North Queensland: The case for Copperstring link to Mt Isa, and renewable mirogrids

North Queensland: The case for Copperstring link to Mt Isa, and renewable mirogrids

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Weighing the case for a new link to Mt Isa, and the push into renewable micro-grids for other remote consumers in north Queensland.

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Connecting Mt Isa to the Grid

Copperstring, a proposed 1 Mega kilometre (see what I did there), $1.5 billion transmission link from Townsville to Mt Isa has made further  progress with some additional initial funding from both the Queensland and the federal governments.

The current proposal has the line starting construction in mid 2021. And although the website for Copperstring says the capital cost is $1.5 billion, ITK thinks it likely that costs will be higher. That $1.5 billion number has been around for years, years in which the costs of other transmission projects, such as Energy Connect from South Australia to NSW, have increased.

On the other hand, historically Queensland has historically been a good place to do business in terms of industrial relations. Still, we wouldn’t be in the least bit surprised if the capital cost was more like $2 billion. We think that would lead to a transmission cost of about $35-$45 MWh.

Copperstring proponents supply the following graph. It shows the huge difference – and savings – that could be made for Mt Isa consumers with the Copperstring link, even with the transmission costs.

However, that graph is only part of the story. The gas fuelled Diamantina power station currently supplys Mt Isa and Mt Isa’s mine owner, Glencore, signed contracts essentially “leasing” all the capacity until 2030.

However, the gas supply from AGL is only fixed in supply and price until 2023.

Using a few fairly rough assumptions we do think there is the possibility that Glencore could go close to breaking even, despite having to pay for the fixed costs of leasing Diamantina.

The point to understand is that financial decisions are based on incremental costs and revenues, not on total costs.

The incremental costs are the gas, transport cost and other variable costs of running the power station.

We can roughly estimate those at about $200 million per year on the assumption of an $8/GJ gas price at Walumbilla (the QLD hub).

Equally, if you accept Copperstring’s $80/MWh estimate of the cost to Glencore of buying from the grid through Copperstring’s transmission link and assuming a constant volume of 2.6 TWh, you get a total bill of about $200 million, near enough to the avoided costs.

ITK doubts it would be a great deal in itself but there maybe other benefits such as enabling the Mt Isa operation to mine lower grade ore or extend its life. Indeed the Copperstring proponents make lots of nose about that.

Glencore could also operate the Diamantina power station as a firming generator in Nth Qld, but it would need a price over say $85/MWh to make it worthwhile.

It’s also true that there is now alternative gas supply from Jemana’s pipeline to the Northern Territory.

I’m sure there are other issues to be sorted through, but here we just try to look at the headlines. In the table below I’ve just done a back of the envelope estimate down to EBITDA level.

There isn’t enough information to do a proper IRR (internal rate of return) or NPV (net present value) calculation. Suffice to say if you believe the $1500 billion capital cost, a price around $40/MWh probably works.

Of course what will actually happen is that Glencore would sign a long term capacity contract.

The cost of debt and the cost of capital for the project will undoubtedly be very low if it goes ahead. Northern Australia Infrastructure Fund [NAIF] is on board – and I can’t think of a better project for them – as are the state and Federal Governments to a greater or lesser extent. The equity piece is also taken care of.

The volume numbers allow for some backflow revenue. That could be optimistic. If the cost was $2 billion, $40/MWh is dodgy.

Copperstring would be bad news for APA

APA would lose its gas transmission revenue and the residual value of Diamantina would decline. Investors love APA and it’s been hugely successful. Lower interest rates mean that long term infrastructure stocks become more valuable.

We’ve seen that with assets like Macarthur wind farm, where the value has gone up despite the performance being soft. Investors will pay more for the locked in revenue stream when their financing costs are lower. But there still has to be some revenue.

These assets are relatively small in the APA portfolio.

Implications for North Queensland power development

Broadly speaking, if Copperstring was built and if we assume most of the energy comes from wind and solar resources over 1 GW of such resources would be required. Also, building this new link will relieve some of the pressure on transmission further south, primarily the bottleneck around Gladstone.

Although there is already 250MW gas fired generation at Townsville, Yabiluka, that is relatively  little used (capacity factor <15%), it’s still a comfort to have another 300 MW available.

I haven’t added in the recently announced 157 MW Cleanco/Neoen Kaban wind farm South East of Cairns to this Queensland Govt map. The red line is the gas transmission.

You can see on the map how far West Mt Isa is, much closer to the Northern Territory border than Townsville.

You can also see the 42 MW Phosphate Hill gas station  and the 35 MW Cannington Gas station off its own little gas spur. Connecting either or both of those will obviously require more transmission.

Without some new ideas that’s the end of Nth Qld demand growth

There are lots of mineral reserves remaining round Mt Isa, but the area has also been mined for a long time.

Coal has been the big growth industry, but is further South. Although Adani is the focal point the underlying question is the viability of the Galilee Basin, that is inland from Mackay/Bowen.

