Powering the Future: Grid Expansions for Digital Growth

There has been exponential growth in the number of data centres and Bitcoin miners applying to connect to the power grid, with global electricity consumption from data centres, AI and the cryptocurrency sector now expected to double by 2026^[1] - to a level roughly equivalent to the electricity consumption of Japan^[2]

Network augmentations are often needed to facilitate the additional capacity when the site first seeks connection to the grid.  These augmentations are typically proponent-funded augmentations which can add tens of millions of dollars to investment costs, just to connect to the grid. Once the facility is up and running, massive charges for power usage will accumulate.

Navigating this process can be complex and confusing for proponents. Even among participants in the national electricity market, the rules can differ between jurisdictions.  Some elements of the augmentation are required to be undertaken by the relevant network owner, while some can be subject to a competitive tendering process, which will depend on the location and value of the augmentation. In some cases, different components of the network augmentation will be constructed by different parties.

Connection process

In the national electricity market (NEM), connection applicants must follow the Chapter 5 of the National Electricity Rules (NER).

From initial inquiry to connection, it typically takes up to 2 years, but may be considerably longer.

As part of this process, the network owner to which the facility is to be connected must undertake a system strength assessment, to determine whether the connection will have a material impact on stability of the grid — both in the location of the connection and the grid more broadly. For large users of electricity, this may result in a requirement to augment the grid to accommodate the additional capacity required.

Augmentation can include reinforcing power lines for additional capacity by duplicating them or bolstering the capacity of existing lines, or by installing devices to stabilise the network, such as synchronous condensers, harmonic filters or new grid technology.

In Victoria, if the cost of the augmentation will be over $10M and can readily be separated from the main grid, the augmentation is subject to a competitive tendering process.  The State’s main transmission network service provider (TNSP) may win the right to develop the augmentation, but another TNSP could also be successful.

Some elements of the augmentation must necessarily be undertaken by the “host” TNSP, to manage interface works needed to “cut-in” the augmentation to its own network. A connection applicant must work with both the host TNSP and the winner of the tender to progress the augmentation.

Cost recovery for augmentations

When an augmentation is needed to connect a private connection applicant, like a data centre, it usually follows a "negotiated service" process, as the augmentation is primarily developed for the applicant, who will also pay for the connection and augmentation.

These are augmentations which don’t typically provide system-wide benefits, but may have an indirect, consequential impact on the grid. It is inappropriate for all users to pay for such augmentations.

If subsequent applicants seek connection in the same location, the initial augmentation costs can be shared by those new applicants. In New South Wales, this occurs under the Pioneer Scheme, where the first to connect will be reimbursed proportionately by those who follow.

Once funded, the new augmentation becomes part of the assets owned by the host TNSP.  Although funded augmentations are not rolled into the regulated asset base on which the TNSP’s regulated revenue recovery is based, the TNSP is entitled to recover revenue for reasonable O&M costs for the new augmentation.

Maximising the benefits of an augmentation

After paying millions of dollars that a large augmentation requires, how do investors capitalise on this massive investment?

Some elements of the augmentation could be characterised as connection assets and could feasibly be retained by the applicant. Having a major power consuming site coupled with valuable electricity connection assets may enhance the value of the investment and provide potential tax benefits for the site owner. This may warrant up-front technical analysis for applicants.

Data Centre owners can also add solar and battery facilities. This will assist with reducing power costs, but the site may also be capable of offering ancillary services such as frequency control or demand management under programs managed by AEMO to achieve grid stability.

Many large power users also enter into Power Purchase Agreements with major solar and wind farms. This allows their consumption of mixed power from the grid to be offset by renewable power dispatched somewhere else in the grid — while it’s not possible to directly consume the renewable power “purchased” under a PPA, it can alter the amount of renewable power dispatched into the grid.  Moreover, a PPA will enable the large user to hedge the price it pays for power, providing a more certain revenue stream at a pre-agreed strike price. This can enhance the bankability of the development.