Asset closure – tick the box or think outside the box?

ASSET CLOSURE – TICK THE BOX

OR THINK OUTSIDE THE BOX?

By Simon Mezger, Principal Infrastructure Advisory: Utilities, Aurecon

The fanfare that surrounds the mobilisation of a new asset is never quite present when it closes. In fact, no one usually remembers the opening because it’s been many decades and a generation of workers ago. Costs to close assets are capital commitments usually viewed as balance sheet liabilities to be minimised. It’s hardly surprising then, that the increasingly heavy economic, political, environmental and regulatory burdens of asset closure are multidimensional and present a serious challenge.

Maintaining the integrity of an asset, whilst minimising cost before it closes, is top of mind for owners, and this frames their key challenge to maintain social licence to operate and ensure reliability all the way to the end. With this in mind, an innovative sustaining capital program can optimise capital works and maintenance programs leading up to a closure, thus managing the tightrope walk of reliability and social licence.

Asset closure is today’s reality for businesses facing accelerated decarbonisation, economic performance pressures and climate risk transition imperatives. This is especially true in the power sector, as businesses are under pressure to speed up their cuts to carbon emissions.

Early planning and decisions around future use of assets that need to be closed, relinquished or repurposed allows asset owners to optimise their asset management spending on sustaining works and maintenance as the asset progresses to the end of its current use.

Reimagining asset closure is an opportunity to transition the site to a new asset type for owner operation or to on-sell (Figure 1). Doing this requires creativity and a willingness to imagine a different paradigm. Asset closure not only challenges planning and operational processes, but also the organisational culture and capabilities to manage the close. Businesses now need a whole new skill set to manage the close and reimagination of their sites.

Recent examples of innovative asset closures include real estate around power plants being redeployed for large-scale battery storage, port facilities exploring the role of large-scale hydrogen electrolysers, an abandoned gold mine acting as a hydro pumping scheme, a mine closure becoming a mountain biking mecca and materials manufacturing plants converting to major retail distribution centres. THE START OF SOMETHING NEW

In recognition of the significant financial, environmental, geopolitical and social risks associated with asset closure, regulators are looking very closely at rehabilitation practices and outcomes. This now frames the thinking for owners who have custodianship of these assets, to shift from the traditional ‘managing liabilities and minimising cost’ approach to better consider the opportunities that asset closures can provide (Figure 2).

This takes a deep understanding of physical assets along with knowledge of the future pressures and opportunities that industries are likely to face. The chance to recover value from redundant assets and envisage new earnings streams from the decommissioned assets cannot be understated.

FIGURE 2: ASSET CLOSURE: A TAXONOMY OF CONSIDERATIONS

There are examples of exemplar asset closures in Australia. In the power sector, a feasibility study is currently underway to determine if a disused open-cut coal mining site in eastern Australia can be converted into a pumpedhydro facility. In New South Wales, a plan is in place to decommission and rehabilitate a coal-fired power station into an industrial park with the hope of attracting manufacturing and food production businesses. These projects address the environmental legacies of their site and strengthen local economies with new operations and jobs. “Thinking outside the box is about holistically considering the future potential of the site and taking a far more humanistic approach to asset closure.”

The commonalities in the exemplar closure efforts is the commitment to invest in reskilling employees and thinking laterally about future uses for the site.

An asset’s operational KPI’s must now be retrofitted with closure and repurposing related KPIs; performance monitoring, knowledge and data management to support varying options and outcomes. Most importantly, this will lead to arbitration and governance mechanisms that consider and make tradeoffs between operational performance and investments, and closure/repurposing performance and investments.

