Australia: Legal challenges for renewables projects due to outdated grid infrastructure

Key takeaways and recommendations

• Grid instability and related issues have recently led to several significant legal disputes. Many of the contracts for these projects provide for confidential resolution of disputes by arbitration, and so have not attracted media attention. 
• Parties seeking to invest in, or contract for, renewables projects in Australia, particularly in the West Murray or affected Queensland zones, should seek legal advice about the best way to protect their interests, having regard to the evolving energy regulatory landscape. 
• In particular, parties should carefully consider contractual terms and conditions relating to delays and extension of time entitlements, performance guarantees, and 'change in law' clauses. 

'Grid instability'—a problem with existing infrastructure

Renewable energy is now a major source of electricity, investment and employment in Australia. By the end of 2019, renewables accounted for nearly a quarter of Australia's total electricity generation, and projects under way or in the pipeline represented some $20.5 billion in investments and 14,500 jobs, according to the Clean Energy Council.¹

However, the limitations of the physical infrastructure that carries electricity from the point of generation (be that a coal mine, a solar farm, or a wind turbine) is jeopardising this important and growing industry. 

Increasingly, these issues are causing legal disputes that project developers, investors, contractors and their lawyers, must be aware of in order to properly manage risk in the market. 

This alert outlines the scope and legal implications of the current grid stability issue; what governments and government bodies are doing in response; and potential solutions for stakeholders when contracting in relation to the development of renewables projects.

Case study: the West Murray Zone

The area in Victoria and NSW bounded by Ballarat, Dederang and Darlington Point is referred to by the Australian Energy Market Operator (AEMO) as the ‘West Murray’ zone. It  has attracted significant investment in solar and wind generation over the last few years.²

There has not, however, been a corresponding investment in grid infrastructure in the area. 

The consequence is that many of these projects are now experiencing delayed approval from AEMO, risk of the reduction (or 'curtailment') of output, substantial loss factors (known as 'marginal loss factors', or 'MLF's) and uncertainty as to when they will be able to connect to the grid, commence commissioning, and begin generating electricity.

On 13 December 2019, AEMO declared a 'system strength gap' in the West Murray zone. This means that AEMO considers the grid is unable to support the amount of 'intermittent' variable generation produced by renewable energy plants. Intermittent variable generation refers to the fact that some types of renewable energy sources can only produce electricity under the right conditions, for instance, when the sun is shining or the wind is blowing. At a large scale, intermittency can put grid stability and power system security at risk. 

The grid's current inability to cope with the level of intermittency that has resulted from the large amount of renewable energy that is now connected to it, has resulted in a range of problems that have both commercial and legal consequences.

Similar system strength issues have also arisen in North Queensland, where in April 2020 AEMO declared a system strength gap and ordered curtailment from two solar farms and one wind farm.³ The nature of the grid in Australia means that declarations in other areas remains a very real risk.

The significance of this issue is made clear in the recent Clean Energy Council estimates that the grid constraints imposed by AEMO on generators in the West Murray zone threaten up to $6.28 billion in investment and more than 5,000 jobs in renewable energy developments in that zone alone.⁴

Significant delays to these projects create additional and ongoing risks to their viability. According to AEMO, these issues stalled progress on 1,700 MW of installed and commissioned generation, about 1,200 MW of committed wind and solar projects in the pre-start-up phase and another 3,000 MW in the application phase in the West Murray zone, alone.⁵

What's being done about this issue?

The following sections outline some of the key responses to this issue. The bottom line for developers, investors, contractors and lawyers, is that these responses each contribute varying levels of uncertainty. This is a dynamic situation that changes constantly, and occasionally, rapidly. Prudent advisors will be live to these issues. 

AEMO

In order to maintain power system security, AEMO has imposed stricter modelling requirements for all new projects in areas impacted by the strength gap issues, has already constrained several existing projects and is delaying its review of prospective projects. The issues being experienced by existing projects now appear to have been largely resolved by technical solutions relating to re-tuning of inverters used on those projects. Such solutions do not however offer long term certainty for investors, developer and contractors looking to take part in future projects in the impacted areas.

