Assignment Task

On March 13th 2024, Tomago Aluminium announced a forthcoming tender for expressions of interest for the supply of renewable energy (electricity) for the operation of its Tomago Aluminium Smelter located in Tomago which is just north of Newcastle, NSW. The Tomago Aluminium Smelter is currently the largest single consumer of electricity in Australia, so transitioning to cleaner, and potentially cheaper, sources of electricity is an important strategic business decision for company. The Tomago Aluminium Smelter commenced smelting operations in 1983 and now employs over 1,200 staff and contractors and produces approximately 37% of all primary aluminium products in Australia. The Tomago Aluminium Smelter business is majority owned by Rio Tinto Limited, the world’s second-largest diversified resources company

Corio Generation Limited, a stand-alone portfolio company part of Macquarie Asset Management, is planning on submitting an expression of interest into the tender process associated with the development of a 1.2 Gigawatt (GW) off-shore wind farm located in the Australian Federal Government declared offshore wind area approximately 35 kilometres off the Hunter Central Coast area extending from Norah Head south of Newcastle up to Port Stephens which is north of Newcastle. The total area for the declared offshore wind area is 1,845km2 . This site is considered as suitable for wind farm location and energy generation as it has consistent strong winds, proximity to electricity transmission infrastructure associated with nearby existing coal-fired power stations, proximity to high demand electricity requirements including the Tomago Aluminium Smelter and growing population centres and availability of support and construction infrastructure using the Port of Newcastle. The proposed offshore wind farm project will have a maximum electricity generation of 1.2 Gigawatts (equivalent to 1,200 Megawatts (MW)) based on the installation and operation of 200 individual wind turbines each with a 6 Megawatt (MW) maximum generation capacity. Initial undersea geological analysis of the declared offshore wind area has indicated varying water depth, resulting in the proposed installation of 150 fixed bottom turbines installed on the sea-bed and 50 floating wind turbines in the area with the deeper water depth. The wind turbine technology associated with the proposed project is based on the rotor blades on each wind turbine being turned by wind moving over them which are attached to a shaft with a gearbox which spins a generator to create electricity. This turbine infrastructure will be connected to an offshore electricity substation using array cabling which will then be connected to an onshore substation using heavy-duty export cabling that will need to be buried under the sea-bed. The onshore substation will then transfer the generated electricity to the electricity grid using the existing above-ground transmission infrastructure (poles and wires). The selected wind turbines for the project are the Siemens SWT-6.0 model wind turbine which have an abovewater tip height of 245 metres based on a tower height of 170 metres and a rotor length of 75 metres, with three rotor blades attached to each turbine tower. The wind turbines require a minimum 14.4 kilometres per hour (Km/h) wind speed to begin rotating and maximum electricity generation is achieved at a wind speed of approximately 47 Km/h. The wind turbines will cut-out (stop turning) at very high wind speeds of 90 Km/h and above to prevent damage to the turbine shaft and generating equipment. The envisaged operating life of the offshore wind farm is 30 years following the commencement of full-capacity operation (based on installation of all 200 wind turbines).

The planned construction, operational and decommissioning schedule for the offshore wind farm is outlined in the table below subject to acceptance of the project tender proposal by Tomago Aluminium:

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 offshore wind farm will involve the installation and operation of 150 fixed bottom wind turbines and 50 floating wind turbines (200 operational wind turbines in total) each with a maximum generation capacity of 6MW (full capacity operation would generate 6MW hours of electricity per hour). Maximum capacity operation of the overall offshore wind farm would generate 1.2GW hours of electricity per hour.
• The cost of the wind turbines (delivered to the Port of Newcastle) is $12 million per wind turbine (in real terms). The under-sea foundation mounting for each fixed bottom wind turbine is an additional $1 million per turbine (in real terms).
• The estimated installation cost per fixed bottom wind turbine is $4 million (in real terms) and $2 million (in real terms) for each floating wind turbine.
• The cost of construction and installation of the offshore and onshore electricity substations is $200 million (in real terms) and the cost and installation of the array and export cabling and the transmission infrastructure to connect to the national electricity grid is $150 million (in real terms).
• The cost of annual maintenance on the offshore wind turbines in 2029 (first year of wind farm electricity generation) will total $180 million (in real terms) and increase 1%, on average, in each subsequent year of wind farm operation due to erosion and weathering effects associated with salt water and the strong winds. Other annual wind farm operating costs are estimated to be $50 million (which will remain constant in real terms).
• The wind farm and offshore wind turbines will be able to operate 24 hours each day, however, there is expected to be an average operating capacity factor (OCF) of 70% due to periods of light or very high winds. This means that the wind turbines are projected to generate electricity at the maximum generation capacity (based on wind speeds of at least 47 Km/h) only for 70% of the potential maximum operating time.
• Due to climate change effects winds off the east coast of Australia are predicted to increase in strength in the future, resulting in an annual 0.5% increase in the operating capacity factor for the project after the first year of electricity generation in 2029.
• The wind farm project will also have to pay an annual $20 million access fee (in real terms) for usage of the declared offshore wind area to the Australian Federal Government. This access fee will become payable from the year that wind farm construction / installation commences through to the year that the wind farm is fully decommissioned and the wind turbines and other offshore wind farm infrastructure are removed.
• The total estimated cost associated with the decommissioning of the offshore wind farm infrastructure at the end of its operational life is $350 million (in real terms).
• The project can claim annual straight-line depreciation deductions against the offshore wind farm turbine, mounting, substation, cabling and transmission infrastructure installed costs over the 30-year expected operational life of the wind farm (from 2029 to 2058).
• Corio Generation expects to be able to charge the Tomago Aluminium Smelter an average electricity tariff price (in real terms) of $90 per MW hour (MWh) for all of the electricity generated by the offshore wind farm.
• Any project profits will be subject to corporate taxation for Corio Generation at an expected average tax rate of 25% over the life of the project.
• The offshore wind farm is assumed to operate 24 hours a day, 365 days a year (ignore leap years). The Tomago Aluminium Smelter currently operates 24 hour a day also, so there is no requirement for any form of electricity storage to provide generated electricity to the smelter.
• The project has an expected long-term after-tax implied cost of capital of 9.50% (in nominal terms).
• The average rate of inflation over the life of the offshore wind farm project is expected to be 2.80% per annum, near the top of the Reserve Bank of Australia’s targeted range.
• All figures are expressed in December 31st 2023 real dollars. All monetary figures are expressed in Australian dollars.
• The project modelling and evaluation is being undertaken on April 1st 2024.
• Note that 1 Gigawatt hour represents 1,000 Megawatt hours and 1 Megawatt hour represents 1,000 Kilowatt hours.

Corio Generation has engaged your consulting firm to conduct the spreadsheet modelling analysis and capital budgeting evaluation of the offshore wind farm project as well as undertaking project risk assessment and preparation of a business case proposal supporting the project to be submitted as part of the tender application to Tomago Aluminium.