Snowy 2 Much: How can a 2.2GW water battery be worth more than $12 billion?

This week’s Snowy Hydro ‘reset’ again proves the only thing that can be guaranteed with the hapless Snowy 2.0 project, and its younger sibling the Hunter Gas Power Station Project (HPP), is an announcement every year or so of further cost blowouts.

The announcement of a $6 billion blowout for Snowy 2.0 to $12 billion (and a 60% blowout for HPP to almost $1 billion), dramatically titled ”Securing the future of critical energy transformation resets”, far surpasses previous re-estimates.

Again, the reset comes with no details or analysis. The Australian public, as the ultimate shareholders of Snowy Hydro, must be provided with a comprehensive report that justifies continuing with these projects, not just a two page media release.

How can a 2,200MW battery be worth anything like $12 billion? Though, as stated below, the all-up cost is more like $25 billion.

Snowy 2.0 will cost every Australian about $1,000. That’s around $4,000 per family.

Surely, after such an unprecedented blowout, the government will finally commission an independent expert review of Snowy 2.0 (and HPP) rather than continue to rely solely on Snowy Hydro’s advice and guesstimates.

Inexplicably, Ministers Bowen and Gallagher don’t seem to be so inclined.

To give the government a spur to do so, I have made some quick comments on each of the 13 statements in Snowy Hydro’s media release. Apologies for the length, but there are so many issues and questions that are unanswered.

Some of my comments may not be completely correct, as they have been made in the absence of detailed information from Snowy Hydro. Nevertheless, I would contend that there are more than sufficient major concerns to warrant a comprehensive government review before Snowy 2.0 (or HPP) is allowed to stumble on.

Snowy 2.0

1. “Revised total cost to complete is $12 billion. At the end of June 2023, expenditure on the project was $4.3 billion, with 80% of these funds reinvested in the Australian economy”

This is the fourth time Snowy 2.0’s cost has been reset – from $2 billion in 2017, to $3.8-$4.5 billion later that year, to $5.1 billion in 2019, to $5.9 billion in 2020, to $12 billion now (2023).


What guarantee is there that the cost won’t continue to blow out, especially as construction is only at the preliminary stage?

There is no breakdown of the components of the $12 billion.

Previous estimates have not included all project components such as capitalised interest and suppressed dividends during construction, hedging, insurance, exploratory and other works, design, project management, owner’s costs, the segment factory, environmental offsets.

If such costs have again been excluded, then the $12 billion will be understated by many billions of dollars.

Minister Bowen said this week: “If the contract is not reset, the very clear advice to me and to Minister Gallagher is that the project would take longer, even longer, and will cost even more than the $12 billion. That is not acceptable to the government.”

But the Ministers’ $12 billion threshold has already been exceeded when all project costs are included.

Also the estimates for Snowy 2.0 have never included approximately 1,000km of transmission lines to Sydney and Melbourne (HumeLink, Sydney Ring South, VNI West) being built primarily for its operation, adding at least another $10 billion.

Snowy 2.0 is stranded without transmission and the related cost should be included in any cost-benefit analysis of the project.

The all-up cost of Snowy 2.0 and its transmission connections is now approaching $25 billion, far beyond the worth of a 2,000MW water battery.

The $4.3 billion already spent constitutes 85% of the $5.1 billion contract.  Why has it taken so long for this reset?  Surely the need for a reset was obvious when $2.2 billion of contractor claims were submitted a year ago.

Even though $4.3 billion has been sunk into Snowy 2.0 there is still another $20 billion or so to be saved and redirected to far more worthwhile projects.

Finally, it is not clear how 80% of the expenditure to date has been “reinvested in the Australian economy,” especially as the contractor is overseas-based and most of the equipment and materials is imported.

2. “First power to be delivered in the second half of 2027 and a target date for commercial operation of all units of December 2028”

The completion date, initially estimated to be 2021, has been reset four times.

This latest target of first power in 2027 looks to be ridiculously optimistic, as does a one-year schedule to commission all six units.  Surprisingly, the reset date is at the lower end of the range in the most recent forecast (May 2023) of full commercial operation between December 2028 and December 2029.

After three years of construction, all that has been achieved so far are two 3 kilometre access tunnels to the location of the power station cavern, 80,000 concrete tunnel lining segments (most stockpiled), lots of roads and construction sites, and other preliminary works.

The bulk of construction work is still ahead – two massive underground caverns, six pump/generator turbines, mechanical and electrical equipment installations at four sites, 27km of water tunnels including the world’s first concrete-lined, inclined pressure shaft, and associated works.

Snowy Hydro’s claim that the project is 40% complete is substantially overstated.

Of course, a big unknown is Florence, the tunnel boring machine, still ‘paused’ 150 metres from the start of the 15km headrace tunnel after one and a half boring years. Even if Florence gets up to the ‘speed’ of the other two TBMs (6m/day) she will take seven years to complete the headrace tunnel.

