The pipeline of renewable energy projects in Australia continues to increase in the wake of the Federal Government’s commitment to achieve net zero emissions by 2050. However, there remain numerous headwinds impacting the delivery of these projects. Some of these hurdles affect construction and infrastructure projects generally, while others pose challenges for renewables projects in particular.

We examine each of the key challenges below, including how industry is responding to them.

Labour and supply chain

A strong pipeline of construction and infrastructure projects has increased demand for labour across Australia. This increase in demand is being felt acutely in the renewables sector. In its ‘Downscaling – Employment Impacts’ Report (April 2023), Net Zero Australia highlights the need for a five-fold increase in the energy workforce by 2035 in order to decarbonise Australia’s domestic energy system and identified that up to 75% of new jobs will be in regional or remote areas.

The challenges posed by this increased demand for labour are exacerbated by the ongoing decline in labour productivity. As the Queensland Major Contractor’s Association stated in its report ‘Queensland Major Projects Pipeline 2023’, the average output for a worker in Queensland has decreased from $679,000 per year in 2011-2015 to $276,000 per year in 2016-2020.

To overcome these challenges, industry recognises that it will be critical to attract more workers to the construction sector, and that the training and retention of these workers will be key to reversing the downward trend in productivity.

Compounding these labour-related problems are global supply chain pressures. Since the advent of COVID-19, we have witnessed a significant increase in the cost of construction materials as well as longer lead times and logistics delays in relation to procurement, which have negatively impacted project completion dates. In 2021 alone, the prices of wind turbines and PV modules increased by between 10% to 25% (depending on location). While these supply chain issues are beginning to settle, there is still a long way to go.

Commercial response

Currently, project proponents and contractors are left to deal with these labour and supply chain issues in their contracting arrangements. We’re seeing the provision for early procurement of materials and equipment that are particularly susceptible to price escalation or supply chain disruptions becoming more commonplace in contracting arrangements. In addition, construction contracts are increasingly providing for ‘rise and fall’ or similar mechanisms to address cost escalation risks, meaning project developers are having to accept lower levels of cost certainty at the outset of a project than in the past.

However, there is a limit to this re-balancing of contracting risk, particularly given the heavy reliance of the renewables sector on project financing. While proponents of other infrastructure projects (particularly in the public sector) have demonstrated an increased willingness to enter ‘collaborative contracting’ arrangements (which place a premium on the sharing of risks between principals and contractors and the use of ‘carrots’ rather than ‘sticks’), lenders are still generally uncomfortable with such arrangements from a project financing perspective. If the labour and supply chain challenges discussed above are not able to be resolved, proponents of renewables projects may find it increasingly difficult to attract contractors willing to deliver their projects given more favourable contracting arrangements available on other infrastructure projects.

Grid connection

Connecting to the electricity grid remains a longstanding challenge for the delivery of renewables projects. As more renewable energy projects seek to connect to the grid, the risk of grid instability has significantly increased. The connection approvals process, regulated by the National Electricity Rules (NER), is critical in managing this risk. Unfortunately, this approvals process has to date lacked transparency and been subject to substantial delays.

This has caused significant uncertainty for the delivery of renewables projects, with connection delays having stalled some projects for years and forced some developers and contractors to leave the Australian market entirely.

Commercial response

These challenges are widely recognised and steps are being taken to address them, including by making the approvals framework more transparent and streamlined and developing better grid stabilisation technologies. The introduction of an increasing number of battery energy storage systems (BESS) into the grid is also anticipated to perform an important stabilising function.

However, in the short term, project proponents and contractors are left to allocate these risks contractually. While grid connection risks were historically pushed down to the delivery contractor to manage, this approach is no longer commercially tenable (particularly in the current market). Project proponents are having to accept a greater share of grid connection risk than in the past. That said, there is no ‘industry standard’ position with respect to the allocation of this risk, with the contractor’s entitlements to time (and cost) relief for grid connection delays often being hotly negotiated between project proponents, contractors and lenders alike.

Insurance

The procurement of insurance for the delivery of infrastructure projects continues to become more problematic. This is no less the case for renewables projects, which often attract higher premiums (and increased exclusions) due to the natural disaster risks associated with development sites and the ‘less mature’ nature of some renewables technologies.

Commercial response

In extreme cases where insurance is unable to be procured on commercial terms, projects may be prevented from proceeding. In less extreme cases, the parties’ construction contracts are left to deal with the consequences of the tightening insurance market, with project proponents typically having to bear increased insurance costs as well as increased risks of insurances not responding to particular events.

In order to mitigate this risk, it is becoming increasingly common for project proponents to insist on procuring contract works insurance (rather than requiring the contractor to do this) in order to try to achieve better cost and coverage outcomes.

Looking ahead

The challenges outlined above are by no means insurmountable. However, a multi-faceted approach is required to overcome them, including the streamlining of the connection approvals process, continuing to encourage domestic investment in mining of critical minerals and manufacturing of renewables products and the implementation of policies and programs to increase the size of (and retention rates within) the construction workforce.

Ultimately, unless meaningful solutions are developed and implemented over the medium-term, proponents of renewables projects will find it increasingly difficult to compete with other projects for scarce material, labour and financial resources. And if that happens, Australia’s ability to reach net zero by 2050 may be jeopardised.

This is an article from our 2024 Edition of Emerging Issues for the Australian Energy and Resources Industry. To read more from this publication, click here.