South Hedland gas power plant has commenced operation. All images: TransAlta.
BY ELIZABETH FABRI
THE opening of the South Hedland gas power plant late July was cause for celebration at Transalta; this is despite a dispute over project performance with commercial customer Fortescue Metals Group (FMG) who – in separate agreement – will buy back the Solomon Power Station it sold to Transalta in 2012 for $US335 million.
On 28 July, TransAlta began commercial operation of its long-awaited 150 megawatt (MW) South Hedland Power Station following a two and a half year build.
The Pilbara combined-cycle natural gas generation facility is a huge boon for the region, and is contracted to deliver 110MW of power to Horizon Power’s commercial customers in the area as well as 35MW to Fortescue Metals Group (FMG) port operations, under two, 25-year power purchase agreements (PPA).
However, the milestone was quickly overshadowed by an FMG statement days later that the project had “not yet satisfied the requisite performance criteria” under its contract.
In response, TransAlta claimed the terms of its power purchase agreement (PPA) had been met in full, from receiving a commercial operation certificate, successfully completing and passing certain test requirements, and obtaining all permits and approvals required from the North West Interconnected System (“NWIS”) and government agencies.
“The South Hedland Power Station is fully operational and able to meet all of FMG’s requirements under the terms of the PPA,” TransAlta stated.
That same day, FMG separately announced it would be repurchasing TransAlta’s 125 (MW) Solomon Power Station; a right it had under a PPA signed with TransAlta in 2012.
While not the preferred outcome for TransAlta, the $US335 million price tag would boost its balance sheet in the short term and allow it flexibility to pursue growth projects in Australia and abroad.
TransAlta’s Australian operating assets currently comprised Solomon Power Station; South Hedland Power Station; Southern Cross Energy project, made up of four open cycle power stations in Kambalda, Mount Keith, Leinster and Kalgoorlie; a 50 per cent stake in 270km Fortescue River Gas Pipeline with partner DBP Development Group; and a 50 per cent interest in 120MW Parkeston power plant in Kalgoorlie.
The company has also plans to develop a 70MW large-scale solar farm in NSW.
After spending the last 17 years at the company’s Canada headquarters, TransAlta Australia’s newly appointed managing director Kelvin Koay said the Australian division had been a “vehicle for growth” for the company particularly in the last five years, and he was pleased the performance of each project.
“With South Hedland coming into commercial operation last month [July] and the rest of the business performing as good as or better than forecasted, our outlook for the year is in-line with our expectations,” Mr Koay said.
The company’s Australian gas production increased for the three and six month periods ending 30 June by 27 per cent and 17 per cent respectively, compared to the 2016 corresponding periods.
“My goals for the Australian operations is continue to add to our portfolio of highly contracted assets and ensure the business absorbs the growth that we have experienced in an efficient and sustainable way, most recently being South Hedland Power Station,” Mr Koay said.
“We now have approximately 110 people employed here in Australia but that number will go down slightly after the Solomon Power Station is transitioned back to FMG by the end of the year.”
The Solomon Power Station has been a promising growth project for TransAlta since it was purchased from FMG in 2012 $US318 million.
However, as part of the 16-year PPA it signed with FMG to provide power to its nearby iron ore operations, the miner had the right to repurchase the project and terminate the arrangement at any given time.
On 1 August, FMG announced its intent to repurchase the plant from TransAlta subsidiary TEC Pipe, and regain control of the operations from November.
The decision was no shock to TransAlta, given FMG’s market capitalisation gains in recent years.
“We knew that this [repurchase of Solomon] was a risk given FMG’s financial situation has strengthened tremendously over the past few years and they have been executing on their strategy to in-source across their operations,” Mr Koay said.
“The decision by FMG to exercise its repurchase option became inevitable as they determined that integrating the plant would lower their financing costs and in turn, lower their iron ore unit costs.”
TransAlta said it would continue to work with FMG during the three-month transition, and gross proceeds from the repurchase would be used for future growth opportunities, and to repay the credit facility used to fund the development of South Hedland power station.
While the disagreement with FMG over South Hedland Power Station not meeting requirements of its contract was yet to be resolved, the news has not dampened TransAlta’s outlook.
With commissioning of the project now complete, Mr Koay said the project was expected to contribute significantly to the Australian business.
The 25-year PPA’s signed with Horizon Power and FMG were expected to contribute about $80 million of EBITDA each year.
“We want to ensure the plant delivers reliable power to our customers and they can enjoy the economic benefits associated with the facility,” he said.
“South Hedland is the most efficient power station on the NWIS [North West Interconnected System] and we hope that it can be a platform for further growth in the Pilbara for both existing and future customers.”
In its second quarter report TransAlta said, it believed all conditions to establish commercial operations had been satisfied under the terms of the PPA with FMG.
“We continue to confer on the issue with FMG,” TransAlta stated.
Horizon Power has chosen not to comment on the issue.
WA Energy minister Ben Wyatt said the new power station was a big win for the Pilbara to deliver reliable fuel-efficient energy and boost jobs in the region.
“This combined-cycle gas power station will provide essential energy supply for the rapidly growing Pilbara region under an innovative privately funded delivery model constructed under an agreement between the State Government, Horizon Power and Fortescue Metals Group,” Mr Wyatt said.
With funds soon to be made available through the sale of Solomon, TransAlta is in a position to pursue other growth projects, and make its entrance into the Australian renewable industry.
The company is currently developing a $160 million solar farm project in NSW, Goonumbla, which is expected to come online mid-2018.
“Goonumbla will be our first renewables project in Australia and it will benefit from our extensive renewables experience in North America,” Mr Koay said.
With an initial capacity of 70 megawatts, the project will generate up to 168,000 MW of clean electricity per year; enough energy to power 28,000 homes and save up to 141,000 tonnes of greenhouse gas emissions each year.
The Goonumbla solar farm would be located adjacent to the proposed Parkes Solar Farm, which was also approved by the NSW Department in 2016.
TransAlta has engaged a tier one engineering, procurement and construction (EPC) contractor to undertake the construction and operation and maintenance and said it was currently securing offtake agreements.
In addition, My Koay said the company was looking at other renewable sources and natural gas projects in Australia.
“We see many opportunities in the Australian market, especially as renewables technology become more and more economic,” he said.
“We will maintain our discipline when evaluating these opportunities and only deploy capital to projects that fit with our strategy.
“I expect we will land a renewables project relatively soon which will be very exciting for the team and gives us a further opportunity to leverage the experience we have in other parts of TransAlta.”