Managing risks in Australian offshore energy transmission projects

Offshore energy transmission infrastructure – including new interconnectors, export cables and inter-array cables – has a key role to play in Australia’s energy transition over the coming decades.

Interconnectors, as the name suggests, connect electricity grids. One example of a subsea interconnector is the proposed Marinus Link which is slated to link the state of Tasmania’s grid to the state of Victoria and mainland Australia. This project is progressing through the design and approvals phase with a final investment decision (FID) due in late 2024. 

Inter array cables for offshore wind projects connect the various turbines to an offshore substation. Export cables connect the offshore substation to the onshore substation and grid.  In Australia, we are yet to see any live offshore wind projects, however the Federal Government has made a firm commitment and has identified priority assessment areas which are being progressed for offshore development. The Victorian state government has also committed to delivering 9 gigawatts (GW) of offshore wind capacity by 2040.  

We know from experience, both here and overseas, that offshore transmission projects face a few challenges, including the need to navigate various and often new regulations, effective engagement with stakeholders, and securing supply chains, among others.

Navigating regulatory changes

Until 2022, there was no domestic legislation regulating offshore projects in Australia, reflecting its status as an emerging market.  While there is now a regulatory regime in place through the Offshore Energy Infrastructure Act 2021 (Cth), it does not solve every problem.

The interaction between the various state, federal and international regulatory regimes has the potential to cause inconsistencies. But this uncertainty is a common scenario internationally, including in mature markets, and should not deter investment or participation in such projects.

Engaging effectively with stakeholders

Early and continued stakeholder engagement is required for the success of subsea transmission projects. It is necessary to consider the impact of the project on various stakeholders, including indigenous communities, and to undertake consultation during project planning and execution. The Santos Barossa pipeline case is a stark reminder of this. An interim injunction was initially granted in favour of traditional custodians, halting works for the laying of a gas pipeline in the Northern Territory.  Although the legal challenge was ultimately dismissed by the Federal Court of Australia, time and cost overruns for the project were incurred.

As with any infrastructure project, parties need to consult with the community, including indigenous communities, to identify potential concerns and issues at an early stage, giving them every possible chance to be managed. On the Marinus Link project, it has been reported that over 230 conversations have taken place with community members and stakeholders discussing key themes such as job opportunities, community benefits, environmental impacts and cultural heritage.

Of course, even when best practices are adopted and early and active management occurs from the outset, disgruntled stakeholders can still adversely impact projects.

Securing supply chains

Offshore projects, including sub-sea transmission projects, are particularly susceptible to global supply pressures due to the use of specialist technologies from overseas and unprecedented competition.

The market for high-voltage direct current (HVDC) connectors, for example, is growing and in high demand. In the last 12 months we have seen capacity issues reported in Europe as well as availability shortages of specialised vessels required to deliver cables. 

To mitigate capacity issues, it is common for reservation or pre-construction agreements (PCAs) to be entered into with key suppliers or original equipment manufacturers. For the Marinus Link project, it was reported that a capacity reservation agreement was entered into for the HVDC cable with electrical cable manufacturer Prysmian in September 2023, some 18 months ahead of the expected date for the FID. While there is no doubt such agreements are required in the current market, they provide fertile ground for dispute.

It is common for PCAs to be concluded months or even years ahead of a full contract to reserve capacity or provide a basis on which to progress design. This can be risky where there is a long contract negotiation period after the PCA and the commercial position changes in the interim. We have seen recent examples of sharp cost increases and supply shortages play out with the impacts of Covid-19 and extraordinary inflation. For this reason, PCAs are often renegotiated. 

To mitigate the risks involved when using PCAs, parties should seek to reduce the negotiation period where possible and use well drafted frameworks, or ensure key parameters of the deal are documented early in the PCA, to reduce the items for detailed negotiation later. They should also include express good faith provisions, as this may provide protection against parties acting unfairly.

Preventing defects

Defects are probably the most common type of claim in offshore projects, often with far reaching implications in the case of recurring defects. They can be a teething problem in an industry that is continuing to develop at pace, with pressure on suppliers to produce new technology quickly. 

Problems with sub-sea transmission cables are common. Over recent years, widespread issues have come up in cable protection systems for inter array cables, including a failure of scour protection systems – used to protect the cable from abrasion – affecting several projects.

Common issues include delayed manifestation of defects after the expiry of contractual warranties or defect notification periods. It is also common for tensions to arise between the differing design standards of fitness for purpose obligations and reasonable skill and care.

Steps that can be taken to mitigate the risk of defect claims include implementing stringent quality assurance processes and ensuring contracts include distinct mechanisms for patent and latent defects, and clarity around whether contractual remedies are the sole remedy. It is also beneficial to engage experts as early as possible, to identify the root cause of defects. Potentially, a further investigation just prior to the expiry of any performance security can also help to mitigate this risk.

Managing interface risk

Transmission projects generally involve a split contracting model. For larger offshore wind schemes this will typically involve half a dozen or so key contracts, one of those being with the cable supplier.

The cable supplier is typically only responsible for time and cost overruns to their own scope.  Developers will bear most of the risk of delays to transmission, as liquidated damages that may arise from delay to individual packages will likely not be at a level that is adequate to fully compensate the developer for its loss of revenue. 

While it remains to be seen how the offshore procurement market will develop in Australia, it will be important for developers to manage the risk of time and cost overruns. Measures supporting the management of these risks would be to include interface obligations in contracts or standalone interface agreements, and to include liquidated damages at a level that provides suppliers sufficient incentive to recover delay, even if it does not compensate developers for transmission delay. The appointment of an appropriately experienced project manager would also help developers mitigate these risks.

Avoiding risks from seabed conditions

As with all projects, accurate information about site conditions is vital, however the task of gathering complete and accurate data about the condition of the seabed presents unique technical and practical challenges. It is also costly. Data is required on water depth, seabed conditions, loading required to offset waves and sea currents, slope gradient and frequency, seabed congestion levels, and seismic activity.

This data is primarily used to determine cable routes and the viability of cable burial, particularly in shallower areas where there is greater potential for interference and damage. Surveying at sea is complicated by factors including adverse weather and distance from the shore. Even if areas can be surveyed, seabed conditions are susceptible to change.

While less data may be acceptable for deeper areas, contractors are unlikely to willingly accept the risk of seabed conditions where data is incomplete or potentially inaccurate. Where seabed conditions are known, contractors should be able to price the performance of those works with relative accuracy, but otherwise the developer is likely to be best placed to carry the risk of site conditions causing additional work and delay.  

There are critical steps that should be taken to mitigate the risk of potential issues. Firstly, contracts should clearly and appropriately allocate risk for subsea conditions and information provided, often referred to as ‘rely upon data’ or ‘reliance data’.

In addition, contracting with outstanding or incomplete information should be avoided. If that is not possible, parties should consider incorporating provisional sums into their agreements to account for this.

Parties should also use new technology to maximise the efficiency and accuracy of seabed surveying, such as remote surveying.  On the Marinus Link project, for example, a remote operated unscrewed survey vessel was deployed to survey seabed conditions in Waratah Bay.

Finally, unnecessary data should not be included in contracts.