The Callide C explosion lands in court: a confluence of contentious consequences
The explosion of unit C4 at the Callide power station in Queensland in May 2021 was the most catastrophic failure of a power station since the inception of the national electricity market (NEM) in 1998 – and perhaps a reminder of the vast forces that are harnessed by technology every minute, day and year to safely produce, transport and consume the electricity supply that we take so much for granted.
Very briefly, and broadly, what (appears to have) happened is this. In early 2021, the Callide C units were undergoing maintenance, including a replacement of the battery charger for DC supply in unit C4. In the course of bringing the new battery charger into service, a fault or error occurred in the switching process, which led to an unplanned loss of voltage in the DC supply, which in turn led to the loss of DC and AC power to a number of protection systems for unit C4. In short, the generator turbine did not trip off and cease spinning as it should have (had the protection systems been operating); and the continued asynchronous spinning of the turbine, coupled with lubrication oil pump failures, culminated 33 minutes later in a kinetic disintegration and explosion of the generator.
But if a picture tells a thousand words, then a 20-minute Youtube explainer conveys what happened far better (from CS Energy’s perspective, as operator) than any short article could ever hope to.
Immediately afterwards, sharp drops in network frequency and voltage caused 9 other major Queensland generating units to trip off automatically. That sudden loss of supply in Queensland caused the Queensland/NSW interconnector to become overloaded, and also to trip off. Automatic load shedding of around 40% of Queensland demand followed, but was largely restored over the following 2 hours. It is testament to AEMO’s management of the power system that the Callide C outage did not cascade into a statewide blackout, as had occurred in South Australia in 2016.
In the meantime, Callide unit C4 has remained out of service since May 2021, as investigations and expensive repairs have ensued. To make matters worse (and more expensive still), in May 2022 the adjoining unit C3 suffered a significant structural failure, and that unit C3 is still also out of service. In the course of repairs, the cooling towers of both units C3 and C4 have had to be demolished. By late 2023 and in the beginning of 2024, the consequences of the unit C4 explosion and the failure of unit C3 have begun to play out in court.
IG Power’s administration and the appointment of special administrators
Callide C is owned by a 50/50 joint venture between IG Power (Callide) Ltd (IG Power) and Callide Energy Pty Ltd (which is a wholly-owned subsidiary of CS Energy). IG Power is owned by a consortium, in which Sev.en Gamma a.s. (Sev.en) is a participant, holding a 25% interest in IG Power, and so holding an effective 12.5% interest in the Callide C joint venture.
The joint venture owners contracted CS Energy to operate, maintain and repair the Callide C units, under an Operation and Maintenance Agreement. CS Energy’s obligations included operating and maintaining the plant, providing the skills and resources necessary to do so, and to optimise the effective life of the plant.
In March 2023, administrators were appointed to IG Power, due in no small part to the substantial costs and loss of revenue caused by the unit C4 explosion and failure of unit C3. The administrators’ tasks were complex, and included progressing the return to service of the damaged units, investigating IG Power’s contractual rights and obligations, servicing IG Power’s complex hedging arrangements, engaging with a buyout process under the JV that had been triggered by IG Power’s administration, and conducting a non-binding indicative offer process for the restructure of IG Power. And the JV buyout process was being carried out as between IG Power and its investors, on one hand, and Callide Energy on the other hand – in circumstances where Callide Energy’s parent, CS Energy, was the operator of the units and so potentially liable for the explosion and the later failure of unit C3.
As such, a key variable in any restructurings of the joint venture and IG Power was what claims and what prospects IG Power might have against CS Energy under the O&M Agreement arising from those incidents.
By late 2023, Sev.en was concerned that IG Power’s administrators had not commissioned their own investigation into the failure of units C3 and C4, in order to evaluate what rights and prospects IG Power might have against CS Energy. In early December 2023, Sev.en applied for the appointment of special purpose administrators to IG Power, tasked with conducting investigations into the failures of units C3 and C4. The application was listed for expedited hearing in late January 2024, and Derrington J gave judgment ordering the appointment of special purpose administrators on 29 January 2024: Sev.en Gamma a.s. v IG Power (Callide) Pty Ltd [2024] FCA 30. In circumstances where the incumbent administrators were able to provide very little information as to what investigations they had carried out or commenced, Derrington J had little hesitation in concluding that the appointment of special purpose administrators was warranted.
