Nearing Net Zero: Unlocking Australia’s renewable energy zones

Elena Lambros
Hello and welcome to ESG Matters by Ashurst Perkins Coie. My name is Elena Lambros, and I'm a risk advisory partner based in Brisbane.

You're listening to a special audio podcast taken from our regular Nearing Net Zero video mini-series. In this episode, we discussed renewable energy zones, often referred to as “REZs”, and we went deep – covering everything from data centres to generation to transmission lines to community engagement and everything in between.

Joining us for this episode was our Sydney Risk Advisory colleague, Luke Horton. Luke has more than 25 years of experience across the infrastructure and energy sectors. And of course, we had my regular co-host for Nearing Net Zero, Dan Brown, as well. Dan is our global co-leader for the energy and infrastructure industry here at Ashurst Perkins Coie.

Let's join the discussion with Dan setting the scene…

Dan Brown
I think it's fantastic having you with us, Luke, particularly given the role that you played historically in helping to shape those the concession models around some of the renewable energy zones that we've seen rolled out in Australia.

And you know when I pull back to 100,000 feet: on paper, I think a REZ is an amazing way to unlock generation and to really help propel us closer to the net zero journey that we as a nation are heading towards, particularly as it relates to renewables. But it feels like the actual implementation and application of those concepts hasn't gone as well as perhaps others might have thought it could.
I’d, love your thoughts on that ecosystem and what your observations are?

Luke Houghton
Sure, I mean I think you need to think about it in in two parts: There's the wires themselves – the transmission lines – and I think yeah that's moving along fairly well. It's been financed, it's been closed, construction starting.

I think there are questions around generators and generation connectivity and the certainty that they're looking for to get access into these assets. So it's not just the access itself; it's around long-term pricing. So if you're looking for a 20–30 year access agreement, how do you forward project that pricing? What does it mean for capacity as more and more generators come online? And what that does for constraints?

So I think you've got to think about it in two parts: transmission and generation. I would say, at the moment, transmission's going pretty well, but there's some uncertainty around generation.

Dan Brown
Yeah, and what are the key parts of that uncertainty? Because I guess just listening to you talk then, and as someone who advises lots of generators on the development of their projects, I imagine it's hard to find a bankable solution when there isn't perhaps clarity around well, what are the costs of access going to be for the life of this asset? And how do we factor that into our financial models when we're wanting to develop our projects? Is that part of the concern?

Luke Houghton
I think that's part of it. So, there's not a shortage of capital at the moment. There are liquidity issues potentially in the market. So separating out capital and liquidity.

But there is capital for good projects. But for long-term investors, they want long-term certainty. You know, certainty around pricing. They want certainty around access. They want certainty around costs in that initial construction period, which is proving pretty hard in a high inflation, high escalation environment. So I think certainty around tax. The tax regime at the moment is a bit fluid here in Australia.
So I think if you're boiling it down to what investors are looking for, it's certainty around a number of things. There's not a shortage of demand. We all know that we need plenty of electricity going into the future, and that only seems to be going one way based on uptake of EVs (electric vehicles) and data centres and just the general requirements. So it's not a demand issue. Getting bankability. It's around long-term assets, inflation, long-term revenue certainty, and in fact even site identification and making sure that the site is suitable for things like contamination and remediation.
They're big issues that need to be dealt with in that that DD (due diligence) process, which all add time and cost.

Dan Brown
Yes and I'd really love to get your insights, you know, given all the work you've done around the commercial and financial modelling for our first REZ here in New South Wales, I'd love to get your thoughts on – with the value of hindsight – what you could do differently.

But before we go there, some of the observations that I've heard in conversations in the market, and when people look at the time and the overall cost it took to get the first REZ away. From multiple bidders, advisory fees for multiple bidders, the duration it took to actually start to implement [and] to run the process, you know, to reach financial close. Some compare and contrast. Let's look at Queensland, my home state. You've got a monopoly provider in terms of PowerLink. They can ultimately just go and build something faster and potentially a better cost outcome. What are your thoughts around that piece? There's always going to be detractors, but what are your thoughts around that?

Luke Houghton
I think hindsight's always easy. If I think about the Central West Orana REZ, a number of quite remarkable things happened there in terms of actually the time it was delivered. You know, that was the legislation was relatively new – in two years from “go to whoa”, you had a concept to a project being closed. That's kind of remarkably fast in “New South Wales government speak”.