Shutdown and decommissioning plans – scope, procedures, budget (including specialist contract and procurement needs) – can be leveraged for closure planning. This now increases the emphasis on the importance of designing, planning and operating an asset with closure in mind. This includes capturing the knowledge of the technical experts operating the asset and housing it in a centralised digital system. As we said earlier, a generation of workers is likely to pass through the gates before closure, so knowledge management is paramount. SOCIAL VALUE AND LICENCE TO OPERATE: WALKING THE LINE

The process of managing sustaining capital toward asset closure is central to maintaining and extending social value and licence to operate, as well as meeting reliability expectations. By definition, sustaining capital is the large number of small capital projects to maintain, and continue to optimise, the asset leading up to its closure. An integrated plan, aligned to a common set of objectives, will preserve net present value and return on assets as closure looms. This approach is highly effective to de-risk overcapitalisation, while still meeting service reliability, community and environmental targets.

The efficiency of asset closure practices is attracting increased scrutiny. An increasing number of industries, particularly power, are looking to close legacy assets early in response to market demand/supply dynamics, continued explosive growth in renewables, deteriorating economics, changing climate and shifts in strategic direction.

Engaging early with regulators and government departments to agree the permitting and de-licencing procedures provide the most effective pathway to achieving full relinquishment. Not doing this may influence the asset closure process and the ability to open new sites in the future. What if, in the future, the requirement to construct a new asset was designing its future uses or disassembly at the end of its life?

Companies in recent times have been reminded of their statutory obligations around the ‘white-hot’ ESG (Environmental, Social and Governance) agenda, to disclose risks posed to their operations by climate change and declare their solutions in response. As industries close more assets, disclosure must be continually managed for both compliance reasons and the social licence to operate. Any bespoke sustaining capital program should include lean asset management and resource allocation that takes into account environmental factors in the closure plan and site repurposing.

Further, the importance of being entrenched in the local communities during operation and the closure phases cannot be overstated. If ignored, an optimal closure outcome is unlikely to be achieved. Asset owners now have a social responsibility to work in partnership with communities to create enduring capabilities for job skills to be transferable to other industries after closure.

Companies that get it right will benefit from the support they receive from employees, neighbouring landholders, First Nations peoples, local and state governments, and many others (Figure 3).

INVESTING IN PEOPLE’S FUTURES REQUIRES AGILITY

From a social perspective, a community has often grown around an asset’s operation. It is often the largest intergenerational employer with dependency on the site for regional growth, prosperity and sense of identity.

When an asset reaches its final years, community and supplier partnerships are important to leave a legacy of regional growth long after the asset has closed. Locals may struggle to adapt to the transformation, grieve and be concerned with what change will mean and if other jobs will be available.

While there is no silver bullet to leaving a jobs and growth legacy after asset closure, setting clear expectations from the outset, along with effective methods of engaging employees, stakeholders, suppliers and communities will go a long way.

Enlightened companies will undertake various initiatives that are enduring for local people and communities. A comprehensive closure plan considers the social needs of all relevant stakeholders. “The future of our industries is dependent on the legacy they leave.”

Examples of exemplar asset closure approaches are surfacing in the large industrial facilities sector, with a leading material manufacturer recently reskilling its employees for employment in the retail sector after a large site was closed.

In the mining sector, we’ve seen closed sites in Queensland given over to cattle farming and in Western Australia, a reforestation scheme restoring the plant species present before mining work began.

As new challenges emerge, better solutions are developing for existing issues, with flexibility and innovation that match site-specific requirements.

Although there are underpinning principles, exemplar asset closure practices focus on a far more nuanced and humanistic approach and attitude. This is far cry when compared to a more mechanical set of fixed practices or technology changes. These practices are exactly what we need as we prepare to transform these assets and develop future industries to meet some of humanity’s biggest challenges.

Observing and learning from adjacent industries will also inform part of the process, to ensure that optimal and correct decisions are taken when closing an asset. We at Aurecon see the growing correlation between ensuring maximum value for the asset owner and local communities, as sectors strive for sustainable and stable systems to asset closure.

The future of our industries is dependent on the legacy they leave. For more information, visit www.aurecongroup.com

Simon Mezger is Aurecon’s Principal Infrastructure Advisory: Utilities. He is a deep utilities expert and has industry experience across the entire value chain, having worked with major electricity, gas and water distributors and retailers in Australia. When he’s not helping clients transform their businesses and create asset value, he can usually be found swimming in cold water or riding his carbon horse.