phase. They are even less willing to hold a lump sum price for reactive support from the bid until the project is connected to the grid. This translates into risks to internal rates of return (IRR) and profit margins on projects.

Grid risk is now a bankability issue, increasing the cost of capital and, therefore, the viability of projects. Worst of all, grid connection risk is creating significant workflows for lawyers.

Contracts cannot manage all grid risks

Contracts excel at allocating risks between parties. Good contracts clearly state what the risks are, who is responsible for different risks and on what terms. However, allocating risks only limits the amount of risk a party bears and still leaves the risks within the project. While contracts seek to reduce risks through KPI and incentive provisions, these largely remain secondary considerations.

If relied on alone, simple allocations of connection risk in a contract can produce poor outcomes for projects. Below are some examples based on cases we have worked on:

Parties often don’t turn their mind to other unintended outcomes from delayed connection to the electricity grid. For example:

What grid risks can parties try to manage?

If contracts are limited in their ability to sensibly allocate connection risks, can the parties manage those risks themselves?

Regulatory risk commonly refers to the risk that laws and regulations (including their interpretation) change. Developers (and contractors) are generally ‘terms takers’ in relation to regulatory risk and in practice, they have little ability to minimise the effect of these risks.

In relation to regulatory risk, the parties can:

While the parties can attempt to forecast changes in law and anticipate the attitudes towards interpretation from when financial close is achieved, they are limited in their ability to reduce the effects of any such changes.

Energy regulators have an overarching obligation to ensure the electricity grid’s power system is stable. This imperative takes precedence over developers seeking their own stability in terms of development timing and technology requirements.

Ensuring grid stability often results in protracted model approval processes, the introduction of new or expanded reactive power support and staggered connection limits. The time and cost impacts of ensuring connection is generally allocated between the parties.

While the parties can attempt to forecast the changing nature of the grid and ‘future proof’ their projects, this is at the cost of the project and inconsistent with tender processes and efforts to achieve target IRRs.

While contracts can set the price of certain products, the parties are generally ‘price takers’ in relation to volatile global price movements.

In reaction to this, it has become common for the cost of reactive equipment to be provisional sums and to use broader price indexes on commodities, such as those mentioned above, in contracts.

Who is responsible for reducing grid risk?

No one person can reduce grid risk. However, key stakeholders all have a role to play.

If you would like to learn how Lexology can drive your content marketing strategy forward, please email [email protected] .

© Copyright 2006 - 2022 Law Business Research