Why Snowy 2.0 Is A Write-Off From The Start

AFR - Bruce Mountain*

The Snowy scheme has the Prime Minister's eye. Alex Ellinghausen

Nine months ago Snowy Hydro, the electricity generator and retailer owned by the Commonwealth, Victoria and NSW governments, announced that it would be carrying out a feasibility study into a massive expansion of the Snowy hydro generation system to add 2000 megawatts of pumped hydro generation capacity.
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

'All Happening Very Quickly': Tesla Battery Sends A Jolt Through Energy Markets

Fairfax - Peter Hannam

When it comes to hype, there is probably nobody as outlandish as US-based billionaire Elon Musk and his Tesla corporation.
Who else would plan to blast one of his new electric vehicles into space aboard his company's SpaceX rocket bound for Mars?

Power play: Tesla's battery may represent a new dawn for the industry. Photo: Joe Armao

"Payload will be my midnight cherry Tesla Roadster playing Space Oddity," Musk tweeted last month. "Destination is Mars orbit. Will be in deep space for a billion years or so if it doesn't blow up on ascent."
A mini version of the hyperbole has been on show in Australia, following the installation late last year of a 100-megawatt lithium ion battery – the world's largest. Musk famously offered to supply it for free if his firm couldn't build it within 100 days.
It arrived in time for this summer's strains on the electricity system, and may come in handy as the mercury soars this weekend over a region of Australia in arc from Adelaide to Tasmania and up to Brisbane and beyond.

The big battery, located next to the Hornsdale wind farm in the mid-north region of South Australia, has already been active, drawing interest from well beyond these shores.
The Los Angeles Times and Washington Post were among international publications to cover the battery's early success in shoring up Australia's electricity grid.
Interest was sparked in part by the battery's quickfire response – just 0.14 seconds – to inject electricity into the network following the failure of a 559-MW unit of Loy Yang A in Victoria's Latrobe Valley.

A Tesla car charging station at the wind and solar battery plant outside Jamestown in South Australia. Photo: AAP

"It appears to be far exceeding expectations," the LA Times trumpeted. "In the last three weeks alone, the Hornsdale Power Reserve [as the battery is known] has smoothed out at least two major energy outages, responding even more quickly than the coal-fired back-ups that were supposed to provide emergency power."

'Lumbering coal'
The concept of the battery beating out coal-fired power was a key part of the story, prompted by an article on the RenewEconomy website, headlined: "Tesla big battery outsmarts lumbering coal units after Loy Yang trips".

All smiles now: SA Premier Jay Weatherill tours the new Tesla battery site at the start of December. Photo: AAP

"By the time that the contracted Gladstone coal unit had gotten out of bed and put its socks on so it can inject more into the grid – it is paid to respond in six seconds – the fall in frequency had already been arrested and was being reversed," the report said.
As impressive as it seemed, the reality, though, was probably more prosaic.

Hazelwood Power Station in Victoria closed in March 2017, with more coal-fired plant closures to come. Photo: Pat Scala

Analysis by Dylan McConnell, a researcher at Melbourne University's Climate & Energy College, found each of Gladstone's six units increased output and had supplied 75MW of the shortfall before the battery "had done anything".
It also appears that at least for the Loy Yang unit tripping on December 14, the battery was not "enabled" in the back-up market for Frequency Control Ancillary Services (FCAS). In other words, probably weren't paid for that intervention.

