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ENGY7004 Energy Investment and Finance Semester 1 2025

INDIVIDUAL PROJECT – RENEWABLE ENERGY AT GUNUNA, MORNINGTON ISLAND

Background
Mornington Island, also so known as Kunhanhaa, is in the southern part of the Gulf of Carpentaria, about 125
km from the Queensland mainland. The island has an area of approximately 1,000 km2, with pristine scrub
forests, estuaries and mangroves. The Lardil people are the traditional owners of the land and surrounding
seas, but the Kaiadilt people, who were relocated from nearby Bentinck Island during missionary times, also
reside there. Artistic expression has empowered the preservation and revival of language and culture of the
Lardil and Kaiadilt people, suppressed in colonial and missionary times. The Mornington Island Art Centre is
one of the oldest Indigenous art centres in Australia, with art works often exhibited in galleries around the
world.
The only developed area on Mornington Island is the town of Gununa (2021 Census population, 1022), located
on the south-west coast. Mornington Island is only accessible by sea or air. There is a weekly barge from
Karumba for freight, which greatly increases the cost of any items compared with major cities in Queensland.
A small airport in Gununa provides air links to Normanton, Cairns and Mt Isa. There is a small shop, state
school, hospital, aged care facility and post office, and other facilities run by the Mornington Shire Council
including a community centre, workshop and water treatment plant. Most people live in social housing
subsidised by the Queensland Government. Overcrowding is an issue, with new houses and infrastructure
restricted by land tenure issues. Mornington Island has warm, dry winters and hot, wet summers, and is
vulnerable to cyclones (average of three per season in the Gulf of Carpentaria).
Electricity is provided by Ergon Energy, a power company owned by the Queensland Government. Almost all
power is generated via a 2240 kW diesel power station, located in the centre of Gununa and distributed to
households via overhead transmission lines. The operating costs are very high (especially due to the diesel
supplied via barge). A small amount (35 kW) of roof top solar has been installed in the community. Gununa’s
power system is heavily subsidised, as the electricity tariff charged to consumers is the same across
Queensland under the universal service commitment. Most households in Gununa access electricity via a pre-
paid system.
Ergon Energy has an Isolated Networks Strategy 2030 with plans to transition communities such as Gununa
to renewable energy. Similarly, the Mornington Island Master Plan, developed by the Mornington Shire
Council, Queensland Government and Aurecon with input from the local community, calls for a renewable
energy future for Gununa.


Barge service (Source: Carpentaria Freight) Gununa Power Station (Source: Tony Heynen)


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The Project
Ergon Energy is considering the sustainable transition of the electricity supply at Gununa as part of its Isolated
Networks Strategy 2030, thereby improving energy security and reducing diesel costs. The electricity supply
could be largely renewable by using an appropriately sized combination of wind and solar photo-voltaic (PV)
generation connected to battery storage. In this way, the diesel generation could be progressively replaced,
and used only when required.
Ergon Energy is commissioning you to design, cost and optimise the first phase of Gununa’s renewable energy
(RE) project, considering Gununa’s unique setting, its cyclical climate and its demand for electricity. Ergon
Energy has requested that three RE scenarios be examined for this first phase: 50%, 80% and 90% RE, with
the balance to be provided by the existing diesel facility as required.
The RE supply may include solar PV and wind, and a Li-Ion battery system that stores the RE. You should
optimise the combination of renewable energy technologies. The solar PV field has an area limit of 35 ha
due to land use considerations.
Your proposal should consider two distinct periods: the wet season (October – April) and the dry
season (May – September). Using the data in Figure 2, the average demand in the Gununa community can
be assumed to be 530 kW in the dry season and 775 kW in the wet season.
The Capacity Factors for solar PV and wind for these two seasons can be determined from Renewables Ninja
(www.renewables.ninja) using the project location, by averaging the monthly capacity factors.
Ergon Energy has also provided ‘Low’ and ‘High’ estimates of operating and capital costs of solar PV, wind
turbines and battery storage at Mornington Island. These are provided in the accompanying Memorandum
from Ergon Energy.
The life of the project is expected to be 40 years (i.e. the project concludes 40 years after the project
becomes operational in 2027). The real, after-tax Weighted Average Cost of Capital (WACC) for Ergon
Energy has been advised as 2.6%.
The task
Your task is four-fold:
(1) Undertake a risk assessment for the unique Environmental, Social and Governance (ESG) issues at
Gununa. Using your evaluation of ESG and other risks associated with the project, decide on an
appropriate IRR (hurdle rate) for the project’s financial returns as a multiple of the WACC.
(2) Analyse the data and design a renewable energy system to satisfy the above constraints. You should
take the provided seasonal variations into account to check that your design satisfies the power and
energy constraints and the three renewable energy targets (50%, 80% and 90%) for the seasonal
requirements. This will lead to you developing a number of scenarios for the financial investment.
(3) For the series of scenarios you evaluate in part (2) above, undertake a financial analysis to determine
the Internal Rate of Return (IRR). You should evaluate the ‘energy flows’ for each scenario and use the
‘with-without’ principle for the relevant cash flows in the determination of NPV and hence IRR. Also
assume that the electricity price is unchanged in all investment scenarios, such that electricity price is
not considered in the NPV calculations, but changes in diesel cost once the investment is made is an
important consideration in the effective revenue stream.
(4) In your assessment, select the best recommended designs from your scenarios by considering the
following:
• The hurdle rate for the investment (IRR);
• The amount of diesel saved each year for your design, and its value;
• Sizing and positioning the wind, solar and battery components of the system;
• The total capital costs of the system;
• Appropriate ongoing replacement costs associated with the system over its life;
• Operational costs (including labour and maintenance); and
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• Provisions for rehabilitation and decommissioning of the system.
• Reduction in annual CO2e emissions for the design