AEMO has however also outlined significant infrastructure projects under its draft 2020 Integrated System Plan which include upgrades to various interconnectors as a means of delivering network security. 'Minor' upgrades to existing interconnections between Queensland and NSW, and Victoria and NSW, are expected to be complete in 2021–22 and 2022–23, respectively.⁶ More major infrastructure upgrades, such as the South Australia to NSW interconnector (Project EnergyConnect) and the installation of a new interconnector between Victoria and NSW, are not expected to be completed until the mid-2020s at the earliest.

It is unclear whether the infrastructure upgrades proposed by AEMO will completely address the current issues. However, with greater interconnection and the regulatory focus on network security, the NEM will be favourably positioned to accommodate the connection of more renewable energy projects. 

Developers and contractors looking to develop renewable projects in system strength affected areas need to be aware of the planned infrastructure upgrades (and potential teething issues which may arise in connection with these upgrades, i.e. outage scheduling) as well as any system strength issues. Developers and contractors should factor these issues into their development and commissioning plans and develop strategies to mitigate their impact.

Australian Energy Market Commission (AEMC)

The AEMC is currently undertaking an investigation into the system strength frameworks in the NEM. In its 26 March 2020 discussion paper on that investigation,⁷ the AEMC  acknowledged that the current system strength frameworks, introduced in 2017 require modification in order to support Australia's transition from large synchronous generators (such as coal and gas) towards a large number of distributed non-synchronous generation technologies (such as wind and solar). 

AEMC's investigation, findings and final report are expected to be released by the end of 2020.⁸ These findings are expected to be included as part of the Energy Security Board's  NEM 2025 proposal.

Government

While various Governments have implemented measures to support the growth of renewable energy projects in their respective jurisdictions, only Victoria and New South Wales have taken active steps to address grid instability issues.

The Victorian Government has recently introduced the National Electricity (Victoria) Amendment Act 2020 which gives the Victorian Government more power over the network in that State and provides the Victorian Minister with wide-ranging powers to bypass some of the requirements prescribed by the National Electricity Rules (NER).⁹ In particular, the Minister's new powers include the ability to direct the construction of new transmission lines or upgrades to existing lines. At the same time, the Victorian Government and AEMO have called for expressions of interest to enable an additional import capacity of up to 250MW on the existing interconnector. This reserve of power, likely to be in the form of utility scale storage, would offer a 'plug-and-play' fast frequency response solution that AEMO can call upon to manage system strength and power system security. 

The NSW Government, as part of its broader Energy Strategy, has plans in place deliver three Renewable Energy Zones to the State's Central-West, New England and South-West regions. While these don't currently address the West Murray zone, it is anticipated that the new zones will provide for the coordinated development of new grid infrastructure in areas rich in renewable resources. The NSW Government is in the early stages of feasibility and planning for the first pilot renewable energy zone in the Central-West, expected to commence by 2022. 

What can industry participants do to protect themselves?

Several significant legal disputes have already arisen from system strength and infrastructure inadequacy issues. Many of the contracts for these projects provide for private resolution of disputes by arbitration the disputes, and so have not attracted media attention.

Parties seeking to invest in, or contract for, renewables projects in Australia, particularly in the West Murray or affected Queensland zones, should seek legal advice about the best way to protect their interests with respect to technical and commercial planning, having regard to the evolving energy regulatory landscape.

