Market volatility has helped bolster the annual earnings of the federal government owned Snowy Hydro, in a year when most other generation companies revealed a sharp slump in profits.
According to its annual report, which was quietly tabled in parliament during the last sitting period, Snowy Hydro recorded a $377.6 million before tax profit for the 2020-21 year, as it used its portfolio of hydro and gas generators to take advantage of peak electricity prices and growing volatility in the energy market.
The result was up from the $110 million pre-tax profit recorded the year prior, which had been depressed after Snowy wrote down the value of a number of its energy service contracts, but its operating profits showed an improvement, rising nine per cent to .
The result enabled the government owned utility to deliver some hefty bonuses to its senior management.
Managing director Paul Broad received $2.25 million, singificantly boosted by $1.09 million in short-term incentive bonuses. The amount was roughly in line with Broad’s remuneration for the year prior, but down from his pay for the 2018-19 year when Broad was also rewarded with a $688,000 “long-term” incentive that took his total remuneration to $2.59 million.
Broad is one of four senior executives at Snowy Hydro that received a salary package totalling more than $1 million for the 2020-21 financial year.
Other high earners include the head of the company’s retail electricity arm, Iain Graham, chief operating officer Roger Whitby and the chief commercial officer Gordon Wymer.
While it is short of the dizzying amounts paid to the heads of other government-owned entities, including the CEO of NBN Co – who was paid more than $3 million in 2020 – it places Broad’s total salary package at around six times the pay of federal energy minister Angus Taylor.
Not so generous was the dividend paid back to the government, which was trimmed to $122.8 million for the full 2020-21 financial year, down from the $217.8 million dividend paid in the year prior.
This was largely expected, given that Snowy has to use additional government funds to help pay for its two controversial construction projects – the $600 million Kurri Kurri gas generator, and the multi-billion dollar Snowy 2.0 pumped hydro project. But the dividend is still less than what was assumed several years ago.
The company’s currently portfolio of hydro generators and gas fired peaking plants allowed it to play a dominant role in the market when demand and prices peak.
“The NEM is experiencing a long-term decline in total annual demand for energy, while undergoing a rapid transition to renewables (wind and solar) as its primary source, with an increased rate of degradation and resultant unplanned outages for coal plants,” Snowy Hydro’s management says in the annual report.
“In this context, the Company is uniquely positioned to facilitate the least-cost decarbonisation of the NEM via its portfolio of low-emission, fast-response, reliable, flexible generating plant and energy storage, critical asset portfolio development.”
Snowy confirmed that it received a $559 million capital injection from the federal government, which will be used towards the Kurri Kurri plant, with an expected price tag of at least $610 million.
Snowy said that it was still on track to deliver the first power from the Kurri Kurri power station in 2023, which it says will help address the volatility that “arises from intermittent renewables”, but some market analysts have been concerned about the level of debt the company is taking on to fund its expansion.
Snowy noted that it had accrued $2.2 billion in bank loans, which had increased by almost $440 million in the 2020-21 year and contributed to a credit downgrade from ratings agency Standard & Poor’s, which dropped Snowy Hydro from a A- credit score, to a BBB+ score.
At the core of Snowy’s business strategy is its dominance in the market for fast response peaking generation, which can be provided by its portfolio of hydro and gas generators, allowing it to take advantage of periods when electricity spot prices surge to extreme highs, and also to set those prices.
It has helped shield the company from the falls in revenues that have hit other generators and forced write-downs in the value of other government-owned businesses – especially those operating coal fired generators.
But given the significant capital outlays that Snowy Hydro is committed to making across both the snowy Hydro and Kurri Kurri generator, it expects profits to remain “depressed” over the medium term.
Snowy Hydro’s management has copped criticism for its generation practices after conceding that the company had withheld available supply from the Colongra power station during a period of tight supply, forcing the shutdown of the Tomago aluminium smelter and subsequently prompting an investigation by the ACCC into Snowy’s bidding practice.
While Snowy does not operate much by way of its own solar and wind projects, the company said that it was on track to sign power purchase agreements with more than 1,000MW of new wind and solar developments that it will offer to customers of its retail electricity divisions.
In 2017, Snowy signed a power purchase agreement with the 95MW Tailem Bend solar farm in South Australia. Since 2019, it has signed off take agreements with 350MW of capacity from five solar farms in New South Wales and 704MW of capacity from five wind farms across New South Wales and Victoria.
The annual report says operations commenced at three of these new projects during 2021, with another three expected to start up in 2022 and the remaining four in 2023 and 2024.
Snowy said that its retail arms, Red Energy and Lumo Energy, had grown their combined customer base to 1.16 million customers and contributed around $130 million to Snowy’s underlying EBITDA.