3. “The fixed-price EPC Contract was executed by Snowy Hydro and Future Generation Joint Venture (FGJV) following Final Investment Decision in a relatively benign and supportive environment. The EPC Contract is no longer fit for purpose”

The Final Investment Decision (FID), made by the Snowy Hydro Board in December 2018, was based on a cost estimate of $3.8 billion to $4.5 billion, expected to be at the lower end of the range.

The Government subsequently approved the project in February 2019, and also kicked in $1.4 billion to try to counter Snowy Hydro’s credit rating being downgraded, unsuccessfully as it turned out.

Just six weeks later (April 2019), the Future Generation Joint Venture (FGJV) was announced as the successful bidder for the Main Works Contract (‘Contract’) at a cost of $5.1 billion.

Ignoring the fact that the contract price exceeded the FID estimate by $0.6-$1.3 billion, the contract was lauded as being ‘fixed-price’, thereby limiting Snowy Hydro’s risk and exposure to no more than $5.1 billion.

Clearly $5.1 billion was an underbid and a ‘fixed-price’ was unsustainable. Whilst Snowy Hydro now say that the contract “is no longer fit for purpose,” in fact it never was. Taxpayers will have to pick up the extra $7 billion or so.

It’s unclear what is meant by “the EPC Contract was executed … in a relatively benign and supportive environment.”

The current environment seems to be even more “benign and supportive,” as FGJV is being released from a fixed-price contract and will be paid 135% more for the same work that it had underbid in the first place.

4. “Snowy Hydro and FGJV are finalising an amendment to the existing EPC Contract to move to an incentivised target cost contract model. Snowy Hydro will also settle all outstanding claims with FGJV”

This is not “an amendment”. The existing “fixed-price contract” is being scrapped and replaced by a brand new “incentivised target cost contract model.”

This just means that FGJV, having won the fixed-price contract on a ridiculous underbid is now freed from the strictures of that underbid.

Apparently, the new contract is still being finalised. Who do you think is now in the box seat as far as negotiating the new deal? And is it not premature to announce the reset price before the contract is finalised?

FGJV is now in control of the project and Snowy Hydro has no alternative but to pay whatever FGJV demands.  And FGJV will be paid even more when they meet the incentivised targets.

This “amendment” just swaps the project risks from the contractor to Snowy Hydro, hence taxpayers.

Finally, why didn’t Snowy Hydro “settle all [legitimate] outstanding claims with FGJV” soon after they were submitted?

5. “Delivery of an additional 200 MW or 10% capacity; bringing total capacity to 2,200 MW”

Snowy 2.0’s initial design capacity was 2,040 MW, not 2,000 MW, so the latest increase to 2,200 MW is an additional 160MW, or 8% capacity.

No information has been provided as to how the extra capacity has been achieved.

A suspicion is that it is a sleight of hand through assuming a power factor of 1.0, instead of the standard 0.9.

It is also relevant to note that the higher the pumping and generating output the greater is the water friction losses and hence the lower is the overall efficiency of operation.

The Feasibility Study estimated Snowy 2.0 to be 76% efficient at 1,000MW, dropping to 67% at 2,000MW. At 2,200MW the efficiency is likely to be around 60%. Hence it is most unlikely that this claimed extra capacity would ever be used.

In fact, Snowy 2.0 is expected to rarely operate at full capacity, with the Feasibility Study stating that “in any given year prior to 2040, the Project will be operated at full capacity [2,000 MW] for less than 87 hours per year.”

It is interesting to note that the capacity of HumeLink, the 500kV transmission connection of Snowy 2.0 to Wagga Wagga and Bannaby, has recently been reduced to 2,200 MW.  This means that when Snowy 2.0 is flat out pumping or generating it will take up all of HumeLink’s capacity.

There are two implications:

  • There should be no further argument as to whether Snowy 2.0 should pay its fair share of HumeLink. The bulk of HumeLink’s latest estimated cost of $5 billion must be paid by Snowy Hydro, rather than leaving electricity consumers to bear the whole amount. (Transmission tariffs in NSW will increase by 50% if consumers pay the full cost of HumeLink.)
  • There is an immediate need for a second HumeLink (HumeLinkTwo) to provide capacity for the nascent Renewable Energy Zones in southern NSW and Victoria. The design of both HumeLink and HumeLinkTwo need to be jointly reconsidered now before HumeLink is approved.

6. “Snowy 2.0 is the largest renewable energy project under construction in Australia and will provide crucial deep storage central to Australia’s renewable transition”

After yesterday’s announcement there is no question that Snowy 2.0 is Australia’s largest and most expensive energy project, but it is not renewable.

Snowy 2.0 is simply a very inefficient water battery, no more or less renewable than any other battery. It doesn’t produce renewable energy, as does a conventional hydro power station.

In fact Snowy 2.0 loses far more of the energy it pumps than other pumped hydro stations due to its inordinately long distance between reservoirs, with round trip energy losses of 24% to 40%. More generally, all pumped hydro stations are far less efficient than chemical batteries.

7. “The value of Snowy 2.0 to the national electricity market has increased materially since the Final Investment Decision in December 2018”

Snowy 2.0’s Feasibility Study and FID estimated the benefits to be between $4.3 billion and $6.6 billion (though energy analysts considered this to be highly inflated), when the cost was estimated to be between $3.8 billion and $4.5 billion. Snowy Hydro now claims the benefits are about $15 billion (discussed below), representing a three-fold increase.