But you contrast that with other models where you have a monopoly provider, and you could argue “yes that that's not that efficient”. If you're saying you've got a competitive environment, then I think the process run by EnergyCo in New South Wales was generally pretty good, but there were some lessons learned that are being implemented in something like the Hunter New England, and I think the biggest change there is the DFE (Development Finance Entity), which is basically separating out the non-transmission assets (so the biodiversity offsets, the land, and things like that) and taking them out of the network operator financing package and putting that into a sort of non-abatable, more vanilla financing package that is very attractive to long-term investors because there's no operational risk.
They're really just carrying some of the size risk of how much is going to go in there because it covers the contingency for the project. So I think that's a really great innovation on Central West Orana.
I think the liquidity in the market, as these projects get bigger and bigger, is going to become more of an issue. So, to what extent you're looking at pre-commitments and underwriters for financing packages is probably something we need to look at in the future, as well as when you think about the other projects that are coming online, like potentially offshore wind in Victoria, etc.

There is a finite amount of financial capacity in the market. So, how we think about getting certainty on the funding and “financeability” of these projects from a government perspective when they go out to bid, versus what the market can provide is going to be really interesting. And I think we'll see a lot more foreign debt coming into the market – things like export credit facilities coming into the market. So I think the structure of these packages, over time, is going to change in the Australian landscape pretty dramatically.

Elena Lambros
Yes, and one of the things that you mentioned earlier, you kind of touched on like the site selection, and then we're thinking through all of the different challenges that there might be in place. And previously on the video series, we've spoken about community opposition, social license, that type of thing. Is there a difference in the way that people can get a project up to market quickly on a greenfield site versus a brownfield site? Does it address any of those risks more easily?

Luke Houghton
I think it really depends on the community that you're building it in. I don't I don't think there's a hard and fast rule on that. I think you know a brownfield site – so if you took a “mothballed” coal fire power station that's now going to be converted, and data centers will be put there. Well, that power station was always there, so the community was comfortable with that.

But we're starting to see some opposition to things like data centers coming up because people don't understand it. [For the] greenfield site on CWO (Central West Orana), community stakeholder engagement was really important, and in some areas it was highly contentious. Even though it was greenfield, and in other communities, less so. So I don't think there's a hard and fast rule on brownfield versus greenfield. I think the backing of community self-interest is always going to be pretty important there, and understanding what's driving that. And people typically don't like change in their own backyard.

Elena Lambros
That's definitely playing out a number of times. Yes.

Dan Brown
Yes, and it's been something that we've spoken about quite a lot, on Nearing Net Zero, is around that that opposition piece.

One of the one of the last things, Luke, I'd love to get an understanding from you on is, as the “architect” in some respects of CWO in the commercial and financial model that underpinned that. Do you see an application of that regulated concession or a modification of that working in other jurisdictions outside of Australia? And (I guess It's a leading question) we've spoken before about a lot of stuff happening in transmission in the US, but there are other jurisdictions … is that something that could apply in those markets?

Luke Houghton
I think it has lots of application in other markets, but also in other industries. So if you looked at other industries like water, where there is a high capital expenditure required for an essential service, I think it has real applicability there.

But I also think it has applicability in other countries. If you think about what the regulated concession model is trying to do, it's about bringing the best of private sector finance with consumer certainty and the regulated model, and having long-term terminal values to try to improve consumer affordability. So I think if you are looking at countries where consumer affordability, capital constraints, and essential services are in play, then that model can work, and that I think that really applies well to power [and] water in particular.

Dan Brown
Yes we need to get you back to talk about the water piece because I think that's an amazing opportunity to really dive into how a model like that can unlock the delivery of much needed infrastructure. And we're seeing it play out here in Oz, in my experience, where we go “from feast to famine”. Right? There's a drought. We say “there's no water” and then we have flooding rains, and we've got too much water. But how do we create a model that allows the private sector to invest in the core infrastructure that helps ameliorate that feast or famine? I think that's definitely something we should be talking to you about.

Luke Houghton
Love to chat about it.

Dan Brown
Yes thanks.

Elena Lambros
Thank you for listening to this episode of ESG Matters by Ashurst Perkins Coie. If you enjoyed today's discussion, you can catch future episodes of Nearing Net Zero on video, via YouTube, or on audio wherever you get your podcasts. And however you're watching or listening, please feel free to leave a comment, question, or a review. We'd love to hear from you. Finally, to learn all about Ashurst Perkins Coie podcasts, visit ashurstperkins coie.com/podcasts.

In the meantime, thanks again for listening, and goodbye for now.