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As demand for renewable energy zones (REZs) grows in the wake of net zero targets, the scale and complexity of REZ projects is prompting a rethink of how they are procured and delivered.
Zac Kerr of Gilbert + Tobin, says the nature of REZ projects required for the clean energy transition is renewing interest in more flexible procurement arrangements.
Future REZ projects will stretch the capacity of traditional models, such as design and build contracts, prompting governments to consider alliances, incentivised target cost and other contracting forms.
“When you’re trying to execute such a large volume of capital-intensive projects at the same time, when you haven’t – until several years ago – done greenfield transmission lines in this country for multiple decades, you need to provide some flexibility for the market.
“The market is not used to bringing in multiple billion-dollar transmission lines as well as the people needed to design, build, string and operate them, all at once. We’re expecting big-ticket assets to be delivered in areas where Australia hasn’t invested in targeted skills for several decades,” he said.
Working out best practice
While the case for flexible procurement may be clear, the pathway to implementation is more complex. Zac says governments and electricity network providers are operating within established regulatory, governance and accountability frameworks, which can make procurement reform challenging.
“The challenge with some of the more flexible procurement approaches is that, at the time the contract is let, there may not be complete certainty around cost, timing or performance outcomes, including capacity and transmission capability.
“When governments move into more flexible procurement models, they understandably need appropriate checks and balances. The challenge is ensuring those controls preserve accountability without becoming so prescriptive that they limit the market’s ability to put forward efficient and innovative solutions.”
By the time projects reach private sector bidders, Zac says there can be significant constraints – some of which are prudent, while others may limit the market’s ability to put forward the optimal solution.
“In that feedback loop, bidders can be constrained in what they are able to propose. That can mean the market is not always able to put forward the most efficient or innovative solution, which ultimately has implications for cost, timing and delivery outcomes.”
Pointers
To address this, Zac says it pays to have a “hard look” at the level of prescription in authority briefs to the market, as well as getting back to procurement fundamentals.
“For example, using an output specification, telling the market what you need between A and B, and then letting the market figure out the specifics of their solution. When the government tries to prescribe how things are done, that can really limit the flexibility and creativity.”
Governments should also consider which risks they are best placed to manage or mitigate, Zac said, with risk allocation often a key factor in the pace of contract negotiations.
“Risks like in-ground contamination, site conditions on linear projects, or approvals for projects which don’t have them yet, need to be allocated to the party best placed to manage them. In some cases, that may be the government. If risks are allocated in a way the market cannot sensibly price or control, it can slow the process and leads to less efficient outcomes. Ideally, projects would come to market with risk allocations that better reflect the role and capability of each party.”
Similarly, government should lean on private sector expertise when seeking solutions for output specifications, Zac said.
“It’s really important because one thing the private sector does well is figure out best practice. And particularly for energy grid companies, they have deep experience in understanding how their networks work, bringing operational expertise that can be valuable to government procurement processes – particularly on the East Coast, where the majority of network companies have been sold at some point a decade or three ago.
“Private sector expertise is powerful. But the more conditions placed around that process, the harder it can be for the private sector to put forward its best solution.”
Balancing speed, certainty and flexibility
Zac says the flexibility of modern procurement models is crucial for efficiency and cautions governments not to let fear of uncertainty stand in the way of progress.
“We’re trying to do over $100 billion worth of greenfield electricity transmission network reorientation in a decade. And in the past decade, close to $0 worth of projects would have reached completion.”
“The more governments can do to support efficient delivery, the better. In some cases, we need to avoid letting the pursuit of the perfect be the enemy of the good, because maintaining the status quo risks slowing delivery and increasing costs, which ultimately affects consumers and the broader energy transition.”
Further insight
Gilbert + Tobin were sponsors of this year’s Australian Renewable Energy Zones Conference. To register interest in next year’s program, visit the website here.
For more on how Gilbert + Tobin can support governments and industry with REZ PPPs, contact:
Zac Kerr
Partner
+61 422 412 429
[email protected]
Geoff Petersen
Partner
+61 459 400 019
[email protected]
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