Ergon Energy Corporation Limited  

Final Report  

Proposed Establishment of a new 66/11kV substation in Southern 

Gladstone  

6 August 2012 

Disclaimer While care was taken in preparation of the information in this discussion paper, and it is provided in good faith, Ergon Energy Corporation Limited accepts no responsibility or liability for any loss or damage that may be incurred by any person acting in reliance on this information or assumptions drawn from it. This discussion paper has been prepared for the purpose of inviting information, comment and discussion from interested parties. The document has been prepared using information provided by a number of third parties. It contains assumptions regarding, among other things, economic growth and load forecasts which may or may not prove to be correct. All information should be independently verified to the extent possible before assessing any investment proposals.

TABLE OF CONTENTS

EXECUTIVE SUMMARY..........................................................................................................................3 1. INTRODUCTION...............................................................................................................................4 2. BACKGROUND & REASONS AUGMENTATION IS REQUIRED...................................................5

2.1. Background.................................................................................................................................5

2.2. Purpose of this “Final Report”.....................................................................................................5

3. EXISTING SUPPLY SYSTEM TO THE SOUTHERN GLADSTONE AREA ....................................6 3.1. Geographic Region.....................................................................................................................6

3.2. Existing Supply System ..............................................................................................................6

4. EMERGING DISTRIBUTION NETWORK LIMITATIONS.................................................................7 4.1. Timeframes for Taking Corrective Action ...................................................................................8

4.2. Known Future Network and Generation Development ...............................................................8

5. OPTIONS CONSIDERED .................................................................................................................9 5.1. Consultation Summary ...............................................................................................................9

5.2. Non-Distribution Options Identified .............................................................................................9

5.3. Distribution Options Identified.....................................................................................................9

6. FEASIBLE SOLUTIONS.................................................................................................................10 6.1. Option 1 – Establish a New Zone Substation in Southern Gladstone .....................................10

6.2. Option 2 – Augment 11kV Network Initially and establish Briffney Sub at a Later Stage ........10

7. FINANCIAL ANALYSIS & RESULTS ............................................................................................11 7.1. Format and Inputs to Analysis ..................................................................................................11

7.1.2 Inputs to Analysis..............................................................................................................11 7.2. Financial Analysis .....................................................................................................................12

7.2.1 Present Value Analysis .....................................................................................................12 7.2.2 Summary of Economic Analysis .......................................................................................13

7.3. Discussion of Results ...............................................................................................................13

8. FINAL REPORT & DECISION........................................................................................................14

EXECUTIVE SUMMARY Ergon Energy Corporation Limited (Ergon Energy) is responsible (under its Distribution Authority) for electricity supply to the Gladstone area in central Queensland. We have identified emerging limitations in the electricity distribution network supplying the southern Gladstone area. The loads on Ergon Energy’s zone substations and 11kV network in the southern Gladstone area have progressively increased such that augmentation is required if reliable supply is to be maintained.

The southern Gladstone area is presently supplied by five 11kV feeders from the Clinton and Gladstone South zone substations. The southern Gladstone area presently comprises approximately 9000 customers and is experiencing rapid development and electricity demand growth which is being driven by an expansion in local mining, coal handling, large liquefied natural gas (LNG) plants and mineral processing capabilities in the area.

Forecasts show that the 11kV feeders supplying the southern Gladstone area either exceed the ‘4 into 3’ Security Criteria or will exceed the Security Criteria in the coming years. As well as this one of the feeders will be overloaded under system normal conditions by 2014/15 and a second one will be overloaded by 2015/16. Also both the Clinton and Gladstone South zone substations are forecast to be loaded above their N-1 capacity within the next 7 years. Table 1 provides forecast substation and feeder loads and capacities.

To meet the security of supply criteria for the southern Gladstone area Ergon Energy needs an additional minimum of 16MVA firm capacity at 11kV to be provided to this area. This size has been matched to expected load requirements within Ergon Energy’s typical 10 year planning horizon.

In order to ensure that supply to customers in the southern Gladstone area complies with Ergon Energy’s security of supply criteria, corrective action will be required to be completed prior to the summer of 2014/15. A decision about the selected option is required by August 2012 if any option involving significant construction is to be completed by December 2014.

