FIN3CSF Case Study 2: Project Evaluation and Business Case Development for the Sale of the Sun Cable Powerlink Project

One January 11^th 2023, FTI Consulting announced that they have been appointed as voluntary administrators of Sun Cable Pty Ltd, which is the company associated with the proposed construction and operation of the Sun Cable Australia-Asia PowerLink project. The PowerLink project was initially developed by Mr Mike Cannon-Brookes, co-founder of the Atlassian Corporation, and Dr Andrew Forrest, founder and current Board chairperson of Fortescue Metals Group Limited. The PowerLink project is based on the construction of a 17-Gigawatt peak (GWp) solar farm supported by a 36-Gigawatt hour (GWh) battery storage system located near the town of Elliott in the Barkly region of the Northern Territory around 650 kilometres south of Darwin. The site represents land provided to the project by the Northern Territory Government at no direct cost. The Barkly region is suggested as being one of the most consistently sunny places on earth and has flat land suitable for the installation of a solar panel array. The solar farm site will cover approximately 12,000 hectares of land, comprising the solar panel array and battery storage infrastructure along with supporting electricity conversion and transmission equipment. The site is located adjacent to the main railway and electricity transmission corridor from Darwin to Adelaide. Electricity generated by the solar farm installation, including battery-stored electricity capacity, will initially be transmitted to Darwin partly for network distribution in the Darwin area. However, the project will also involve the construction of 4,200 kilometres of under-sea high voltage direct current (HVDC) submarine cable between Darwin and Singapore with the remaining electricity planned to be transmitted to supply approximately 15% of Singapore’s electricity requirements. Subject to buyer identification and achievement of the required approvals and sourcing of project funding, project construction is expected to commence at the start of 2024 with electricity transmission to Darwin expected to commence at the start of 2027 and commissioning of the under-sea transmission cable and provision of electricity to Singapore at the start of 2028. The solar farm and battery installation is expected to provide a minimum of 3.2 Gigawatts (GW) of electricity per hour each day and supply 800 Megawatts (MW) of electricity (equivalent to 800 MW of electricity per hour) to the Darwin electricity grid and 2.0 Gigawatts (GW) of electricity (equivalent to 2.0 GW of electricity per hour) under contract to the Singapore Government’s Energy Market Authority (EMA). The solar panel array and electricity inverter and transmission infrastructure is expected to have a 41-year useful life once full-capacity electricity generation commences in 2027 and the under-sea transmission cable will have an operating life of 25 years before a major maintenance and upgrade program will be required. The project is projected to create 1,500 jobs during the construction phase and 350 ongoing operational jobs once electricity generation and transmission commences. In terms of climate change impact, the project is expected to deliver total carbon emissions abatement equivalent to 8.6 million tonnes of carbon dioxide equivalent (CO2e) greenhouse gases per year.

Table 1 outlines the construction, operating and decommissioning schedule proposed for the project:

Table 1: Project Site Construction, Operation and Decommissioning Summary

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The following information outlines the base requirements, specifications and parameters that have been developed or forecast as part of the project planning and analysis:

