In today's AFR

Cost woes hit $2.3b energy line

Jenny Wiggins and Angela Macdonald-Smith

SA project is critical to next wave of renewables

The $2.3 billion EnergyConnect project, a critical high-voltage line connecting renewables projects in South Australia to the national power grid, has been hit by cost blowouts, delays and payment defaults.

The problems plaguing the cornerstone project have contributed to €70 million ($112.5 million) of losses for Spanish contractor Elecnor Group, adding to major delays at other projects that are critical to Australia’s energy transition, including the $12 billion Snowy 2.0.

Elecnor, which took over the project when South African-owned contractor Clough Group collapsed in 2022, has delayed paying its bills for about a year, suppliers say.

The first major new transmission line to be built for about 15 years, the cable is expected to allow more than 2 gigawatts of wind, solar and battery projects to connect into the grid, involving up to $10 billion in investment.

‘‘The project is well over the original cost estimate and then saw delays in construction and commissioning,’’ said Grattan Institute energy program director Tony Wood, noting that it took ‘‘a surprisingly long time’’ to bring transmission lines fully online.

A credit check shows two payment defaults have been registered in the past few months. Brooks Hire Service, which supplies equipment, registered a default in May for an invoice worth $224,662 due in December last year, and industrial recruiter Employment Group registered a default in April for an invoice worth $335,397 that was due in March this year.

The project is intended to reduce the risk of South Australia being ‘‘islanded’’ when its existing connection to the national power grid, via Victoria, is lost, making the state’s renewables-heavy power system vulnerable to blackouts and price spikes.

South Australia has been isolated from the national grid on many occasions, most recently in 2022, 2020, 2019 and 2018; in September 2016 the whole state went dark in a ‘‘black system’’ event, affecting 850,000 customers.

Elecnor Australia has had 248 credit inquiries in the past 12 months. The inquiries have surged in the past six months, particularly in May and last month, according to Creditor Watch, whose C3 risk rating reflects a view that suppliers should ‘‘trade with caution’’.

The 2023 financial results of Elecnor’s Spanish parent, Elecnor Servicios y Proyectos S.A.U, show that Australia was the second-biggest source of revenue from the group by geographical region after Spain.

However, the company, which is listed on the Madrid Stock Exchange, reported in its results for last year that it was taking €69.5 million of losses in Australia – its heaviest losses of any country anywhere in the world.

In its 2023 annual report, Elecnor Servicios blamed ‘‘execution delays on the back of COVID-19 and the global economic instability unleashed by the disproportionate rise in raw material prices, labour and logistics expenses and local overheads as a result of spiralling inflation’’ for negative profit margins in Australia.

‘‘With the customer’s collaboration, we are together seeking solutions to keep these projects – which are of strategic importance for Australia – afloat,’’ Elecnor Servicios said in the report. ‘‘We are confident that these joint endeavours will result in a reversal of the situation estimated at 2024.’’

Michael Wright, national secretary of the Electrical Trades Union, said the union had been hearing repeated rumours since mid-last year that the scale of losses on EnergyConnect had been ‘‘threatening the viability of the mothership [Elecnor Servicios].’’

The Electrical Trades Union, which has a couple of hundred union members working on EnergyConnect, claims there have been many safety issues on the project, and last year raised concerns that none of the structures on the first of four transmission lines to be installed by Elecnor were properly earthed by qualified electrical workers.

The cost of the project was originally put at $1 billion in 2019, rising to $1.53 billion in 2020. By May 2021, when Transgrid and ElectraNet committed to building it, the cost was up at $2.3 billion. Only a last-resort $295 million debt deal with the Clean Energy Finance Corporation got the project over the line.

Mr Wood said he understood that the July 2027 date for full start-up was on track, and noted that disputes over costs with contractors were ‘‘not uncommon when delays occur that lead to claims and counter-claims’’. The timeline has changed many times since the project was first envisaged.

Labour arrangements on the project have also been controversial, with a fully-owned subsidiary of Elecnor Australia, Green Light Contractors, arranging a labour migration agreement with the federal government in July last year that lasts five years.

The agreement allows Elecnor to bring in hundreds of workers from the Philippines. Transgrid confirmed that about 200 international transmission construction workers and technicians were currently working on EnergyConnect, employed directly through Elecnor.

The rates of pay for workers entering Australia on the labour migration agreement were initially $39 per hour, according to the Electrical Trades Union, which says other workers on the project are paid $52-$55 per hour.

Elecnor declined to answer questions on the project’s delays and costs. ‘‘Elecnor like Transgrid remains committed to the success of this nation-critical project,’’ a spokeswoman said. ‘‘Elecnor maintains a strong working relationship with Transgrid.’’

Transgrid, which is owned by a consortium of infrastructure and pension funds after being privatised in 2015, has acknowledged the delays but declined to comment on reports of tensions and cost disputes with Elecnor, instead re-emphasising the pair’s commitment to delivering the project.

A Transgrid spokesman said the company ‘‘has and continues to make all of its contractual payments to Elecnor Australia’’ and ‘‘continues to engage’’ with Elecnor to ensure subcontractors and suppliers were paid on time.

The venture has long been deemed by the Australian Energy Market Operator as one of the cornerstone projects for the transformation of the national power grid over this decade, to handle rising renewable energy volumes and the decline of coal power stations.