How to mitigate construction risks and avoid disputes in pumped hydro projects

As with all civil tunnelling, the subsurface geological conditions can never be fully ascertained before construction begins, and unexpected conditions can present a major challenge. If issues arise, consequential design modifications, cost increases and delay can also lead to disputes.

Such issues demonstrate the importance of early and comprehensive geotechnical investigations, but even thorough investigation cannot fully eliminate the risks associated with unforeseen and difficult ground conditions.

Rather, the parties to a PHES construction contract need to be explicit and thorough in relation to the risk allocation between them arising from geological issues. The scope of the geotechnical investigations should include work to identify the full catalogue of risks or potential ground conditions. This should form the basis of a detailed and extensive risk allocation model. The risk distribution between the parties should be:

• realistic and equitable: providing sufficient contingencies for when unforeseen ground conditions are encountered, and allowing works to progress unhindered; and
• detailed and comprehensive: providing certainty of which party owns the cost and delay of latent conditions and eliminating the need to argue at every geotechnical surprise.

This can be achieved by incorporating a 'geological baseline report' into the contractual documents, to describe detailed ground conditions, knowns and unknowns and responsibility for the unexpected against the GBR and other reliance information on geotechnical conditions.

Connecting PHES projects to the transmission network and grid also brings challenges. Not all risks can be eliminated. Parties should be prepared for complications arising from connection requirements and commissioning processes, which can lead to delay.

PHES projects in particular are highly complex, involving multiple interconnected systems:

• civil infrastructure (dams, tunnels, reservoirs)
• electromechanical systems (pumps, turbines, generators)
• grid connection systems (substations, transformers, HV lines)
• digital control systems (SCADA, communications, real-time monitoring).

Each of these components may be designed, built or supplied by different contractors/vendors. This introduces technology interface risks. If these components do not integrate smoothly, it could result in operational delays, cost overruns, disputes, system underperformance and/or regulatory scrutiny.⁵

Risks are not limited to the delivery stage, but subsist post-commissioning. One key example is the SCADA (Supervisory Control and Data Acquisition) system—the nerve centre of modern generators (including PHES facilities):

• The SCADA system plays the key technological role in an array of critical operational matters, including monitoring real-time data (eg grid frequency), controlling operations (eg pumping or generating), and communicating with grid operators and balancing supply and demand. This, in turn, impacts the generator's compliance with the National Electricity Rules.
• PHES is particularly sensitive to SCADA breakdown as an energy storage system (as well as a generator), which therefore plays a critical role in grid stability. Any malfunction or misalignment in the SCADA system can (for example) delay the facilities' response to grid demands, cause synchronisation issues with the transmission network and/or ultimately lead to the risk of grid instability.
• While it is critical that the contractual matrix adequately assigns risk and liability in relation to the proper operation of SCADA, owners/developers also need to be cognisant of regulatory scrutiny. Non-compliance with SCADA obligations has been a key enforcement priority for the (AER) and has the potential to lead to enforcement action and regulatory penalties.

It is essential that the contractual frameworks include clear delineation of responsibilities between contractors, developers and transmission or distribution network operators. Interface agreements and strong technical governance frameworks reduce the risk of costly misalignments, post-commissioning disputes and regulatory investigations or enforcement.

Owners cannot contract out of regulatory requirements, but can have a sufficiently robust contractual liability and good governance framework to minimise the risk of system failure and regulatory breach.

Parties should prioritise early collaboration between technology providers, transmission network operators and AEMO, including for:

• comprehensive testing of control systems prior to commissioning; and
• contingency plans in place to address potential integration challenges as they arise.

Given the geographical scale and requirements for PHES projects, appropriate sites are often situated on or near to culturally significant sites and/or land subject to Indigenous claims. This means PHES developments are particularly susceptible to legal challenge to licences and approvals, on the basis that developers have failed to adequately consult with Indigenous stakeholders in satisfaction of domestic ESG regulations. This risk can materialise as a result of activism by public interest groups, formal complaints to regulators and/or judicial review proceedings. Efforts to address complaints by Indigenous stakeholders and consequent litigation will not only lead to inflated costs, but also likely disrupt the project or halt progress entirely.

Developers are also subject to stakeholder scrutiny for compliance with their own ESG policies, voluntary commitments and published representations, which may go further than domestic ESG regulations. Increasingly, stakeholders, shareholders and activists expect companies to align with both international laws and voluntary soft law standards like the UN Guiding Principles on Business and Human Rights (UNGPs).

In addition to project, legal and cost consequences, failure (or perceived failure) to comply with ESG policies and commitments can lead to reputational damage and loss of social license (ie support from the community).

Contracts should be clear around who bears the cost and time risks associated with any legal challenges. In order to mitigate against time and cost implications of potential challenges, it is essential that parties consult traditional owners early and transparently, and engage compliance policies to ensure ESG regulations and internal ESG policies and commitments are met.

One strategy to achieve this is to design robust complaints and grievance mechanisms and deploy them as early as possible in the project. These mechanisms should allow traditional owners and other stakeholders to lodge complaints prior to design and development. This allows developers to make changes and negotiate agreements while it is still reasonably quick and inexpensive to do so.

In 2024, the Clean Energy Council published a best practice guide for the renewable energy industry to support their engagement with First Nations. This included discussion of key principles of best practice for renewables projects with First Nations peoples, including respectful engagement, preservation of cultural heritage, ensuring economic and social benefits are shared and embedding land stewardship and cultural competency. The guide is a useful source of discussion on minimum and best practices around PHES projects.

PHES projects are capital-intensive, often requiring decades-long payback periods. This makes them highly sensitive to changing energy policies (eg subsidies), National Electricity Rule amendments and grid connection regulations. Uncertainty or sudden policy reversals can (depending on their revenue solutions) make PHES projects financially challenging, stalling projects before they start or undermining returns for those already under development.

While not exclusively PHES-focused, the policy reversal exemplifies how long-term green energy investments can be derailed by changing regulatory landscapes. In Australia, some developers voiced concerns in 2024 over delays in finalising the National Energy Market (NEM) rule changes to accommodate large-scale storage, impacting final investment decisions for several PHES proposals.

These risks should be mitigated to makes PHES projects more attractive to investors and reduce the risk of costly litigation. Consider securing government-backed contracts that have comprehensive termination payment regimes and a diversified capital base so as to reduce the potential impact of adverse policy changes.

PHES projects require highly specialised skills across multiple domains—civil tunnelling, high-voltage electrical systems, hydro-mechanical equipment installation and digital control integration. The growing pipeline of green infrastructure globally has led to increased competition for a limited pool of experienced contractors and specialist workers, driving up costs and project delays, with the potential for quality or defects risks.

PHES projects, like other complex green energy infrastructure, are particularly reliant on overseas specialists for certain areas of expertise, eg in the areas of design and geotechnical issues, as well as overseas suppliers of specialised components such as turbines and pumps. Components fabricated overseas can present particular quality control issues, leading to the potential for inflated costs, complex liability matrices and litigation, if defects arise.

The risk of increased costs flowing from defective or damaged components can be mitigated by securing well-drafted warranties from both suppliers and installers as to the fitness of their products. Warranties should include the right for the developer to fix defects and recover costs and would ideally be supported by indemnities. It is essential to have the appropriate warranties to seek to avoid unexpected costs and disputes if components fail.