Where is the information to support this claim?

Snowy 2.0’s latest cost well exceeds the $7.8 billion market value (2018) of Snowy Hydro itself, which with 5,500MW of power stations and two retail businesses is many times more valuable than Snowy 2.0.

8. “Snowy 2.0 will provide 350,000MWh of energy storage for 150 years”

The claimed 350,000MWh of storage has long been disputed by energy experts as not being deliverable:

  • The upper reservoir, Tantangara, is rarely full.
  • The lower reservoir, Talbingo, even if empty can only fit two-thirds of Tantangara’s water.
  • Talbingo is normally kept as full as possible as it also serves as the upper reservoir for the Tumut 3 pumped hydro station (1,800 MW).
  • Refilling Tantangara will take a couple of months due both to limited periods when pumping energy is cheap enough and to the limited inflow into Talbingo from Eucumbene Dam.

Also, the need for 350,000MWh at one point in time would be very rare, if ever.

It is rather fanciful to state that Snowy 2.0, or any such infrastructure, will be operating for 150 years. The typical design life of pumped hydro stations is much less, and major overhauls and refurbishments are required every decade or two. The Snowy 2.0 EIS states the operational life is ‘potentially 100 years’.

9. “Snowy 2.0 remains value accretive, with the company currently projecting a NPV of ~$3 billion (based on a $12 billion revised target total cost and December 2028 delivery)”

One assumes that a NPV of ~$3 billion means that the benefit of Snowy Hydro is now estimated to be $15 billion.  How could the value of Snowy 2.0 have increased three-fold from the FID estimate (which itself was inflated)?

If Snowy 2.0 costs more than $12 billion and is not completed by December 2028, both of which are certainties, what is the impact on the NPV?

10. “Snowy Hydro is working closely with its shareholder to develop an appropriate capital structure for the company to support the increase in costs and to maintain the company’s target credit rating of BBB+”

When Snowy 2.0 was announced it came with an assurance that no taxpayer funds were required – Snowy Hydro was going to pay for the project out of its balance sheet.

That assurance was broken a year and a half later when Snowy Hydro requested a $1.4 billion equity injection from ‘its Shareholder’ (the federal government, hence Australian taxpayers) before it was prepared to approve the FID in December 2018. As it turned out $1.4 billion was not enough to avoid a subsequent downgrade in Snowy Hydro’s credit rating from A- to BBB+.

According to the S&P Credit Rating Agency all additional costs for the two projects will need to be paid by taxpayers if Snowy Hydro’s credit rating is to avoid another downgrade. That means that another $8 billion or so is needed now, with more to come as the full costs of Snowy 2.0 are realised.

Hunter Power Project (formerly the Kurri Kurri Gas Power Station)

11. “The total target cost is now $950 million and will be funded by Snowy Hydro”

When announced in May 2021, the Kurri Kurri Gas Power Station was to cost $600 million and be fully financed by an equity injection from the Government – i.e. no funding from Snowy Hydro as its balance sheet was empty.

Snowy Hydro revealed at Senate Estimates in May 2023 an updated figure of $765 million, which has now risen again to $950 million.

But as with Snowy 2.0, this figure does not include all project costs, such as land, capitalised interest, owner’s costs, etc. It also doesn’t include the 20km pipeline connection to the Sydney-Newcastle gas trunkline, nor the on-site gas storage, which is expected to add another $300 million.

Hence, the total cost of HPP is approaching $1.5 billion – a 150% increase in two years!

Contrary to the media release, HPP’s cost will not “be funded by Snowy Hydro.” It has no spare cash.

S&P Credit Agency has warned on numerous occasions that Snowy Hydro’s current rating (BBB+) can only be sustained if the government fully funds Snowy 2.0 and HPP. It is relevant to note that Snowy Hydro’s stand-alone credit rating, that is if the government wasn’t its shareholder, of ‘BB’ is in junk-bond territory.

12. “The project delivery remains December 2024”

The original completion was end 2023. So instead of taking two and a half years, HPP will now take three and a half years.

13. “The project remains economically viable on a forward looking basis with the value of its firming capacity clearly demonstrated in the May/June 2022 energy crisis”

Where is the analysis?

It needs to be remembered that HPP will only have sufficient storage to run on gas for ten hours at full output.  It will then take more than a day to recharge before it can run for a further ten hours, due to gas flow constraints in the Sydney-Newcastle trunkline. That’s provided, of course, that there is sufficient gas available to purchase and store.

HPP will be of limited use for any prolonged period.

HPP will have back up diesel fuel, but only 30 hours storage. Obviously, using diesel is a last resort and needs to be done sparingly due to the pollution impacts on surrounding areas and its exorbitant cost.

It is noted that the media release didn’t mention the government’s intention for HPP to run on 30% hydrogen when commissioned, rising to 100% by 2030. Obviously, if implemented, this would substantially increase the cost.

Ted Woodley is a former managing director of GasNet, PowerNet and EnergyAustralia

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