Ergon Energy published a Request for Information relating to this emerging network constraint on 18 April 2012. No submissions were received by the closing date of 13 June 2012.

Ergon Energy published a Consultation and Draft Recommendation on 27 June 2012 relating to this emerging network constraint. No submissions were received by the closing date of 25 July 2012.

Two feasible solutions to the emerging network constraint have been identified:

Option 1 Establish a new zone substation in the southern Gladstone area

Option 2 Augment adjacent zone substations and establish express 11kV feeders to the southern Gladstone area

In accordance with the requirements of the National Electricity Rules (NER), this is now a Final Report where Ergon Energy provides both economic and technical information about possible solutions, and the solution decided on, being Option 1, to establish a new zone substation on the Briffney sub site in the southern Gladstone area by December 2014.

Information relating to the consultation about this project is provided on our web site: http://www.ergon.com.au/community--and--our-network/network-management-and-projects/regulatorytest-consultations

For further information, please email: regulatory.tests@ergon.com.au

1. INTRODUCTION

Ergon Energy has identified emerging limitations in the electricity distribution network supplying the southern Gladstone area in central Queensland.

When a distribution network service provider proposes to establish a new large distribution network asset to address such limitations, it is required under the National Electricity Rules (the “Rules”) clause 5.6.2(f) to consult with affected Rules Participants, NEMMCO and Interested Parties on possible options to address the limitations. These options may include but are not limited to demand side options, generation options, and market network service provider options.

Under clause 5.6.2(g) of the Rules the consultation must include an economic cost effectiveness analysis of possible options to identify options that satisfy the Australian Energy Regulator’s (AER) Regulatory Test, while meeting the technical requirements of Schedule 5.1 of the Code.

This Final Report is based on:

• the assessment that a reliable power supply is not able to be maintained in the southern Gladstone area.

• the Request for Information consultation undertaken by Ergon Energy to identify potential solutions to address the emerging distribution network limitations; and

• an analysis of feasible options in accordance with the AER’s Regulatory Test.

This project has been considered under the reliability limb of the Regulatory Test as the service standards linked to the technical requirements of Schedule 5.1 of the NER and Ergon Energy’s licence conditions are unable to be met, as detailed in Section 4 of this report. This project was included in the Ergon Energy Network Management Plan 2011 to 2016 Part B. Information relating to the consultation about this project is provided on our web site: http://www.ergon.com.au/community--and--our-network/network-management-and-projects/regulatorytest-consultations

For further information, please email: regulatory.tests@ergon.com.au

2. BACKGROUND & REASONS AUGMENTATION IS REQUIRED

2.1. Background If technical limits of the distribution system will be exceeded and the rectification options are likely to exceed $10M, Ergon Energy is required under the National Electricity Rules (NER)1 to notify Rules Participants2 and Interested Parties3 within the time required for corrective action and meet the following regulatory requirements:

• Consult with Rules Participants and Interested Parties regarding possible solutions that may include local generation, demand side management and market network service provider options4.

• Demonstrate proper consideration of various scenarios, including reasonable forecasts of electricity demand, efficient operating costs, avoidable costs, costs of ancillary services and the ability of alternative options to satisfy emerging network limitations under these scenarios.

• Ensure the recommended solution meets reliability requirements while minimising the present value of costs when compared to alternative solutions5.

Ergon Energy is responsible for electricity supply to the Gladstone area (under its Distribution Authority) and has identified emerging limitations in the electricity network supplying southern Gladstone. Augmentation to the electricity distribution network supplying this area is required if reliable supply is to be maintained.

2.2. Purpose of this “Final Report” The purpose of this Final Report is to:

• Provide information about the existing distribution network in the southern Gladstone area.

• Provide information about emerging distribution network limitations and the expected time by which action must be taken to maintain the reliability of the distribution system.

• Provide information about options identified and considered.

• Explain the process (including approach and assumptions) to be used to evaluate alternative solutions, including distribution options.

• Report the solution Ergon Energy has decided on.