Some contract features which should be carefully considered in any new contracts are:

1. Risk allocation for delays in construction and commissioning caused by grid instability issues. This can be addressed via the extension of time mechanisms in the contract, and particularly the definitions of 'delay event' and 'compensation event' (or other equivalent terms). In recent years, we have seen a transition towards the parties sharing such risks, with contractors bearing the risk of known or foreseeable issues. 
2. Relief for the effect of instability during commissioning, completion testing and performance testing. Such relief may be in the form of additional time to complete the relevant tests, rights to re-test, a deemed pass of tests where they are unable to be completed within an agreed period of time, adjustment of pass/fail requirements on the occurrence of particular events
3. Relief from performance guarantees, and in particular, an adjustment of any liquidated damages payable for failure to achieve the performance guarantees due to grid instability issues.  
4. The definition of 'change in law', and whether changes to MLF, curtailment, directions of AEMO or a change to the interpretation of the National Electricity Rules by AEMO should be changes in law for which the contractor is granted time and cost relief.  
5. Responsibility for interface with AEMO and connection to the grid. This will largely be dependent on the relationships and experiences each of the parties has with AEMO.
6. Risk allocation for delays in generating electricity (versus delays in construction). 

Parties who have already entered contracts in the West Murray or affected Queensland zones where disputes have arisen should seek legal advice as soon as possible about the most effective way to manage their risk.  

Ultimately, each dispute will depend on the facts of the case. Given the unprecedented position that many investors and contractors are facing, parties have questioned whether the doctrine of frustration of contract may apply in these circumstances. A 'frustrated' contract is a contract that, subsequent to its formation, and without fault of either party, is incapable of being performed due to an unforeseen event (or events), resulting in the obligations under the contract being radically different from those contemplated by the parties to the contract.¹⁰ In order to argue frustration, performing the contract must become impossible, not just delayed. Given some of the comments by AEMO, this may eliminate the ability to pursue frustration as a cause of action in instances of mere delay.

Other possible avenues for relief are extension of time claims for a change in legislation, extension of time claims for a Force Majeure and claims under the Australian Consumer Law (in limited circumstances). Each of these arguments will depend on the facts and the terms of the relevant contracts. 

Although investment in renewable energy remains high, it has fallen from its peak in 2018. This is due to a number of factors, including the current COVID-19 pandemic. Ongoing issues in the West Murray and Queensland regions and grid stability more generally look likely to continue as a significant risk to be considered by stakeholders in the development of renewable energy projects in Australia into the future. 

Baker McKenzie's experts in renewable energy and construction disputes are keenly following these issues and related legal, policy and commercial responses. For assistance with these or other issues, please do not hesitate to contact us. 
 

1 https://www.cleanenergycouncil.org.au/resources/resources-hub/clean-energy-australia-report#:~:text=2019%20snapshot&text=This%20extra%20capacity%20increased%20renewable,generation%20to%2024%20per%20cent.&text=At%20the%20end%20of%202019,and%20more%20than%2014%2C500%20jobs.

2 https://aemo.com.au/en/energy-systems/electricity/national-electricity-market-nem/participate-in-the-market/network-connections/west-murray.

3 For more information concerning the system strength gap in North Queensland, visit the following article: https://reneweconomy.com.au/aemo-declares-system-strength-shortfall-in-queensland-after-wind-solar-curtailed-65525/.

4 https://reneweconomy.com.au/wind-solar-projects-warned-of-seven-year-delays-in-victoria-nsw-36095/.

5 As at 10 February 2020. https://www.afr.com/companies/energy/troubles-escalate-for-renewables-ventures-20200204-p53xk2.

6 https://aemo.com.au/energy-systems/major-publications/integrated-system-plan-isp/2020-integrated-system-plan-isp.

7 https://www.aemc.gov.au/sites/default/files/documents/system_strength_investigation_-_discussion_paper.pdf.

8 https://www.aemc.gov.au/market-reviews-advice/investigation-system-strength-frameworks-nem.

9 https://www.premier.vic.gov.au/victoria-acts-to-secure-a-more-reliable-energy-system/.

10 For further discussion on the doctrine of frustration, see our article: https://www.bakermckenzie.com/en/insight/publications/2020/03/force-majeure-doctrine-of-frustration