Your Report
Your project assessment should include the following:
• A separate cover letter to Ergon Energy (addressed to Mr Dane Thomas, Isolated Networks
Manager, Ergon Energy, 157 Bunda Street, Cairns QLD 4870).
• An executive summary (1 page).
• A table of contents (1 page).
• An introduction (1 page).
• An overview of the risk assessment methodology used and the key risks associated with the project
(based on a risk matrix and risk assessment in the appendix) (2 pages).
• An overview of your methodology and approach to the financial assessment process (1 page).
• A summary description of your capital and operating cost estimates, based on your analysis of the
energy requirements of seasonal scenarios (3 pages).
• A synthesis of the expected benefits to Ergon Energy (2 pages) including:
(i) the overall proportion of renewable energy recommended;
(ii) the achievement of a desired rate of return on investment (hurdle rate);
(iii) the avoided costs of the replaced diesel;
(iv) the savings in CO2e emissions from the investment (t/year); and
(v) any further recommendations.
• A reference list.
The Assessment Report should have a maximum length of 9 pages, not including the cover letter, executive
summary, table of contents or Appendices. In addition to the report submission via Turnitin (Blackboard), you
should also submit a Microsoft Excel financial spreadsheet on Blackboard to support your recommendations.
As per the marking rubric provided on Blackboard, this task will assess your ability to write a professional
report, to think critically about the financial analysis of major projects and to broaden your knowledge base to
consider business decisions.
Your financial assessment should be robust, making assumptions for all major elements and justifying
decisions for your methodology and output.
Clear presentation is important in the financial assessment. Do not confuse the brevity of the assessment with
the amount of thought required. Spelling, punctuation, grammar and formatting errors will be heavily penalised.
It is recommended that you proofread your work thoroughly and ensure it is readable, logical, free from errors
and consistently formatted (e.g. dot point formatting is consistent).
Assumptions and Hints
• To start the assignment, undertake a full risk assessment of the proposed investment. Ensure you find
information to contextualise the risk assessment for the community and geography.
• To fully understand the way energy is flowing from the renewable sources, battery storage, and diesel
generators, to satisfy the town’s demand, draw an ‘energy flow diagram’ for the peak wet season
demand of 775 kW. To do this, make an assumption about the ratio between the renewable energy
generated that goes directly to consumers, and the energy that goes to the battery.
• Using this system, then consider the dry season (which has different average capacity factors), check
the adequacy of the system and work out the required diesel consumption.
• Using these models, adjust the sizing and combination of the RE components to achieve the desired
50%, 80% and 90% RE target scenarios. This can be done in a series of spreadsheets developed to
determine the energy requirements for the seasonal conditions and the different RE targets.
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• The avoided diesel costs will need to be considered, taking into account your estimates of freight and
the wholesale price of diesel per litre at Gununa, and any potential tax concessions.
• The efficiency of conversion of diesel to electricity in the reciprocating diesel engines is 0.257 L/kWh
(provided by Ergon Energy). This enables calculation of the amount of diesel replaced by renewable
energy.
• You can assume that any energy generated from wind will be made by installing a specific wind turbine:
the Enercon E40 600kW turbine. The Capacity Factors for this turbine are available from Renewables
Ninja (www.renewables.ninja) using the project location. Ergon Energy has stated that from a risk
reduction perspective (based on experiences at other remote installations), if you choose to use
turbines, a minimum of two of these turbines would be installed.
• It may be assumed that wind is constant over 24 hours of a day for each seasonal scenario.
• It may be assumed that the Australian Tax Office (ATO) will allow for the (straight line) depreciation of
capital assets.
• It may be assumed that Large-scale Generation Certificates (LGCs) are not applicable for this project,
as Gununa is not connected to the National Electricity Market.
• The project will use the existing electricity transmission lines at Gununa. The existing diesel
generators and diesel storage will be maintained but do not need to be considered in your analysis.
• This exercise requires making many assumptions in the modelling and analysis. We recommend
keeping a detailed list of assumptions you are making. Key assumptions should be clear to the
reader to understand how you have approached the task.



Figure 2: Annual average monthly power demand at Gununa

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