‘Rewiring the nation’: upgrading Australia’s electricity grid

Out-Law Analysis | 09 Aug 2022 | 8:24 am | 2 min. read

Australia’s Albanese government has pledged to increase the share of renewable energy in the National Electricity Market (NEM) to 82%. It is necessary to update Australia’s electricity grid swiftly and thoroughly.

The government’s 'rewiring the nation' policy will create ample opportunity for private transmission developers. However, there are several significant challenges to modernising the grid.

Increasing the share of energy in the market sourced from renewables creates transmission challenges, some of which have already been experienced in areas of the NEM such as the West Murray Zone. The grid must be expanded to reach wind and solar farms, which are often located in different regions to traditional power plants; and must be able to handle the intermittency of renewable energy generation. The transmission network is expected to become more congested as additional renewable plants are added to the grid.

The Australian Energy Market Operator’s (AEMO) 2022 Integrated System Plan (ISP) suggests that Australia needs over 10,000km of new transmission lines and recommends key transmission projects to prepare the NEM for the energy transition.

A number of transmission projects identified by AEMO are already committed and are expected to come online between 2023 to 2026. A range of other projects have been identified as “actionable” and have estimated completion dates between 2026 and 2030. Additionally, AEMO has identified a range of future projects which will need to be undertaken if the grid’s capacity is to increase to manage the estimated three times the current electricity generation required for Australia’s electrified future.

Buchanan Rob

Rob Buchanan

Partner

Investment in new transmission projects is critical to supporting ongoing investment in renewable energy projects in Australia. It is really the missing piece to support a transition to a renewable energy NEM.

The government’s ‘rewiring the nation’ policy includes A$20 billion of low-cost loans to transmission companies to incentivise the private investment needed to modernise the grid. The Labor party’s modelling estimates that these low-cost loans will attract an additional A$58bn of private investment in transmission.

There will be several challenges to expanding and updating the NEM.

Supply chain constraints

Updating the national electricity grid will increase steel and aluminium consumption in Australia significantly over the next 10 years. At the same time, extensive transmission projects are being contemplated globally, thereby increasing competition for these raw materials. Constraints on the supply of steel, aluminium and other raw materials threaten to delay the project if steps are not taken to secure supply early.

The impact of such shortages have already been seen in relation to timber and other materials for home building during the pandemic.

Skill and labour shortages

With the national unemployment rate falling to 3.5% in the last three months, finding enough skilled labour has become a challenge in the construction market generally.

Even without the current labour shortages, 'rewiring the nation' would require significant labour up-skilling because an electricity grid update of this scale has never been completed in Australia. Recent experiences on mega-projects in Australia have shown that an appropriately skilled management team and general workforce is critical to a project’s success. A shortage of skilled labour could significantly delay updates to the national electricity grid.

Social licence

To 'rewire the nation' fairly and responsibly, the government must consult and support Indigenous and regional landholders to minimise landholder opposition.

The government must consult Indigenous and regional landholders early in the transmission planning process, before finalising a proposed alignment, and fairly compensate landholders for hosting infrastructure on their land.

Given the extensive land required for the scale of transmission line projects contemplated by 'rewiring the nation', this “social” licence represents a particular risk. However, ongoing engagement with local communities also offers an opportunity for government to positively contribute to the future of regional communities

Managing contractor risk

Australia is unique in its approach to contracting for the development of transmission projects in that contractors are typically asked to take a greater role in managing project risks.

This includes requiring contractors to be responsible for site conditions, supply chain delays, material cost rise and fall, and design development. This, combined with the current conditions in the general construction market, creates a greater risk of cost blow outs, disputes and contractor insolvency.

Developers of transmission line projects will need to consider whether a more balanced contractual risk profile ultimately offers better value for money and lower overall project risks. Alliance or other alternative contracting models may also need to be considered.

Co-written by Patrick Hart of Pinsent Masons.