Inside the economics of Snowy 2.0
On Thursday morning, the Morrison government launched its energy generation underwriting program, asking for registrations of interest in a scheme it says will lower power prices and increase reliability. Critics fear it may lead to taxpayer money backing the construction of new coal-fired power generation. As it stands, funding for the grants and loans scheme is uncapped.
The announcement came hours after the board of Snowy Hydro voted to approve Malcolm Turnbull’s pet project, Snowy 2.0. The decision is now over to Snowy Hydro’s sole shareholder – the federal government. There is no deadline for that call to be made and Energy Minister Angus Taylor was cautious in his response, saying the government would “take whatever time is required to do the necessary due diligence”.
Depending on who you ask, Snowy 2.0 is either vital to shore up Australia’s energy security as the shift to renewables gains pace, or it’s a mysterious white elephant that’s worsening the dearth of investment it seeks to solve.
Some of the split is ideological – how big should the government’s role in energy be? However, much of the public debate lies in the unknown, as the full details of the business case have been withheld by Snowy Hydro because of commercial concerns.
Built between 1949 and 1974 by more than 100,000 workers, Snowy Hydro has a solid pedigree. Angus Taylor’s grandfather was the scheme’s chief engineer. It consists of nine power stations, 16 major dams and 33 hydro-electric turbines, and currently produces about one-third of all renewable energy available to Australia’s eastern mainland grid.
Snowy 2.0 would expand the scheme’s existing pumped hydro, increasing its generating capacity by half. Storage will also be added, which is what 2.0’s proponents argue makes the project so important as coal factories become less viable. Pumped hydro storage works by pumping water uphill in off-peak times and waiting until there’s high demand to release the stored water through turbines, generating electricity. At full capacity, Snowy Hydro says it would provide enough large-scale energy storage to power three million homes for a week.
All of this comes at a cost, of course. At a minimum, Snowy Hydro is looking at a spending of $3.8 billion to $4.5 billion, according to its own feasibility study. However, this excludes the cost of land and development, foreign exchange, funding or financing, project management and GST. And beyond that, as the feasibility study notes, there “are risks, opportunities and contingency amounts that significantly affect this range”.
The cost of SnowyLink – the upgrades to shared transmission lines necessary for Snowy 2.0’s power to be sent to Victoria and New South Wales – is estimated at $2 billion. Those upgrades aren’t included in the project costing either, because the NSW transmission monopoly TransGrid – not Snowy – is responsible for the shared network.
Andrew Blakers, professor of engineering at the Australian National University, says $4 billion for the project is “a very acceptable price”.
“That’s roughly in the middle of the price band that would be acceptable for pumped hydro of this scale – $2000 per kilowatt with a week of water, that’s a pretty nice price. Of course, I don’t know whether that’s what the final documents will say. Six billion dollars, I think it would probably still be okay. If it was $8 billion, you’d start to think, could we do something else?”
That uncertainty is what drives fear among sceptics of the project. Bruce Mountain, director of the Victoria Energy Policy Centre, says in his analysis the project will cost at least $8 billion and the market value of the project won’t come close to the amount spent building it.
“I’m afraid it’s NBN 2.0 – it has been subject to no proper scrutiny, no public accountability, no proper assessment.
“It’s not money the government is spending, it’s money the government is taking out of taxpayer pockets. On such a major investment, not least the size of the expenditure but on implications for the rest of the industry, good public process ought to hold this decision up for scrutiny.”
Whether any of this information will ever be made public remains unclear. Snowy Hydro considers it commercially sensitive and says that – as it operates in a competitive market – it will protect its intellectual property, though it seeks to release as much information as possible to keep interested parties informed. Within its final investment decision announcement, Snowy Hydro said it would release further project information if and when it gets federal approval to go ahead.
According to Andrews Blakers, it is likely Australia will reach 50 per cent renewables for its energy production by 2024. In order to support 100 per cent renewable energy, he says, the whole system will need 15 to 20 gigawatts of storage. Currently, the country only has 1.34 gigawatts of pumped hydro storage, according to the Australian Renewable Energy Agency.
Beyond Snowy, Origin Energy has proposed to double its pumped hydro storage power at Shoalhaven in NSW, taking the total generation capacity to about 500 megawatts. In Queensland, Genex Power has development approval to start building 250 megawatts of pumped hydro at its Kidston project. Hydro Tasmania, the largest generator of renewable energy in Australia, has identified 14 sites it could use in its “Battery of the Nation” project and says it could start building as soon as 2020.
At a recent Committee for Economic Development of Australia event in Melbourne, Hydro Tasmania’s chief executive, Stephen Davy, said the Tasmanian projects ranged between $1.1 million per megawatt installed and $1.5 million per megawatt installed, with “anything from seven to 20 hours’ worth of storage” behind them.
“What we’ve identified in Tasmania through the Battery of the Nation work is pumped hydro is at the moment – and will be for quite a long time – the most cost-competitive grid-based storage,” Davy said.
Bruce Mountain says there is evidence Snowy 2.0 won’t be worth the cost of building it. He points to the Dinorwig pumped hydro plant in Wales, which last year received a valuation of about $250 million. Snowy 2.0’s own feasibility study says it has “a multitude of similarities” to Dinorwig.
“Snowy are saying, ‘We must have our project’ without any reasonable ability to forecast those technology changes over the at least decade it will take for them to build their project,” Mountain says. “We are investing an unknown sum into a technology which is – on what we can observe from countries that are making the transition to wind and solar very much more quickly than we are – not terribly valuable at all, not worth anything near its cost.”
Both proponents and critics agree the delay between former prime minister Turnbull’s announcement in March 2017 and the final investment decision – released by Snowy Hydro’s board on Wednesday – has deterred other construction of pumped hydro. The company has said approvals and detailed plans could be completed in 2019, with full construction forecast to be finished about seven years after the final call is made.
“While it’s hanging there it hugely inhibits other people wanting to construct pumped hydro. If it’s committed, other people will say, ‘Okay, we’re pretty much right until 2024, I will commit my pumped hydro to start in 2025, or 2026,’ ” Blakers said.
Mountain, on the other hand, says it is not plausible that the project will be finished that quickly, and while being developed it’s likely to create a great deal of uncertainty, scaring off other potential investors. “There couldn’t be a clearer example of how not to do a major project.”
Politically, Snowy 2.0 is popular. As the Coalition ramps up its interventions in the energy market, a massive battery in the Snowy Mountains that can provide certainty when the wind isn’t blowing and the sun isn’t shining doesn’t seem so out of place.
Labor, too, seems favourable – shadow energy minister Mark Butler has had the same line since Turnbull announced the plan, that only Labor’s policies would result in enough renewables to make 2.0 a worthwhile investment.
So where to next for Snowy 2.0? Although its board has made the decision to push ahead with the project, as was widely expected, there are still some regulatory hoops to jump through. The project was declared “critical state significant infrastructure” by NSW in March, and that set out a planning approval pathway, beginning with environmental impact statements for each phase. NSW Planning Minister Anthony Roberts now needs to give approval before exploration work can begin.
Construction could start as early as 2020 and, on Snowy Hydro’s timings, start generating power by 2024. From there, the company already anticipates it will have the need, and the business case, to expand further – by up to as much as 8GW of capacity.
Before all that, the federal government has to decide whether the plan does stack up. Malcolm Turnbull may have lost the prime ministership over his energy policy, but he may yet gain a legacy as the PM who spurred the creation of a multibillion-dollar battery.
This article was first published in the print edition of The Saturday Paper on Dec 15, 2018 as "The plan from Snowy River". Subscribe here.