'Outstanding'
While the hype rings a bit hollow in that instance, there's no doubt the battery has been making a difference, responding to four coal generator trips in December alone.
Franck Woitiez, managing director at Neoen – the French operator of the battery – told Fairfax Media its performance had been "outstanding". (Tesla, as is its wont, declined to comment.)
"We are very proud of the battery performance throughout December and the start of January," Mr Woitiez said, adding the company had received "quite a few inquiries" about its operations.
Critics have quibbled at the battery's size, highlighting that alone it could only supply perhaps 30,000 homes for an hour or so, at a cost guessed at $US50 million ($64 million).
But such figures ignore the many benefits – including supporting the security of the grid – that are only beginning to be understood.
"The battery has been dispatched on multiple occasions for both energy and FCAS," a spokesman for the the Australian Energy Market Operator tells Fairfax.
For December, "the battery was dispatched for energy on over 380 separate five-minute dispatch intervals, and enabled on over 4600 separate dispatch intervals in one or more FCAS markets", he said.

'Significant' savings
The SA government also spruiks the benefits.
"It is difficult to determine price trends at this early stage, however the battery has been active in the Raise and Lower Regulation Frequency Control and Ancillary Services [R-FCAS] markets since commissioning," a SA government spokesman tells Fairfax.
"The cost of Raise and Lower R-FCAS in SA in December 2016 was $502,320, compared with just $39,661 in December 2017, following the operation of the battery," he said.
"In recent times FCAS services have cost South Australians about $50 million each year," he says. "The battery is expected to significantly reduce the cost."
According to Mr McConnell, the battery dispatched about 2.5 gigawatt-hours of electricity while consuming about 3 gigawatt-hours, representing a round-trip efficiency of about 80 per cent.
"The performance to date has been very impressive. It's ramp-up from zero output to maximum in seconds (or less) is something that we haven't seen in the electricity market before," Mr McConnell said, noting the current fleet of "fast start" units take five to 10 minutes to synchronise to the grid and start providing power.
Cases of the Tesla battery responding without being "enabled" could also be part of its testing, and there may also be arrangements with the SA government separate from the FCAS market, he said.

Victoria moves too
A smaller 20-MW battery deal signed with last week between Neoen and the Victorian government – again using Tesla – will provide similar benefits to Victoria when it comes online in mid-2019.
The site, next to a wind farm near the western Victorian town of Stawell, could be the first of perhaps a dozen or more battery and storage ventures in the pipeline, according to the Smart Energy Council.
"What we're seeing in South Australia and in Victoria is really the tip of the iceberg for projects that will be coming along," John Grimes, the head of the council, said.
Bruce Mountain, director of Carbon and Energy Markets, a consultancy, said the battery is already proving its worth with the full implications still to come.
"The biggest single source of insecurity to the power system is a trip of a major coal thermal generator unit simply because they are so large – [it's] not the wind or the sun, or people switching on their airconditioners," he says.
Batteries are also useful in taking up excessive supply should demand suddenly drop, affecting the frequency of the grid on the upside.
"In the olden days, this was simply sent out to large heatloads, which would just heat up, and waste all the energy into the air," he said.

Slowing down progress
The arrival of batteries and other storage that can be immediately released has exposed flaws in the existing market. One issue remains the fact generators supply at five-minute intervals that are priced on the average over half an hour, with an alignment of the two not due to kick in for years.
"Bringing the settlement period in line with the trading period, which will come from 2021, will be a major step in allowing batteries to compete effectively and get their full value," Mountain said.
That delayed implementation is "symptomatic" of how the industry, including regulators, continues to be dominated by major, centralised operators, he said. (AGL, Energy Australia and Origin Energy are the three biggest so-called gentailers, combining generation and energy retailing.)
"They do all they can to slow down progress and ensure the market compensation mechanisms don't suit them," Mountain said. "And the energy market authorities have generally been in their pockets."
The power industry has been struggling for years as ageing coal-fired power plants close and shifting federal and state policies have created busts and booms in renewable energy. Troubles included South Australia and its 1.7 million residents being hit by a blackout following a storm in September 2016 and NSW narrowly dodging major forced outages during a heatwave in February 2017.