1 Clause 5.6.2(f) 2 As defined in the NER 3 As defined in the NER 4 NER, clause 5.6.2(f) 5 In accordance with the Australian Energy Regulator’s Regulatory Test Version 3, November 2007

3. EXISTING SUPPLY SYSTEM TO THE SOUTHERN GLADSTONE AREA 3.1. Geographic Region

The geographic region covered by this Final Report is broadly described as the southern Gladstone area as shown on the map below. Also shown are the Kirkwood Rd and Glen Eden development areas which have been approved for residential development.

3.2. Existing Supply System The southern areas of Gladstone are supplied by Clinton and Gladstone South zone substations (the diagram in 3.1 shows the location of these zone substations). Both these substations are located approximately 4kms from the Kirkwood Road and Glen Eden development areas with Clinton substation being even further than this from the Glen Eden development area. Clinton and Gladstone South zone substations collectively supply approximately 9000 customers in the southern Gladstone area. Dalrymple Drive (GS-104), South Gladstone (GS-105) and Sun Valley-New Auckland (GS-108) are the main 11kV feeders used to supply Kirkwood Road and Glen Eden from Gladstone South zone substation while Callemondah Drive (CI-105) is the main 11kV feeder supplying Kirkwood Road from Clinton zone substation. An additional feeder, Dixon Drive (GS-1xx), is planned to be constructed in 2012 to supply Kirkwood Road and Glen Eden and to reduce the load on GS-105 and GS-108.

Glen Eden Development Area

Kirkwood Road Development Area

Clinton zone substation

Gladstone South zone substation

66kV line from Gladstone South substation

66kV line from Clinton substation

66kV line to Beecher

Blue lines are the 11kV distribution network

Briffney sub site

Table 1 below provides the supply network element capacities with the 11kV feeder loads and capacities given in amps and the zone substation loads and capacities given in MVA.

Ergon Energy’s planning criteria requires that distribution feeder peak loads should be at or below the feeder 75% rating to allow for ‘4 into 3’ load transfer during feeder outages. Therefore additional 11 kV feeders are required in the southern Gladstone area to comply with this criterion.

• The distances involved from the Clinton and Gladstone South zone substations to the Kirkwood Rd and Glen Eden development areas mean quite a large number of extra 11kV feeders will be required to restore compliance with Ergon Energy’s Planning Criteria and the establishment of this number of relatively long substantially underground feeders will represent significant capital cost.

• Soon after these expensive 11kV feeders were established from Clinton and Gladstone South zone substations the capacities of these substations would be inadequate and further significant capital expenditure would be required to restore compliance with the Planning Criteria.

4. EMERGING DISTRIBUTION NETWORK LIMITATIONS The Gladstone area is undergoing substantial and sustained population growth. This growth is being driven by an expansion in local mining, coal handling, large liquefied natural gas (LNG) plants and mineral processing capabilities in the area. The additional population is in turn driving an increase in development of land for residential purposes.

The focus of the residential development is in the south of Gladstone adjacent to Kirkwood Road. Plans have been produced and approved by the Gladstone City Council to develop about 500ha of land around Kirkwood Rd. It is estimated that ultimately the Kirkwood Rd development will contain about 4000 dwellings. In addition to this there is about 250ha of undeveloped land in the suburbs of Glen Eden, New Auckland and Telina. The Glen Eden development area is expected to ultimately contain about 550 dwellings.

Based on expected developments the following loads are forecast on the HV supply network in the southern Gladstone area.

TABLE 1 – Southern Gladstone Supply Network Capacity and Forecast Loading

2010/ 2011/ 2012/ 2013/ 2014/ 2015/ 2016/ 2017/ 2018/ 2019/2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CI104 Clinton Park (amps) 300 292 295 250 255 260 265 270 275 280 285CI105 Callemondah Drive (amps) 320 242 250 280 313 346 379 412 445 478 511Clinton sub MD (MVA) 24 19.1 17.4 20.3 21.3 22.3 23.3 24.3 25.3 25.9 26.9GS104 Dalrymple Drive (amps) 320 169 186 167 177 187 197 208 218 228 239GS108 Sunvalley (amps) 320 292 320 210 215 219 224 229 233 238 243GS105 South Gladstone (amps) 300 167 183 135 145 155 165 176 198 208 217GSDIX Dixon Drive (amps) 330 233 268 303 338 373 408 443 478Gladstone Sth sub MD (MVA) 26 15.9 16.5 18.8 20.0 21.3 22.6 23.9 25.4 26.7 28.0