In passing, Derrington J noted that CS Energy had commissioned a forensic engineer to investigate the causes of the unit C4 explosion as early as June 2021 – yet, by January 2024, neither IG Power’s administrators nor Sev.en had received any draft reports or information about the progress of CS Energy’s investigation.
Insurance proceedings
Around the same time, in December 2023, Callide Energy commenced a proceeding against its insurance syndicate to recover nearly $300 million in claimed repair costs and business interruption losses: QUD 572/2023. (IG Power had previously commenced and settled a proceeding against its insurers.) A first case management conference of the insurance proceeding is listed on 24 April 2024, also in Justice Derrington’s docket in the Federal Court.
AER commences civil penalty proceeding
On 9 February 2024, following its own investigations into the unit C4 explosion, the AER commenced a civil penalty proceeding (QUD61/2024) against Callide Power Trading Pty Ltd, which is the entity registered as the generator for the Callide C units.
The AER alleges that Callide Power Trading breached its obligations to operate and maintain the unit in accordance with generator performance standards relating to having adequate protection systems to promptly disconnect the generator from the power system in the event of a fault. The AER’s concise statement summarises how the initial loss of DC supply from the C4 battery charger caused loss of power supply to 3 protection systems – which in turn allowed the unit C4 turbine to continue spinning uncontrollably after the initial loss of power, rather than disconnecting from the power system and shutting down.
Notably, this is the AER’s first civil penalty case for contraventions in the wholesale NEM since the maximum available penalties have been increased from $100,000 to $10 million for the most serious class of contraventions – with effect from January 2021. If this case had been run under the old penalty limits, the maximum penalty available would have been a paltry few hundred thousand dollars. Given the severity of these breaches and the harms outlined in the AER’s concise statement, one could expect that a penalty in the tens of millions of dollars might be awarded, which would mark a real step change in AER civil penalty outcomes in the wholesale NEM.
The civil penalty proceeding is also listed in Justice Derrington’s docket in the Federal Court. Barring a reallocation of some or all of these proceedings, his Honour will end up well-versed in the causes and consequences of the unit C4 explosion.
CS Energy’s engineering report
On 13 February 2024 – two weeks after the special purpose administrators had been appointed to IG Power, and 4 days after the AER’s proceeding was filed – CS Energy published a technical investigation summary, based on its own investigation assisted by the forensic engineer it had appointed in June 2021. The technical investigation summary was published together with the Youtube explainer that is linked above.
Class action risk?
The AER’s concise statement alleges that the unit C4 explosion resulted in load being shed to customers in Queensland and northern New South Wales on the day of the explosion; and that the extended outage of unit C4 resulted an increased wholesale spot price for electricity in Queensland in the period after the explosion. Those alleged consequences raise the question what class action claims might potentially lie against CS Energy.
As confirmed in litigation that followed the Longford gas explosion in Victoria in 1998, no claim in negligence lies for customers who suffered only pure economic loss by reason of the loss of supply that immediately followed the explosion; whereas any customer who could establish economic loss in addition to property damage is owed a duty of care in respect of both kinds of loss: Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] VSC 27. An interesting question might arise whether any of the other 9 generators affected in Queensland might qualify as having suffered any property damage.
As to the increase in Queensland wholesale prices that is alleged to have ensued, that would – if causation were established – be an even more remote form of economic loss. But it is interesting to contrast this scenario with the currently-pending class action against CS Energy (and Stanwell) in Queensland, in respect of increased spot prices that are alleged to have been caused by CS Energy and Stanwell engaging in anti-competitive bidding conduct in the wholesale NEM. Significantly, those cases are brought for misuse of market power under the Competition and Consumer Act 2010 (Cth) – section 82 of which entitles claimants to sue for pure economic losses caused by contravening conduct. It is instructive to contrast that provision with the position under s 61 of the National Electricity Law, which creates a statutory right to damages, but only for breaches of a very narrow class of “conduct provisions” – none of which would have been breached in relation to Callide C.
In Johnson Tiles v Esso, one reason given by Gillard J for not recognising a duty of care to avoid pure economic loss to customers was that the creation of such a broad liability was properly a matter for Parliament, which had not seen fit to enact such a statutory claim. So too here, in relation to the loss of electricity supply from Callide C and its subsequent wholesale market impact.
At the time of writing, further applications were pending in the administration of IG Power. Now that these various strands of fallout from the unit C4 explosion have made their ways into court, we shall continue to watch these spaces.