Snow job
Mountain is scathing of the federal government's response, not least its promotion of the Snowy 2.0 pumped hydro scheme as a way to support the grid.
By his estimates, it will need 1.8 megawatt-hours to generate each MW-hour of storage for the proposed scheme that Prime Minister Malcolm Turnbull has touted as one of his government's major responses to the nation's energy crunch.
"There is no doubt at all that the revenues it will produce won't compensate the capital costs," Mountain says, estimating it would take as much as a decade to build and balloon out to $8 billion – or four times Turnbull's initial estimate.
"It took them a couple of months to build Musk's battery, which is essentially a white good that you plug and play," he said.
"I've got absolutely no doubt that batteries will win hand over fist."
Households and businesses are also seeing batteries emerge as a viable option to add to solar panels, reducing exposure to higher power prices.
Mountain estimates batteries and solar PV with grid back-up are "now competitive on any grid offer" in South Australia, and the same is true for about a third of residents in Victoria and NSW.
"It will be true for two-thirds in a couple of years' time – if not in a year's time," Mountain predicts. "It's all happening very quickly."

Links

• Tesla's enormous battery in Australia is responding to outages in record time
• Tesla’s enormous battery in Australia, just weeks old, is already responding to outages in ‘record’ time
• Tesla big battery outsmarts lumbering coal units after Loy Yang trips
• Pressure on NSW as Victoria in line for large-scale battery
• 2017 brought another year of weather extremes

Climate Change Is An Overwhelming Problem. Here Are 4 Things Executives Can Do Today

Harvard Business Review - John Elkington

clement m./unsplash

Today’s climate challenge is so far beyond our collective experience that it demands a radically different kind of engagement from senior leadership teams in the private sector. The threats that climate change poses to business, markets, and, indeed, capitalism are peculiarly hard for most top teams to spot, let alone act on.
Our brains evolved to respond reflexively to immediate threats but ignore or downplay systemic crises that creep up on us. Such market dynamics behave like vortices — a whirlwind in the air, or a whirlpool in water. When a vortex is just beginning to form, it is virtually invisible unless you have extremely good peripheral vision and happen to know what you are looking for. In this stage, things move at a deceptively slow pace. Even the best-designed vessels — or ventures — find themselves drawn inexorably into the danger zone. Then, suddenly, there’s a point of no return.
Such slow — but ultimately exponential — dynamics characterize what I call the carbon vortex. Picture the three major hurricanes photographed from space in the autumn of 2017 in a single, unparalleled NASA image. Think, too, of the forecast that carbon dioxide emissions, instead of declining, will probably have spiked by 2% in 2017, in part because much economic growth in China is still fueled by coal.
But as the carbon vortex gains momentum, there is also evidence of an equal and opposite vortex pulling us toward breakthrough innovation and a more sustainable future. Remember the Norwegian Sovereign Wealth Fund’s landmark commitment to run down its coal industry holdings. Or Siemens explaining that the major job cuts planned for its gas turbine business have been partly triggered by the renewable energy boom. GE, which decided to double down on coal, despite its much-vaunted “Ecomagination” platform, is now caught in the same market riptide, eliminating thousands of jobs from its power division.
It is clear that much of the world is at a market inflection point, where issues that were once seen as peripheral surge into the mainstream. As Generation Investment Management put it in “The Transformation of Growth,” their 2017 white paper, “The Sustainability Revolution appears to have the scale of the Industrial Revolution and the Agricultural Revolution — and the speed of the Information Revolution. Compared to these three previous revolutions, the Sustainability Revolution is likely to be the most significant event in economic history.”
Change of this scale can be hard to fathom, so I’d like to offer four early steps to help your top team get a grip, spot the potential silver linings in the gathering storm clouds, and, over time, learn how to “speak carbon” with growing fluency.