Southern Gladstone Area Loads & Capacities

Feeder Rating (amps)

Notes: i) Red shading indicates the load has exceeded 75% of the feeder capacity (loading above 75% results in a

breach of the security of supply criteria). ii) Black shading indicates the demand is greater than the feeder rating i.e. the feeder is overloaded. iii) Dixon Drive 11kV feeder is not yet established but its effect has been included in Table 1 as its establishment is in progress. iv) 2010/11 and 2011/12 values in Table 1 are recorded values. Subsequent years are forecast values.

The forecast loads indicate that a number of breaches of the Planning Criteria will occur over the next few years and by 2015 network overloads will be occurring. The situation is summarised as follows:

• Two of the 11kV feeders are already exceeding their maximum allowable MD level under system normal conditions (i.e. >75% of rating). These are the CI104 Clinton Park and CI105 Callemondah Drive feeders.

• In 2014/15 the CI105 Callemondah Drive feeder load will be exceeding its rating (i.e. it will be overloaded) and the Clinton Park and Dixon Drive 11kV feeder loads will be exceeding their maximum allowable MD level (i.e. >75% of rating) under system normal conditions.

• In 2015/16 the Callemondah Drive and Dixon Drive feeders will be overloaded and the Clinton Park feeder will be exceeding its allowable loading.

• As well as the above 11kV feeder issues by 2016/17 Clinton substation will be loaded above its N-1 capacity and hence be in breach of the planning criteria.

• In 2018/19 we will have all of the above issues and also Gladstone South zone substation load will exceed its N-1 capacity. This isn’t necessarily a breach of the planning criteria as Gladstone South zone substation load transfers via field switching are allowable. But due to the level of 11kV feeder constraints in the area it is expected that the planning criteria will be breached soon after this.

• In 2021 4 x 11kV feeders into the area will be exceeding their allowable loading, the other two 11kV feeders will be overloaded and the two zone substations supplying the area will both be loaded above their N-1 capacity.

The above defined shortfall in capacity will become an increasing problem as the area develops, reducing customers supply reliability and increasing the risk of loss of supply should a fault occur on an 11kV feeder. Connection of new customers will also become increasingly problematic and costly.

A routine engineering planning study completed in 2011 identifies that the preferred network solution is to establish a new zone substation in the southern Gladstone area. This new substation would be established at the location labelled Briffney substation site on the diagram in section 3.1.

4.1. Timeframes for Taking Corrective Action In order to ensure that security of supply to customers in the southern Gladstone area complies with Ergon Energy’s planning and security criteria, corrective action should be completed by summer 2014/15.

A decision about the selected option is required by August 2012 if any option involving significant construction is to be completed before December 2014.

4.2. Known Future Network and Generation Development (i.e. projects that have been approved and are firm to proceed)

Ergon Energy is not aware of any other network augmentations or generation developments in the Gladstone area that could relieve the emerging network limitations described in section 4.0 above.

5. OPTIONS CONSIDERED

5.1. Consultation Summary During its planning process, Ergon Energy identified that action would be required to address an anticipated distribution network limitation related to supply to the southern Gladstone area in Central Queensland.

On 18 April 2012 Ergon Energy released a Request for Information providing details on the emerging network limitations in the southern Gladstone area. That paper sought information from Rules Participants, AEMO and Interested Parties regarding potential solutions to address the anticipated limitations. Ergon Energy did not receive any submissions by 13 June 2012, being the closing date for submissions to the Request for Information paper.

Therefore, in acccordance with the requirements of the NER6, on 27 June 2012, Ergon Energy released a Consultation and Draft Recommendation setting out feasible options, economic analysis and a draft recommended solution. There were no submissions received by the closing date of 25 July 2012.

