First thoughts: Snowy 2.0 will lift emissions without more renewables

The project data

The key data we focus on for Snowy 2 are summarised in the following table.

Figure 1: Snowy market data. Source: Snowy, ITK

The distinguishing feature of Snowy compared to all the other pumped hydro projects in our sample is the amount of storage.

Snowy has between 10 and 20x more storage at maximum power output relative to 11 other recent and proposed projects in our sample. That’s assuming we haven’t made any mistakes in looking at these projects.

Figure 2: Pumped hydro projects Australia and world wide sample. Source:Company, Cannacord Genuity, ITK

 

Figure 3: Pumped hydro projects, storage hours at max power. Source: Company ITK

We note:

• The capex per MWh of the max deliverable energy ie, $4.1 billion divided by 350GWh @ 365 days a year is just 10 per cent of that for a more typical project at around $35/MWh

• The project has zero chance of making money solely as merchant plant – that is, buying electricity out of the market at off-peak, pumping it 27km uphill at 70 per cent round trip efficiency, and then selling it at peak prices. The project will be able to earn some revenue doing that, but 2000MW is a lot of power and obviously only a small fraction of the storage could be used on any one day. Just to cover the round trip efficiency requires off-peak prices to be, say, 30 per cent less than peak prices. Snowy will certainly have a strong upwards influence on off-peak prices and negative downwards push on peak prices if it was operating on a regular basis.

Figure 4: Average of daily max and minimum demand and price. Source: NEM Review

• As the NEM is current configured, Snowy 2 will increase electricity demand, and increase CO2 output. In a sense it will make breakdowns of the other plant more likely due the probably coal-fired power required to do the pumping. Of course this would could change in a largely renewable world, but at first blush when renewables penetration is 20-30 per cent there is a 60-70 per cent chance of pumping being powered by coal. If you think the lowest prices are when renewable output across the NEM is high, then the pumping might have a higher renewables share. At the moment, though, NSW – one of the key markets for Snowy – has a relatively low renewables share, anyway.

• The private sector would not contemplate this project without a PPA. Yet at the moment there is no PPA. Perhaps one will be guaranteed by the NEG. The most cynical way of looking at the whole thing is that the NEG is just a mechanism to make Snowy 2 viable. We don’t necessarily go that far. But what we would say is that for the time being we don’t see AGL or Origin having much need for Snowy’s reserve capacity, even in 2024.

• So more broadly, excuse the pun, we can only see Snowy making sense if Australia has a much higher share of renewables than contemplated under the NEG.

• Snowy states it can finance the project off its own bat. Clearly this will mean no dividends to its owners for the next seven years. Even so, it will require, say, $3 billion of likely on balance sheet debt. Snowy had $0.8 billion debt at 30 June 2017 on $3.5 billion of assets. Although profits were well up last year, if generation output falls the REC income would drop sharply.

• Snowy will likely crowd out various other pumped hydro projects, particularly those proposed for South Australia. It looks as if more transmission from South Australia to the eastern states will be built making Snowy 2 pumping requirements and output sort of accessible to the South Australian market.

• However we doubt it will crowd out all the battery stuff. Snowy talks about its inertia but, increasingly, digital inertia is more easily and swiftly provided by batteries which can be installed in three months. No one is going to spend $4 billion to get some inertia into the system that can be provided by batteries for much less. Secondly, behind the meter batteries, which have entirely different economics, are also likely to proceed provided the forecast supply and price reductions become a reality.

• Finally, we note that the costs and the time line are in a sense still best-case estimates, in that despite contingencies they exist only on a piece of paper. Whether it’s reverse osmosis water plants, peaking gas in Victoria, or LNG plants around Australia, experience suggests that any project budgeted to take seven years and cost $4 billion is at risk of taking longer and costing more.

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.