Pass the valium, the NSW Government takes the initiative
About two weeks ago, the NSW government announced that it was holding a briefing day looking for EOI [Expressions of interest] to take WaterNSW existing assets and see how some pumped hydro could be added on.
As Amy Kean’s email stated:
“The EOI process is investigating the opportunity for WaterNSW’s assets, such as 42 dams across the state, to offer private developers the key ingredient required to develop new energy investments, such as pumped hydro, hydro generation, floating solar and other technologies.”
I wasn’t able to make the briefing. The great advantage of the existing infrastructure is that there are likely to be far less issues around environmental approvals and water licenses. In addition brownfields developments can be far cheaper than greenfields developments.
Origin’s Shoalhaven expansion half the cost of Snowy 2.0 in terms of power, more expensive for energy
The same was true of Origin Energy’s announcement of its co sponsored ARENA study for a doubling of power at its existing Shoalhaven pumped hydro scheme. This plan would see Origin spend $240 million for a 235MW increase in output.
This is, of course, only half of the cost of building Snowy 2.0 – which on current estimates is around $4 billion for 2000MW increase in power. That is, $2 million a MW.
Origin’s water licence won’t change so it will only be able to produce for 14 hours whereas Snowy could produce for a couple of weeks. So Origin’s plant is far cheaper on a power basis, but more expensive in terms of energy.
Likely that the EOI process will produce new options that have lower power cost than Snowy 2.0
It will be surprising if there isn’t one technically viable project emerging from a study of 42 dams.
And we would expect that for daily arbitrage, that is 4-8 hours of daily output a brownfields plant will be significantly cheaper on a power basis than Snowy 2.0. Still, we will have to wait and see.
Pumped hydro economics work @ $1m a MW, but not at $2m
There are three potential revenue sources for pumped hydro.
Price arbitrage, ie selling electricity at a higher price than cost of electricity used to pump the water back to the top of the hill. This cost typically has to allow for round trip efficiency of about 75%. That is, pumped hydro is a net consumer of energy.
Cap or insurance products: The standard product in the existing market is a $300 cap. This guarantees the buyer of the cap won’t pay more than $300/MWh over a given period for a given number of MW.
Ancilliary services. It could be argued that this is code for “the project doesn’t make enough money.” Ancilliary services as we increasingly hear are black start, inertia, frequency control.
There is a capital cost for pumped hydro to provide these services and we think that batteries are inherently better suited to many of them. In any case, there just isn’t that much revenue.
Shoalhaven 2 will need to do better than Shoalhaven 1
In the 12 months ended May 8, 2018 the existing Shoalhaven power station produced 85 GWh and earned $9 m of pool revenue.
It should be obvious that even if there was zero cost of pumping, zero fixed costs that $9 million of revenue isn’t going to justify $240 m of capex.
This brings us to the point that we previously made looking at Wivenhoe pumped storage in Queensland (Read: Wivenhoe, the litle pumped hdyro plant that didn’t.
The owner of that pumped hydro station is also the owner of a coal fired power station, and so there is very little incentive to operate the pumped hydro. It’s cheaper to burn coal and the price is higher than if you have to pay to pump the electricity.
In addition, the pool revenue won’t reflect the internal hedge that Shoalhaven provides the wider Origin Gentailer Group.
Limited arbitrage signal in NSW
We used the excellent NEM Review data service to get the 17,500 sequential half hourly prices for the 12 months ended May 8, 2018.
We then used Excel to sort these into a 365 row, 48 column table and then used the excel large and small functions to sort the prices each day into the low prices and the high prices.
From this we were able to establish the average 2, 4, and 6 hour price arbitrage for each day and get the yearly average.
That is, for the 4 hour arbitrage we used the average of the highest 8 half hours on the day and subtracted the average of the lowest 10 half hours. Using 10 half hours corrects price for round trip efficiency but we also need to adjust volume.
Surprisingly a 5% gross return was available assuming 6 hours generation and a brown fields capital cost of $1 m/MW
Of course this assumes perfect foresight of daily prices and that your plant has zero impact on either or both the buying and selling price. So it’s very much produced by Ross Gittins’s Italian analyst friend “Rosie Scenario”.
All we need is for her English assistant “Phil Wright” to complete the spreadsheet and it’s off to the Board for approval.
What about $300 caps? Well in NSW for the year to June 30, 2020 these are selling for a time weighted average of $8.40 a MWh. No post Liddell closure cap prices are yet quoted by the ASX.
As it happens there were only 2 half hours where NSW price exceeded $300 MWh in the past 12 months. Very different to the year before.
Each MW of caps @ $8 MWh adds around $70,000 of revenue per year, but may require some arbitrage revenue to be foregone and if prices stay above $300 for more than 14 consecutive hours, would expose Shoalhaven to risk.
In the present market that seems unlikely and in the context of a bigger portfolio is easily covered.
Even so the combination of caps and arbitrage would likely justify Shoalhaven 2, but probably still wouldn’t justify Snowy 2.
In short, more price volatility is needed for these projects to really get a sign off. Its probably appropriate to be developing some of these projects but only as a secondary priority.
The highest priority in NSW is surely getting common agreement on how to deal with the forthcoming closures of the coal generation and specifically making sure there is enough transmission infrastructure to encourage wind & PV plants to get out of the computer and onto the ground.
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.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.