5.2. Non-Distribution Options Identified No non-distribution options have been identified.

5.3. Distribution Options Identified In addition to the consultation process to identify possible non-network solutions, Ergon Energy carried out studies to determine the most appropriate distribution network solutions. It was considered that a “do nothing” approach was unacceptable. Two feasible corrective solutions were identified, details of which are contained in the following Section 6.

6. FEASIBLE SOLUTIONS This section provides an overview of the feasible solutions identified, with full details of the financial analysis contained in Section 7.

6.1. Option 1 – Establish a New Zone Substation in Southern Gladstone

Option 1 – Briffney Zone Substation

Date Req’d Augmentation Capital Cost

2014

Install a new 2 x 20MVA 66/11kV Zone sub at Briffney site in southern Gladstone, including distribution works

$22.5m

This option involves the establishment of a new 66/11kV 2 x 20MVA zone substation on the Ergon Energy owned Briffney sub site in southern Gladstone by December 2014. This proposed new sub will be supplied by cutting into the nearby Clinton sub to Beecher 66kV line and connecting in the nearby Gladstone South 66kV line. Five distribution feeders will be established by augmenting and restructuring the surrounding 11kV network. A brief description of the works and the timing are as follows:

2014

Establish a new 66/11kV 2 x 20MVA zone substation on the corner of Kirkwood and Harvey Rds in southern Gladstone (Briffney sub)

Connect the new sub into the nearby Clinton sub, Beecher and Gladstone South sub 66kV lines

11kV distribution works to connect Briffney sub to the distribution network in the southern Gladstone area.

6.2. Option 2 – Augment 11kV Network Initially and establish Briffney Sub at a Later Stage

Option 2 – Augment Existing Subs & Establish New 11kV Feeders

Date Req’d Augmentation Capital Cost

2014

2016

2017

Establish the Glen Eden 11kV feeder out of Gladstone South sub.

Establish the Red Rover Rd 11kV feeder out of Clinton sub.

Install a new 2 x 20MVA 66/11kV Zone sub at Briffney site in southern Gladstone, including distribution works

$2.6m

$3.8m

$22.5m

This option involves the establishment of two additional 11kV feeders into the study area to defer the need for Briffney sub until 2017. An additional 11kV feeder could be established from Gladstone South sub in 2014 (the Glen Eden feeder) and from Clinton sub in 2016 (the Red Rover Rd feeder).

These works would then be followed by the establishment of Briffney zone sub as per Option 1 in 2017.

2014

Establish an additional 11kV feeder out of Gladstone South substation via Glen Eden into the Kirkwood Rd area (the Glen Eden 11kV feeder).

2016

Establish an additional 11kV feeder out of Clinton substation into the Kirkwood Rd area via Red Rover Rd (the Red Rover Rd 11kV feeder).

2017

Establish a new 66/11kV 2 x 20MVA zone substation on the corner of Kirkwood and Harvey Rds in southern Gladstone (Briffney sub)

Connect the new sub into the nearby Clinton sub, Beecher and Gladstone South sub 66kV lines

11kV distribution works to connect Briffney sub to the distribution network in the southern Gladstone area.

7. FINANCIAL ANALYSIS & RESULTS

7.1. Format and Inputs to Analysis

7.1.1.1 Regulatory Test Requirements The requirements for the comparison of options to address an identified network limitation are contained in the Regulatory Test prescribed by the Australian Energy Regulator (AER).

The Regulatory Test requires that, for reliability augmentations, the recommended option be the one that “minimises the present value of costs, compared with a number of alternative options in a majority of reasonable scenarios”. To satisfy the Regulatory Test, the proposed augmentation must achieve the lowest cost in the majority of (but not necessarily all) credible scenarios.

The Regulatory Test contains guidelines for the methodology to be used to identify the lowest cost option. Information to be considered includes construction, operating and maintenance costs and the costs of complying with existing and anticipated laws and regulations. The Regulatory Test specifically excludes indirect costs and costs that cannot be measured in terms of financial transactions in the electricity market.

7.1.2 Inputs to Analysis

A solution to address the future supply requirements for the southern Gladstone area as outlined in this document is required to satisfy reliability requirements linked to Schedule 5.1 of the National Electricity Code and the requirements of the Queensland Electricity Act 1994.

