Pumped hydro is vital to the future grid. So why does gas exploration get all the tax benefits?

Australia’s electricity system is entering a decisive decade. As renewable energy dominates new supply, one question will determine whether the transition succeeds or fails: can we keep the lights on when the wind doesn’t blow and the sun doesn’t shine?

The Australian Energy Market Operator’s draft 2026 Integrated System Plan makes the scale of the task clear. By 2050, the National Electricity Market will require around 55 gigawatts and 618 gigawatt-hours of storage to maintain reliability and affordability.

This is not a system that can be stabilised with short-duration solutions alone. It requires storage that can deliver for days, provide inertia and system strength, support frequency control, ramp rapidly, and restart the grid after outages. On every one of these measures, pumped hydro is indispensable.

Yet despite its economic and system fitness, pumped hydro remains chronically under-incentivised in Australia’s policy framework. 

If offshore gas exploration qualifies for grossed-up deductions and uplifted carry-forward because it is nationally important and risky, long-duration storage should receive the same treatment given its role as critical infrastructure in a decarbonised grid.

When gas companies drill a dry hole, the tax system shares the loss; when we ‘drill a dry hole’ for pumped hydro, we carry it alone.

Australia is not merely suitable for pumped hydro, it is uniquely advantaged. Research led by Professor Andrew Blakers at the Australian National University has identified around 22,000 potential pumped hydro sites nationwide, with an estimated 67,000 gigawatt hours of storage potential.

To put that figure in context, modelling shows a fully renewable Australian electricity system would need only about 450 gigawatt hours of storage. Australia possesses close to 150 times more potential than required, allowing developers to be highly selective and focus only on the best sites.  

Further refinement through the Bluefield Atlas has identified another 1,500 sites that use existing reservoirs as part of a pumped storage pair. These sites avoid the need to dam major rivers, are often publicly owned, and already carry a degree of social licence that significantly reduces approval complexity. 

Given this apparent abundance, the question becomes unavoidable: why isn’t pumped hydro being developed at the pace and scale the system requires?  In part, because there is still risk in the discovery and development process, risk that is not unlike the risk inherent in the fossil fuel industry.

Pumped hydro development begins with large, risky, sunk investments in site exploration, geotechnical studies, feasibility work and approvals, often over many years and with no guarantee of success.

These risks are directly analogous to those associated with frontier offshore petroleum exploration. Yet while fossil fuel projects receive immediate deductibility of exploration costs, uplifted carry-forward of unused deductions and generous depreciation treatment, pumped hydro projects do not.

The consequences of this imbalance are increasingly stark. Without sufficient long-duration storage, the grid becomes more volatile, prices spike during prolonged low-renewable periods, and reliability is compromised.

Industrial decarbonisation suffers because sectors such as aluminium, steel, chemicals and data centres require continuous, firm power that batteries alone cannot economically provide at scale. Pumped hydro, with operating lives measured in decades and the ability to deliver deep, multi-day firming, is uniquely suited to this role.

Pumped hydro can be deployed within this decade, using proven technology, existing supply chains and familiar planning frameworks. It works in complementarity with batteries, covering the deep-firming needs beyond lithium duration while allowing batteries to focus on short-term response.

Australia has the sites, the engineering expertise and the grid need for pumped hydro. What it lacks is a tax and policy framework that recognises pumped hydro as what it truly is: mission-critical national infrastructure for a net-zero economy.

Rick McElhinney is a renewable energy expert and the CEO of Sunshine Hydro