Historically, the area has been rated as “dubious” from an economic viability perspective even by coal analysts who don’t think about climate change.

Once you factor climate change in, it’s hard to see coal as the future for Queensland. Indeed the problem is how to grow away from it.

There are prospects for more agricultural demand particular if more dams are built in the Burdekin area. The local community is apparently big on the “Hells Gate” dam and even a revised version of the “Bradfield scheme”.

There is never any lack of local support for these “region building” projects so if they don’t get built the economics can’t be there. And indeed that is what various reports have found.

ITK believes the idea that Townsville can support a world class lithium battery manufacturing business is completely bonkers. We’d be happy to be  proved wrong but you’ll have to show me the audited profit.

Think about Tesla, its captive auto market, its investment in chemistry and in cell technology, eg tabless cells, its investment in factory automation, its likely investment in lithium resources. The vast reservoir of advanced economy manufacturing expertise in the USA.

Nor does the climate suit things like data warehouses/server farms. It’s too hot and too far from the load.

Leaving Covid aside, tourism has been struggling a bit. Costs are high relative to Asia and global warming isn’t doing much for the Coral.

In short, i’ts not easy to see the growth once you get past the traditional resource extraction. And that’s where the wind and solar resource comes in.

The resource is massively bigger than demand in the region, even assuming Gladstone Power station moves from coal to a transmission hub supporting wind and solar. Hydrogen is the long shot but will still have to be transported to load.

Conversion of existing high energy consumption resource process would drive economic activity.

An example is the aluminium industry. Not just aluminium but also alumina using “Mechanical Vapour Recompression” as outlined by Alcoa at the recent “Minerals and Mines” conference.

That was a great presentation, certainly my Gold Star award from that conference.

That’s about 150 MW of electricity demand at Yarwun smelter, and for a new smelter energy costs would be lower than those gas generation by some margin (according to Alcoa). Retrofitting is, however, hard to justify.

Everyone knows Boyne Island smelter could serve to support both a lot of wind and solar, and also do the firming job if people put their mind to it. ITK’s view is that RIO sees its Australian aluminium assets as a business it should close as soon as its contracts will allow.

That’s basically in a decade. There is an issue around Gladstone, Boyne Island and Yarwun that needs to be worked on. It’s possible that keeping the businesses going and moving them off coal will provide more GDP than allowing them to close.

However, that careful analysis is way beyond the scope of this note. All we see is the potential and the need to think about it.

A different approach to developing North Queensland come from developing its links to the rest of Australia, transmission, internet, air, road, rail.

If the transmission existed the North Queensland wind and solar resource would be valuable down South. Solar farms are not big employers, once they are built, wind farms maybe need a bit more maintenance.

The transmission is expensive and line losses are material.

However, development of a DC line is arguably economic and in ITK’s view a lot more viable than something like the Bradfield scheme, even if it employs less people.

Thinking local. Power supply and demand in North Qld is a bit of a story and as usual its political

The LNP is proposing to continue the subsidy paid to regional Queensland electricity consumers of about $0.5 billion [NPV over $5 bn], but it will no longer explicitly make South East Queenslanders pay for it.

The subsidy represents $600 per customer in Ergon and negative $300 per Energex customer.

The LNP proposes to take the money out of the State budget and says that growth in the state economy will take care of the cost. Of course, if it doesn’t north Queenslanders will pay some of the cost in higher taxes or bigger Queensland deficits.

I find it hard to see how that’s a vote winner, but I don’t understand Qld politics so I refrain from further discussion.

The bigger problem is that the LNP scheme doesn’t deal with the fundamental problem of removing or at leas reducing the underlying need for the subsidy.

That can only be done by lowering the underlying cost of electricity to remote consumers. At a household and community level this probably means more batteries and microgrids.

Federal Govt is supporting microgrids. Go get a grant

One of the few positive steps the Federal Govt has done is to make over $100 million available for micro grid development.

For instance, $19 million has been allocated under Round one of the “Regional and remote communities reliability fund”.

And of that $2 million was awarded for development at the 3 MVa demand ,  7000 population of Yarrabah, on the coast from Cairns.

As with many things that happen in North Queensland, the hand of Bob Katter can be seen.

Ergon, the regional Qld distribution owner, still has essentially monopoly control of the retail customer base of regional Qld including North Queensland.

In our view, this would make it easier, to push on with things like community batteries and micogrid development. One example of this is at Lockhart River (700 people) see photo.

It’s easier with Ergon because even though ring fencing requirements still exist, they can be negotiated by the left hand talking to the right hand of the same business.

Despite that, ITK is of a view that Ergon, via its Yurika subsidiary is very slow on the microgrid and community battery progress and that West Australia has moved well ahead.

We think that the folk at James Cook University could push a bit harder, maybe liaising with battery/micgrrid team at ANU.

Developing and installing microgrids and community batteries creates jobs, not 1000s of jobs but skilled jobs and a sense of  progress.

It may also increase reliability and lower costs to facilitate further growth.

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