1. Plunge into the data
“Even a vortex is a vortex in something,” noted George Bernard Shaw. “You can’t have a whirlpool without water; and you can’t have a vortex without gas.” So in what medium is the carbon vortex forming? Look around, and it is clear that the vortex is forming in multiple arenas, among them the worlds of science, technology, business models, and, crucially, money. Imbibe the data.
The capital markets may have been slow to engage, but the Norwegian example above suggests acceleration. A growing number of indices now show the trajectory. Consider the work of Carbon Tracker on the growing risks of stranded assets and the death spiral impacting coal. See, too, PwC’s Low Carbon Economy Index 2017, tracking the rate of the low carbon transition in each G20 economy. The top performers in 2016 were China and the UK, which reduced their carbon intensities by 6.5% and 7.7%, respectively. They are still exceptions, but their trajectories signal where the carbon vortex is likely to take us.

2. Embark on a learning journey
Growing numbers of senior teams are going on “learning journeys,” visiting regions and organizations that are at the cutting edge of change, typically guided by organizations like Leaders Quest. If we were putting together such a learning journey for 2018, we might include the OECD in Paris for its work on the links between carbon dioxide emissions and GDP, and the UK government in London for its national carbon budgeting — and its recently announced commitment to improve the country’s emissions intensity ratio.
Elsewhere, we would want to visit Tesla and the X Prize Foundation in California, the latter for its Carbon X Prize — with a growing emphasis on the role of financial markets. We would want to visit Noah Deich’s Center for Carbon Removal, with its work on the new carbon economy, and Bernard David because of his work with the Global CO2 Initiative, spotlighting the most carbon-intensive sectors — cement and concrete and iron and steel, particularly in China. These are people who are pushing for gigaton-level improvements in our carbon emission and drawdown strategies. We will also be keeping a close eye on HBR’s Future Economy Project.

3. Swallow hard — and raise the price of carbon
If we are to meet climate pledges made under the Paris climate agreement, the cost of emitting carbon dioxide must rise to $50–$100 per ton by 2030, dramatically higher than the current EU price of less than $6. This was the conclusion of the Commission on Carbon Prices, a group of leading economists supported by the World Bank. Supporting the call for a worldwide carbon pricing scheme is a group of more than 200 businesses and governments, including oil majors Shell and BP.
Meanwhile, to help drive down the cost of sustainable energy, over 100 companies, including Google, Unilever, and Tata Motors, have joined the Climate Group’s RE100 platform. This shares the business case for switching to 100% renewable electricity, while working to address barriers. Consider joining.

4. Invert the vortex 
It is easy to be spooked by downward spirals, and an easy reflex action is to demonize carbon and talk of radical decarbonization. But that risks blinding us to the semi-magical aspects of this element, which is the basis of life on Earth. We need to rethink our relationship with carbon, but it’s no accident that people like Noah Deich speak in terms of the new carbon economy. Carbon will not disappear; indeed, it will be integral to the circular economy.
Among those working to reimagine carbon are Paul Hawken with his Project Drawdown platform, billed as the “most comprehensive plan ever proposed to reverse global warming,” and the carpet tile company Interface, with its ambitious Climate Take Back strategy.
This inversion approach is also championed by the Carbon Productivity Consortium, anchored by the German materials company Covestro. The aim: to work out how best to invest an increasingly squeezed global carbon budget for much-enhanced economic, social, and environmental returns. The Consortium has launched a free-to-use carbon productivity tool to help companies identify and begin to pull the levers of change. Its four stages spell RIPL: Recouple, Improve, Product and business model design, and Loop. So far, the tool focuses on fossil fuels, but eventually must expand to embrace the entire carbon cycle.
Even the biggest waves of change start with just a few ripples. You’ll need a multi-decade strategy for making business sense of the carbon vortex, but the only way to get there is to start somewhere — and to start today.

Links

• Aligning capital market actions with climate reality
• The Low Carbon Economy Index 2017
• Innovate on climate
• The Challenge
• We believe in climate change and we’re taking action
• Global carbon prices must soar to meet Paris climate target: report
• RE100
• 100 Solutions to Reverse Global Warming
• Climate Take Back
• Carbon Productivity A 10x mindset