 |
| The Snowy scheme has the Prime Minister's eye. Alex Ellinghausen |
Snowy Hydro's announcement of the feasibility study followed an earlier announcement from the Prime Minister that Snowy 2.0 was expected to cost $2 billion.
The feasibility study was published shortly before Christmas and the final investment decision is expected by the end of 2018. All economic analysis has been excluded from the public version of the feasibility study.
But the publicly available version does report the "base cost" of Snowy 2.0 (to Snowy Hydro) is likely to be in the range from $3.8 billion to $4.5 billion. This "base cost" excludes land and developments costs, funding and financing costs, GST, project management or hedging costs. And the feasibility study warns that there are risks, opportunities and contingency amounts that significantly affect this range.
In addition to the costs that Snowy Hydro incurs, Snowy 2.0 will be the largest point connection in the National Electricity Market's history and will require massive transmission expansion along the Great Dividing Range. TransGrid in NSW provided early estimates of transmission costs in NSW related to Snowy 2.0 of $0.6 billion to $1.4 billion. Estimates of the requirement in Victoria are not yet known but are likely to be even higher because the necessary upgrade to Victoria will be even larger.
So, in round numbers, a conservative estimate of the total capital outlay attributable to Snowy Hydro 2.0 will be at least $8 billion, four times more than the prime minister suggested when announcing this project. It would be surprising if the estimate at the time of the final investment decision is any lower than this, and the actual build cost will surely be yet higher, quite possibly significantly so.
Will it nonetheless be money well spent?
This is very unlikely. Pumped hydro is an inefficient storage technology. Australia already has significant pumped hydro capacity – 900 megawatts (MW) at Tumut 3 in Snowy and 500 MW at Wivenhoe in Queensland. Both are rarely used because they are inefficient.
The feasibility study says that at capacity, Snowy 2.0 will only produce about 1 kilowatt hour for each 1.5 kilowatt hours needed to pump water to the top reservoir. Add to that 10 per cent for losses in transmitting electricity from generators in the Hunter and Latrobe valleys to pump the water uphill. And then add another 10 per cent for losses in transmitting the stored electricity back to the main load centres in Sydney and Melbourne where most of it will be consumed.
In other words, Snowy 2.0 will use about 1.8 kilowatt hours for each kilowatt hour that it actually delivers to consumers. By comparison, a battery installed on a customer's premises or on the local grid can be expected to use about 1.1 kilowatt hour for each kilowatt hour delivered.
It is inconceivable that Snowy 2.0 will produce revenues that are vaguely close to that needed to compensate its capital outlays. This is because the volume of electricity it can produce, valued at the difference between the price paid to pump water uphill and the price received when running the water back down the hill again, will be much too small.
Experience in other countries is also instructive. The feasibility study likens Snowy 2.0 to the Dinorwig pumped hydro plant in Wales. Dinorwig, along with the smaller Ffestiniog, has comparable capacity to Snowy 2.0. In its most recent market transaction six months ago, the market value of Dinorwig and Ffestiniog was established at $236 million, a small fraction of its initial build and subsequent refurbishment costs.
It is almost certainly the case in Australia that the market value of Snowy 2.0 will be a small fraction of its likely construction cost. If they decide to proceed with Snowy 2.0, the Commonwealth, NSW and Victorian governments will be forced to substantially write down their investment, at tax payers' expense. Or, if they can not stomach that, electricity consumers will be forced to fund the deadweight.
There is time to dodge this bullet. At the very least, independent investment advisors should now be asked to opine, in publicly available reports, on likely market valuations of Snowy 2.0, before any further contemplation of this project.
More generally, unravelling the mess that is the electricity market in Australia demands independent, rigorous and impartial advice. This is always valuable but even more so when such advice is not likely to be popular with sectional political, industry or customer interests.
Deep institutional reforms are needed to ensure energy market institutions are rewarded for providing such advice rather than for telling ministers what they want to hear.
*Bruce Mountain is the director of consultancy Carbon and Energy Markets (CME).
Links
- Snowy Hydro 2.0 Could Actually Cost As Much As $4.5b — More Than Double The Initial Price Tag
- Behind Closed Doors At The Energy Briefing: A Rocky Start To Turnbull's Energy Pitch
- Why Turnbull’s Plan Could Be Disaster For Renewables, Climate, Prices
- Turnbull Unveils Snowy Plan For Pumped Hydro, Costing Billions
- The Government’s Energy Policy Hinges On Some Tricky Wordplay About Coal’s Role
No comments :
Post a Comment