The federal government owned Snowy Hydro is bracing for further cost overruns and construction delays at its landmark Snowy 2.0 project, with the company pointing the finger at the Covid-19 pandemic for complicating the project.
Snowy Hydro CEO Paul Broad told the Australian Financial Review that the company was preparing to launch a review into the Snowy 2.0 project – flagging the prospect that the project is already facing schedule and cost blowouts – by as much as $400 million.
Broad attributes the delays to the impacts of the Covid-19 – a pandemic that has been ongoing for most of the life of the Snowy 2.0 project – which he says has complicated the project’s construction by taking key staff offline as well as driving up the cost of components.
Construction may already be a year behind schedule, with first generation now expected to occur as late as 2026.
But several energy market experts say cost blowouts at the project were entirely predictable and questioned the ability of the Snowy 2.0 project to deliver positive outcomes for consumers.
Energy Finance Analyst with the Institute for Energy Economics and Financial Analysis, Bruce Robertson, told RenewEconomy the prospect of cost blowouts at the Snowy 2.0 project had been evident from the time of its first announcement.
“Many people warned at the time that Snowy 2.0 would be subject to rather large cost blowouts,” Robertson said.
“This is not in hindsight; the costs of Snowy 2.0 were underestimated at the start. The full business case should have been released publicly to allow for public scrutiny.”
The Snowy 2.0 project involves the construction of a new pumped hydro energy storage project, through the digging of 27 kilometres of new underground tunnels that will be used to transfer water between the Tantangara and Talbingo dams.
A new 2,000MW power station will also be constructed between the two dams to provide up to 350,000 megawatt-hours of pumped hydro energy storage capacity.
When the Snowy 2.0 project was announced in 2017, by then prime minister Malcolm Turnbull, the estimated cost was just $2 billion. It was a figure widely viewed at the time as one likely to prove overly ambitious.
The official cost estimate came in at $5.1 billion – which would cover the construction cost of the new tunnels and the power station – but would not include the cost of necessary transmission network upgrades, which will also run into the billions of dollars.
The total cost of construction and new network infrastructure is likely to exceed $10 billion.
The latest indication from Broad is that the project’s cost, less than two years since the start of construction, may have already swelled by a further $400 million, absorbing the entirety of the project’s contingency budget set aside for such situations.
Broad has previously been dismissive of suggestions the project would cost more to complete than had initially been suggested, while Snowy Hydro has so far refused to release the full details of the Snowy 2.0’s business case.
Critics of the project have long said that it would inevitably face further delays and cost increases – predictions that appear to be coming true given Broad’s intention to instigate a review before the project has even reached its halfway mark.
“The cost blowouts are extraordinary. We’ve already gone from $2 billion to $5 billion, and [Snowy Hydro CEO] Broad is already talking about an extra $400 million,” Robertson said.
Robertson added that there remained fundamental problems with the pursuit of the Snowy 2.0 project, which would further reinforce Snowy Hydro’s overwhelmingly dominant position in Australia’s market for peaking generation.
“One of the big structural problems of the National Electricity Market is a tendency towards monopolies and the monopolisation of profits,” Robertson said.
“Snowy 2.0 will allow Snowy to increase its domination of the peaking market across the whole of the NEM. We do not want single companies allowed to dominate a market for peaking generation in that way.”
“The government forcing Snowy Hydro to build another peaking plant at Kurri Kurri, which is also pushing other players out of the National Electricity Market and will further reduce competition.”
Robertson said the project’s design meant that there were more effective ways to add the needed energy storage capacity while also improving competition within the energy market.
“The extra issue with Snowy Hydro is that it is a large point source of generation. It is a problem because if power lines go down for any reason, such as by storm or other weather events. You lose the whole generation capacity in one go, which makes it a major system security risk,” Robertson said.
“It’s not a great project because the distance between the dams is so large and that decreases its efficiency. The Snowy 2.0 project is designed to achieve a large drop of water over a very large distance, which causes significant friction losses.”
Snowy Hydro has been contacted for additional comment.
