Snowy Hydro confirms its expansion contract will shift to a ‘cost plus’ model

Snowy Hydro is likely to offer to cover some of its contractor’s cost inflation on the massive pumped hydro expansion.

Snowy Hydro is likely to offer to cover some of its contractor’s cost inflation on the massive pumped hydro expansion, according to chief executive Dennis Barnes.

Mr Barnes confirmed to a Senate estimates committee this week that Snowy was negotiating with Italy’s Webuild over amendments to the fixed-price contract in order to get construction of the project back on track.

Snowy Hydro chief executive Dennis Barnes

The likely outcome was a “cost plus” model with Webuild, in which Snowy covered construction costs and paid an agreed profit margin on top.

Snowy unveiled a fresh round of blowouts and delays at the $5.9bn project in early May, adding up to another two years to the construction time, meaning its commercial operation could be delayed until the end of the decade.

At the time Mr Barnes told The Australian the government-owned company could need to renegotiate the fixed-price contract with the Future Generation Joint Venture – now solely owned by Webuild after its buyout of collapsed partner Clough earlier this year – in order to make sure the revised schedule could be delivered.

Mr Barnes told Senate estimates this week the original contract would not be scrapped entirely, but would need to be amended to “drive better performance”.

“I think there will be some element of fixed-base performance in the contract. The EPC contract we have will form the base of the contract, but I believe there will be some elements that we’ll negotiate to be of a cost-plus nature,” he said.

Snowy Hydro 2.0’s Tantangara onsite workers accommodation. Picture: Jane Dempster

“The industry lingo on it is to refer to incentivised target cost.

“The current contact structure is obviously not one which is driving stellar performance. An incentivised target cost model is likely to form a more collaborative venture with us as a client, and probably save the taxpayer money.”

The shift to a cost-plus model has not necessarily led to quick completion elsewhere among the portfolio of projects Webuild acquired from the ashes of Clough, however, given that Beach Energy last week withdrew cost and completion guidance for construction of its Waitsia gas project in WA.

Snowy has blamed the delays and cost increases on four factors: the mobilisation and resourcing implications of the Covid-19 pandemic, the effect of global supply chain disruption and inflation impacting the cost and availability of a skilled workforce, materials and shipping.

New design elements required more time to complete due to their technically complex nature, and the final design was more expensive to construct.

Workers with the boring machine “Florence” which has been stuck after achieving just 70m of tunnelling.

Last year The Australian revealed Webuild and Clough were claiming up to an additional $2.2bn in costs due to the impact of the pandemic and rising raw material prices.

Mr Barnes told the committee the revised costs and schedule would be included when Snowy delivers its next corporate plan to the government, due in July, and he expected negotiations with Webuild to conclude at about the same time.

The Snowy boss said the company would deliver an assessment of the commercial returns of the expansion project with its new corporate plan but said that, despite the further cost escalation, he expected that the “commercial case for it has gotten stronger since the financial investment decision”.

“I fully expect it to be very commercial. We’re trying to deal with the hardest part of the transition, which is providing deep storage to enable more renewables,” he said.

“So I expect it to be a very commercial business.”

This week Mr Barnes confirmed the biggest factor in the delays was now that one of the tunnel boring machines, named “Florence”, was stuck only 70m into the drilling of a 15km tunnel required for completion of the job.

Soft ground ahead forced the “pause” in Florence’s work in December 2022, and the boring machine has been stuck since then as Webuild accelerated work on a slurry plant to firm up the ground in front and allow it to continue to drill.

Mr Barnes said commissioning of the slurry plant would begin at the end of May and Florence was expected to recommence work soon afterwards.

But the Snowy Hydro boss said it would still take Florence up to three years – depending on ground conditions ahead of the boring machine – to finish its work, and the company was still considering whether it would try to accelerate completion of the tunnel by starting from the other end using traditional mining industry drill-and-blast techniques.

“Positive progress on the project does continue, including completion of tunnelling to the underground power station, giving us access to this site from both ends and good progress on the excavation of intakes at the Tantangara and Talbingo reservoirs,” Mr Barnes said.

Originally published as Snowy Hydro confirms its expansion contract will shift to a ‘cost plus’ model