How to Manage Risk in Renewable Power Projects

MELODIE MICHEL, Reporter, Energy and Mines

Despite the flurry of renewable projects announced in the past few years in the global mining sector, integrating clean sources of energy into a mine’s power grid is still a fairly new practice. As a result, understanding the risks involved, and making sure they are appropriately allocated and managed between the miner and the independent power producer (IPP) can be a tricky exercise.

Law firm HFW advises both miners and renewable IPPs in drafting solid contracts for clean energy integration. Amongst others, HFW Australia Partner Jo Garland guided clients through the first hybrid power system for a remote mine site with the DeGrussa Solar Project. She believes that the time for renewables and the mining sector is now. “There is a very high level of interest in renewables and hybrid power stations for mines in Western Australia (WA), both from the mid-tier miners and the larger miners. Cost, technology certainty and green thinking are all combining,” she says.

According to her, managing risk in a hybrid renewable power project starts with a clear understanding of what the likely risks are, and then agreeing which party bears the risk, or agreeing to share risk. Then, the parties must decide how this will be done both commercially and in the contracts. “With a very new technology, not all of the risk is always known at the outset. It can be a challenge when parties are negotiating terms, when a technology has not been widely used in practice and risks or the level of risk is not well understood,” she explains.

However, she finds that what was new technology only a few years ago is now more commonplace and understood. “Parties are more willing to accept any resulting risk, and as technologies are tested, risk decreases as time goes on too,” she adds. It’s also important to understand the link between risk and price: “Often if all the risk is pushed onto a developer then this can come through in the form of a higher energy price,” she notes.

For IPPs, covering costs is key

If you are a renewable IPP looking to play a role in the mining sector’s energy transition, Garland has some advice for you. “Understand the technology you intend to use; understand any risks you need to manage; understand the renewable resource at the site. Aim to get a guaranteed minimum return to cover costs, for example, a minimum offtake amount or a fixed charge component.”

She notes that given difficulties many miners are facing in getting funding, there may be a clause in the contract that makes the power agreement conditional on the miner making a final investment decision, which could be a big risk for the IPP. “Often smaller/mid-tier miners tender for power providers but are not at the point that they’ve got finance for their mining projects. The IPP will start to get ready for work under the (conditional) contract, including ordering some equipment so they can make all the deadlines. However, the miner may never get the financing (and therefore the contract falls over). IPPs need to think carefully about how to manage this risk in their contracts or commercially (and potentially get advice),” Garland warns.

Regional differences in corporate PPAs

Many IPPs are interested in offering large-scale, behind-the-meter renewables to grid-tied mines, often through corporate power purchase agreements (PPAs). Since 2017, the Australian Renewable Energy Agency (ARENA) estimates that there has been a total of 58 Corporate PPAs negotiated for 2.3 GW of capacity. But few of these were in the mining sector, and most of the deals were concentrated on the East Coast of the country. Garland explains that the legal environment differs between the two coasts.

“In WA, there are very few corporate PPAs,” she points out. “There is a common belief that as WA’s electricity market is different to the National Electricity Market (NEM) — which operates on the East Coast — corporate PPAs do not work as well in WA. While there is certainly some basis to this, it would be possible to structure a type of corporate PPA.”

She adds that in the NEM, corporate PPAs are evolving and are now not always what you would typically think of as a corporate PPA. For example, electricity retailers can hold the contract with the renewable power plant and then on-sell the renewable energy to the corporate PPA holder. There are also hybrid corporate PPAs where the retailer ‘sleeves’ the corporate PPA into a retail agreement. “With proper structuring, it should be possible to achieve something similar in WA,” Garland explains.

No more excuses

The variety of renewable technologies and contracts, coupled with recently increased public pressure to take action on climate change — in part due to the bushfire crisis in Australia — means that it is now harder than ever to justify the continued use of fossil fuels as the primary power source for mines. HFW is currently advising a number of IPPs on more traditional renewable solar and battery projects that are at the bidding phase and is also starting to see more and more novel technology-based systems.

“A good example we have worked on recently includes virtual and shared large-scale grid-tied batteries often tied with peer-to-peer trading. The advantage is the battery cost is shared and there is greater scope to set and manage your own energy prices through trading. While this is still in the early stages and more at a community level, there is also potential to use the same principles in an area with a number of grid-connected miners or processing plants,” Garland comments.

According to her, the main change from the bushfire crisis is that it has increased the public pressure on the government to have a proper climate change strategy in place. There is now talk of setting a 2050 net-zero carbon target for the country, which is getting a lot of attention and has been backed widely by industry — though exactly how the target would be met is unclear, and there is still no carbon trading scheme or firm measure on the horizon.

“There’s a bit more direct connection to the public now, who are saying: sure, we might lose some jobs and there is a chance some industry may move offshore, but we’ve all been affected by the bushfires, so maybe government should do something about climate change. The public isn’t really buying excuses anymore,” Garland adds.