According to the AER Regulatory Test, this means that the costs of all options must be compared, and the least cost solution is considered to satisfy the Regulatory Test. The results of this evaluation, carried out using a discounted cash flow model to determine the present value costs of the various options, are shown in section 7.2.2.

The costs to implement the network augmentations outlined in section 6 have been estimated by Ergon Energy. Sensitivity studies have been carried out using variations in capital cost estimates of plus or minus 20%. The operating and maintenance costs have been derived as a fixed proportion of capital cost. As a

result, a variation in capital costs would be equivalent to separately varying the operating and maintenance cost.

The financial analysis considers all foreseeable cost impacts of the proposed network augmentations to market participants as defined by the regulatory process.

7.2. Financial Analysis The economic analysis undertaken considered the present value of cost of alternative options over the 15 year period from 2014 to 2028.

7.2.1 Present Value Analysis

Financial analysis was carried out to calculate and compare the Present Value (PV) of the costs of each option under the range of assumed scenarios.

A 15 year analysis period was selected as an appropriate period for financial analysis. A discount rate of 10% was selected as a relevant commercial discount rate.

The Base Case (Scenario A) was developed to represent the most likely market scenario.

Market scenarios B - G were formulated to test the robustness of the analysis to variations in load forecast, capital costs and the discount rate. As required by the Regulatory Test, the lower boundary of the sensitivity testing was the regulated cost of capital.

Under the Regulatory Test, it is the ranking of options which is important, rather than the actual present value results. This is because the Regulatory Test requires the recommended option to have the lowest present value cost compared with alternative projects.

The following table is a summary of the economic analysis. It shows the present value cost of each alternative and identifies the best ranked option, for the range of scenarios considered.

The summary shows that Option 1 (Establish Briffney substation) has the lowest present value under all but one scenario.

7.2.2 Summary of Economic Analysis

7.3. Discussion of Results

The following conclusions have been drawn from the analysis presented in this report:

• There is no acceptable ‘do nothing’ option. If the emerging network constraints are not addressed by summer 2014/15, Ergon Energy will not be able to meet its security criteria for load transfer capability in the event of a failure of an 11kV feeder in the southern Gladstone area, resulting in likely loss of supply to network users. After 2014 Ergon Energy will not be able to meet its planning criteria in regards to allowable maximum loading on 11kV feeders, resulting in overloading of existing feeders and/or the inability to connect new loads.

• Economic analysis carried out in accordance with the Regulatory Test has identified that

proposed augmentation described in Option 1 Establish Briffney Substation, is the least cost solution over the 15 year period of analysis in all but one of the scenarios considered.

• Sensitivity testing showed that the analysis is robust to variations in capital costs and the

selected discount rate.

• As Option 1 is the lowest cost option in the majority of scenarios, it is considered to satisfy the AER Regulatory Test.

Option 1

Briffney sub

Option 2 Augment Dist Network

Scenario A PV ($M) $25.18 $26.28

Base Case Rank 1st 2nd

Scenario B PV ($M) $25.18 $24.44

Low Load Growth Rank 2nd 1st

Scenario C PV ($M) $25.18 $26.54

High Load Growth Rank 1st 2nd

Scenario D PV ($M) $24.23 $24.31

Discount Rate = 12% Rank 1st 2nd

Scenario E PV ($M) $25.97 $27.92

Discount Rate = 8.5% Rank 1st 2nd

Scenario F PV ($M) $30.21 $31.41

Increased Capital Costs Rank 1st 2nd

Scenario G PV ($M) $20.14 $21.15

Decreased Capital Costs Rank 1st 2nd

8. FINAL REPORT & DECISION

Based on the conclusions drawn from the analysis in sections 6 and 7 above, it is recommended that Ergon Energy proceeds with Option 1 to establish a new zone substation on the Briffney sub site in the southern Gladstone area at an estimated cost of $22.5M with commissioning to be scheduled for approximately December 2014.

Technical details relevant to the proposed new large distribution asset are contained in section 6.1.

Ergon Energy now intends to take immediate steps to implement the solution decided on to ensure system reliability is maintained.