Via Westpac:
As investor and energy industry interest runs high in Snowy Hydro’s big expansion plans, Chief Executive Paul Broad predicts greater reliability and lower electricity prices.
As the balance of Australia’s energy generation moves inexorably towards renewable sources, battery storage is becoming critical.
By its nature, renewable energy from wind and solar sources is intermittent, creating the probability of shortages at times of peak demand such as in high summer.
In such scenarios, power dispatched from battery storage can fill the gap and prevent blackouts like those in South Australia in 2016, and the power shortages that threatened supply in NSW in February 2017 when demand hit record highs.
Not all batteries, however, look like the 100MW lithium ion battery installed at the Hornsdale Wind Farm in South Australia by Tesla co-founder Elon Musk.
The largest battery soon to be operating in Australia could be hydro-electric and many times larger than the Tesla battery, and built off a scheme which has been operating for almost half a century, delivering peak load power on the eastern seaboard.
Opened in 1972, the Snowy Mountains Scheme has a capacity of 4100MW and this will be boosted by another 2000MW when the proposed Snowy 2.0 pumped hydro scheme comes online in 2025.
This massive new project, which would generate enough power for 500,000 homes at peak demand, requires the construction of 27 kilometres of water tunnels, 20 kilometres of access and ventilation tunnels and an underground powerhouse 200 metres long.
In addition to its 2000MW of generation, it would deliver 175 hours or 350,000 MWh of storage.
Paul Broad, Chief Executive and Managing Director of Snowy Hydro, explained the business case for the Snowy 2.0 project at a recent CEDA Energy Series event, sponsored by Westpac, describing it as critical in ensuring the reliability and security of the next generation energy market built around renewables.
“The energy market is complex and the move to decarbonise the economy is on,” Broad said.
“There is 4000MW of renewables coming onto the market between now and 2020, but you won’t be able to build up renewables without massive storage, and that is what drives us at 2.0.”
The right time and place
Broad said the idea for Snowy 2.0 was not new. It was conceived in the 1960s but instead a decision was taken to build new coal-fired power stations such as Hazelwood and Liddell which began operating in the early 1970s.
Now that these plants are being retired and future generation is moving to renewables, the moment for Snowy 2.0 has arrived.
Broad said the renewable generation coming into the market could not deliver continuous power without the development of pumped hydro or hydro storage, and without it “the lights don’t stay on”.
Snowy 2.0 has a critical role to play in a future dominated by renewables and could be part of an ongoing expansion which could see the development of Snowy 3.0 and 4.0 over the remaining years of this century, according to Broad.
“We are in the prime position, sitting between key states, and we can be the cornerstone of the future National Energy Market (NEM).
“The size of the project could triple over the next 25 years and beyond, because we are going to need two or three of these (projects) to meet the demands of the decarbonised economy.”
A final investment decision on the project, estimated to cost between AUD 3.8 and AUD 4.5 billion (without transmission infrastructure), is expected to be made in late 2018 when Broad anticipates initial work, such as creating new access roads, will commence.
At the forum, Westpac Institutional Bank Chief Executive Lyn Cobley noted that this cost compares with AUD 820 million for the original scheme, but this is the equivalent of around AUD 8 billion today.
Broad listed the finalisation of geotechnical drilling, refining the design and engineering plans, and issuing tenders as current priorities. He said environmental approvals will be secured in a staged process as the project is built.
“There’s a lot of stress and strain, but it’s all coming together for a target date to be at the board for a final investment decision in December,” Broad said.
Strong investor interest
Snowy Hydro is now 100 percent owned by the Federal Government after it paid AUD 6 billion in March this year to buy out the shares previously held by the NSW and Victorian Governments.
Broad said that half of the estimated AUD 4.5 billion cost of the scheme would be met from Snowy Hydro’s internal sources, with the balance coming from debt capital markets where investors are already showing strong interest.
“We won’t need external money until probably 2021 or thereabouts,” he said.
“So the structured financing deals are coming together which are very, very promising and the interest globally is amazing.
“The basics of the company’s performance suggest to us strongly that this will work.”
Broad defended the economics of the project and said the investment was looking to deliver a rate of return of 8 per cent on the “most conservative set of assumptions”.
“The concept for Snowy 2.0 is built around the products that we sell today, so we won’t be going out on a limb and creating something new or different,” said Broad.
Snowy Hydro’s derivative risk products, created from its capacity to fill gaps in the market at times of shortages, offer generators of renewable energy and the wholesale market the ability to protect themselves from the spikes which occur when demand outstrips capacity.
“People don’t really get the idea of the assurance products which will come out of this, because there are storage products, capacity products, and insurance products which will help firm up renewables.
“And that is now, before 2.0, which will just supercharge that,” Broad predicted.
Planning for flexibility
Although it is a major generator of electricity, the pumped hydro system of Snowy 2.0 actually will use more power than it generates.
The plan for the project is to use surplus solar and wind power to pump water uphill cheaply, and then use that water to generate power by running it back downhill through tunnels and turbines during periods such as “wind droughts” when renewable generation falls below demand.
“You have to be able to flex, and that is the world we are getting into at scale,” said Broad.
“Snowy 2.0 operates in those very short times when prices might climb to $14,000MWh, when there is an outage somewhere in the system and when the lights have to stay on.”
Snowy 2.0 would be able to respond “within minutes” to meet market needs, ensuring energy security and reliability and its “strategic location” in the middle of the NEM will enable it to both absorb surplus energy and supply major load centres.
Broad said the project would also put downward pressure on future energy prices, and that wholesale energy costs “will be lower with Snowy 2.0 in the market than without”.
“Those who built Snowy dared to dream,” said Broad, before going on to endorse the role of the National Energy Market over the last two decades.
“Industry is now at a tipping point and is the subject of much debate, most of it ill informed.
“The need for Snowy 2.0 is here. Yes, there are difficulties in some of the mechanics, but let’s get beyond that and get this embedded, because certainty on structure is the cornerstone of rational investment.”
All true. The question is will it be cheaper than the private sector doing the various forms of storage that are looming as highly competitive?
Nope:
It’s all more money than sense for Canberra.