• The solar power farm will have a 17-Gigawatt peak (GWp) maximum electricity generating capacity based on the use of photovoltaic (PV) solar panels which absorb the energy from sunlight in the form of direct current (DC) electricity which is transformed through an inverter process into useable alternating current (AC) electricity. A 17-Gigawatt (GW) generating facility operating at maximum (optimal) capacity will produce 17 GW hours of electricity per
• The solar power farm will require the installation of 34,000,000 (34 million) individual solar panels each with a maximum electricity generating capacity of 500 watts (0.50 of a kilowatt hour (kWh) per hour). The PV solar panels will be installed on single axis mounting that will allow the panels to tilt horizontally to absorb more hours of available
• The solar panels will cost $300 per panel based on site delivered cost (in real terms). All of the required solar panels will be purchased in bulk in 2024.
• The cost for the installation of the solar panel mounting, solar panels, inverter equipment, transmission network equipment and electricity sub-stations, other plant and storage buildings and equipment and vehicles is estimated to be $5.5 billion (in real terms). It is estimated that 40% of these installation costs, primarily related to installing the solar panel array, will be incurred in both 2024 and 2025 with the remaining 20% of the installation costs incurred in 2026.
• The cost of purchase and installation of the solar battery storage units supporting the solar farm will be $7.8 billion (in real terms). This battery storage infrastructure will be purchased and installed in 2026.
• The under-sea transmission cable between Darwin and Singapore will be constructed and installed on the sea-bed during 2027 at an estimated cost of $7.5 billion (in real terms).
• The wholesale tariff at which solar farm generated electricity can be sold to users of the Darwin electricity grid is expected to average A$105.00 per Megawatt hour (equivalent to A$105,000 per Gigawatt hour) in real terms over the life of the project. Electricity will be sold to the Singapore Government EMA at an average tariff of SG$160,000 per Gigawatt hour (equivalent to SG$160.00 per Megawatt hour) in real terms. Any excess electricity generation beyond these contractual requirements will be transferred to the Australia National Electricity Market (NEM) grid at an average wholesale tariff of A$120.00 per Megawatt hour (equivalent to A$120,000 per Gigawatt hour) in real
• Weather analysis and modelling of historical sunrise and sunset information for the Barkly region of the Northern Territory suggests that the solar panels will receive an average maximum of 7 hours of sunshine during the Summer season, 5 hours of sunshine during the Winter season and 6 hours of sunshine during both the Autumn and Spring seasons.
• The Summer, Autumn and Spring seasons will have 91 days, on average, and the Winter season will have an average of 92 days.
• There is expected to be an average daily 15% loss of maximum solar power generating capacity due to cloudy conditions, rain, and other forms of inclement
• Due to usage and exposure to the outside elements, and independent of the robotic panel cleaning system that will be installed and maintenance of the solar farm site land, the PV solar panels are expected to decline in generating capacity relative to maximum output by 50% per year after the first year of full capacity electricity generation in 2027.
• The solar power farm will be relatively self-sufficient once generation commences, however, there will be annual operating and maintenance expenditure estimated to be $600 million (in real terms) associated with management and site staffing costs, costs associated with solar farm and infrastructure maintenance, supplies, spare parts and vehicle costs, and utilities costs including water for solar panel cleaning, gas and electricity.
• The project can claim straight-line depreciation deductions against the usage of the solar panel, inverter, transmission infrastructure, battery storage and under-sea transmission cable across the 40-year period of full capacity electricity generation and under-sea cable transmission (from 2028 to 2067) based on the undiscounted installed cost of the project.
• There will be a $1 billion upgrade expenditure on the under-sea transmission cable required in 2053 (year 26 of usage of the transmission cable) which will involve the transmission cable being unavailable for electricity transmission to Singapore for half of the 2053 year.
• The project developers invested $210 million (in real terms) for initial development activities in 2021 and Grok Ventures (the private company of Mike Cannon-Brookes) invested a further $65 million (in real terms) in interim funding in 2022 to continue initial project
• At the end of the expected 41-year useful (generating and storage) life of the PV solar panels and battery storage units, there will be a $750 million expenditure (in real terms) incurred in 2068 associated with dismantling the solar panel array and mountings, inverter and transmission network infrastructure, battery storage units and deactivating the under- sea transmission cable, which are assumed to have no alternate use or re-sale value at this
• The project will be subject to corporate tax on annual profits (and can claim tax benefits for losses) of the project at an average expected long-term corporate tax rate of 25%.
• The project has an expected long-term after-tax implied cost of capital of 80% (in nominal terms).
• The average rate of inflation over the life of the solar power farm is expected to be 2.75% per annum, within the Reserve Bank of Australia’s targeted range.
• All figures are expressed in December 31^st 2022 real dollars. All monetary figures, apart from the Singapore dollar tariff for the electricity transmitted to Singapore using the under- sea transmission cable, are expressed in Australian dollars (A$).
• The Australian dollar to Singapore dollar exchange rate is expected to average 9250 (A$1 = SG$0.925) over the life of the project.
• The project modelling and evaluation is being undertaken on March 1^st
• Note that 1 Gigawatt hour represents 1,000 Megawatt hours and 1 Megawatt hour represents 1,000 Kilowatt hours. Gigawatt peak (GWp) refers to the amount of electricity expected to be generated in optimal equipment, weather and environmental

FTI Consulting, as the appointed voluntary administrator, has engaged MA Moelis Australia and Moelis and Company (together Moelis) as sale advisor to administer the project sale process. It is envisaged that the project sale process will be completed by May 2023. As part of this sale process, Moelis are providing a data facility for parties submitting initial expressions of interests in acquiring the project. This data facility will provide background project information and technical data, project site evaluation and geology assessment data, project spreadsheet model valuation and risk assessment information and business case documentation.

Required:

This case study requires the completion of the following tasks as part of the preparation of the data facility to support the project sale process for Moelis and FTI Consulting:

• The development of a spreadsheet model representing the cash flows associated with the Sun Cable PowerLink project, and the assessment of the project’s valuation and return attributes using a range of capital budgeting evaluating techniques.
• The completion and provision of qualitative and quantitative risk assessments of the project, with the quantitative risk assessment based on conducting appropriate sensitivity and scenario analyses of the project valuation focusing on key parameters impacting on the project’s operation, feasibility and cash
• The preparation of a business case proposal for the project supporting the feasibility and attractiveness of the Sun Cable PowerLink

The due date for submission of this Case Study task is no later than Monday 17th April 2023 at 11.59pm. This Case Study will represent 25% of the final assessment for this subject and is to be submitted using the upload facility provided on the subject LMS site. This Case Study is an individual assessment task, and should be a maximum of 1,500 words, excluding any calculations, tables, spreadsheets or other exhibits. The Case Study report should be prepared in a professional manner and include relevant, accurate and logical information to justify any project decision-making and feasibility conclusions drawn. The Case Study report submission should be accompanied by the provision of a spreadsheet model developed for the Sun Cable PowerLink project.