Behind Snowy’s Hydro 2.0’s big bet on giant water battery
Negative pricing is spreading from renewables-heavy SA along the eastern seaboard.
On an early spring day in a control room at the foot of the Snowy Mountains, Maarten van der Stap points up at the screen, smiles, then looks again.
A video wall spits out a mass of data tracking every facet of Australia’s sprawling electricity grid.
One flashing unit calls for a closer look: in energy-rich Queensland the spot price for electricity has dived to minus $1000 a megawatt hour, the lowest possible level, turning the once-predictable market on its head.
“Twelve months ago people said the market might change. Well it’s changed,” says van der Stap, a central control room manager for the Snowy scheme, gesturing to the unusual price point.
Negative and zero pricing has swung from a phenomenon normally seen in renewables-heavy South Australia to rapidly spread along the eastern seaboard.
The phenomenon occurs when a period of low demand combines with rooftop and large-scale solar and wind flooding the grid with supply, hollowing out wholesale prices during daylight hours.
On the flipside, when a period of low wind and solar coincides with a period of high demand, prices soar, providing a renewed opportunity for flexible generators like Snowy to smooth out the peaks and troughs.
In the process, it’s driving a new layer of market volatility, raising the question of how generators from coal to solar will adapt to the dynamic.
To be sure, while most big electricity users and generators already have locked in contract prices, shielding households from big market swings, the spot price provides a valuable insight for investors and traders to identify underlying demand and supply trends in the grid.
And for Snowy Hydro, the vast “water battery” that’s been pumping for 70 years, it underlines that the market is changing much faster than anyone anticipated. From where van der Stap sits in Cooma — a small town gearing up as the headquarters for the federal government-backed $5bn-plus Snowy 2.0 expansion — the market signals are flashing that Snowy’s vast pumped hydro capacity is needed to smooth out an untested transition from coal to intermittent renewables that require back-up storage from hydro or batteries to steady the grid.
“For us it completely underscores the need for Snowy 2.0 and that the storage market is going to be desperately needed as renewables just grow and grow. We actually need eight Snowy 2.0s of capacity, so without us you can guarantee the national electricity market is going to be pretty bloody horrible.”
An hour’s drive up the road at the giant Tumut-3 power station, those negative pricing signals play out in real time amid the grand backdrop of Australia’s largest hydroelectric scheme.
Snowy takes advantage of low prices and surplus supply to pump water uphill into huge dams and basins which can then be released to flow downhill through massive turbines to make electricity when demand and prices are highest.
The Snowy scheme has been tapping this century-old hydro technology for 70 years through an extraordinary post-war nation building scheme which saw 100,000 workers labour for 25 years, building an intricate 150km tunnel and pipe network connected to 16 dams and nine power stations.
Now, Snowy’s vision is to increase the amount of power it can provide to keep the lights on, albeit at massive cost and to an ambitious late 2024 deadline. It aims to add an extra 2000MW of power, roughly equivalent to a large coal plant, to the national grid. Crucially, that generation will also provide a week of storage, keeping the system stable during both summer heatwaves and solar and wind “droughts”.
Inside the 1800MW Tumut-3 power station, Guy Broadman calls the Australian Energy Market Operator, which operates the grid, to let them know he’ll be starting up one of the plant’s six generators.
Within seconds a distant noise turns into a loud rumble, shaking the floor beneath our feet as water rushes downhill to spin the turbines.
Broadman, one of Snowy’s area managers, needs to have the power plant ready to dispatch into the market in an instant, which keeps him on his toes.
“We only need one coal-fired power station to have an issue with megawatts dropping out and all of a sudden our dispatch targets go through the roof.”
Unpredictable solar and wind generation can also mean a station like Tumut-3 can be flat out or barely used, depending on the market. Snowy has direct exposure to the trend after underwriting South Australia’s Tailem Bend solar farm in 2017, which includes a safety clause allowing output to be cut if prices dip below zero.
It expected to be tapping that safety net four times a year, but has now done so 60 times since April.
“We’ve seen now in the middle of the day we could have one pump running when there’s a lot of solar and wind in the network,” Broadman says. “Then the weather changes and that can drop off a cliff and bang, you’re away. That’s what we do. We’re peaking power, quick start and we’re online before you know it.”
Snowy 2.0, designed to “firm” unreliable renewable power, would purchase power off-peak at $40/MWh, using it to generate hydro power, which would be sold into the market at peak periods at about $100/MWh.
Broadman’s day job is to keep the plant running as efficiently as possible.
But in the last few years he’s added a sideline as a tour guide, shepherding a gaggle of federal politicians through the hydro scheme after the government paid NSW and Victoria $6bn for their stakes, handing it full control as the sole shareholder.
“It’s a fantastic opportunity,” he says in a well worn sales pitch. “Tumut-3 is 60 years old and apart from a few refurbishments the main plant is still here and still works and still makes a lot of money. And that’s what you hope 2.0 will be. We want the same again.”
Labor Prime Minister Ben Chifley fired Snowy’s first construction blast in 1949, while Robert Menzies’ Liberal administration opened facilities a few decades later. And it was this rich heritage Malcolm Turnbull sought to draw on when he declared in March 2017 his credentials as a “nation-building prime minister”, launching the next grand plan for Snowy: 2.0.
The “nation changer” was immediately met with scepticism by some in the industry who questioned whether the scheme was a convenient ruse to distract voters from a domestic gas crisis and high power prices.
Critics also questioned the budget and likely return on taxpayer dollars and voiced concern that such a large government-owned generator would squeeze competitors out of the market.
The building of new transmission also looms as an issue, given the estimated $2bn cost. Snowy owns the generators but not the transmission network, meaning it must rely on other providers to press ahead and build lines such as the southern NSW HumeLink and KerangLink to Melbourne.
Back at Snowy’s Sydney headquarters, chief executive Paul Broad shakes his head when the criticisms of the 2.0 project are trotted out.
“For those naysayers who keep saying perhaps Snowy 2.0 isn’t going to happen: sorry, it’s started and for something not happening there sure is a lot of action happening. The diggers are digging, the financing is being lined up and the tunnel boring machines have been ordered. It’s all on track.”
While the government will tip in $1.38bn in equity for the expansion, Snowy has yet to detail how it will fund the balance other than through a mix of its own equity, retained earnings and debt.
But with low interest rates and a global rush for long-dated infrastructure assets, banks are showing strong support in initial talks.
“There’s no box we don’t tick. We’re not coal. There’s a lot of things we’re not. And all of the things we are is good,” Snowy chief commercial officer Gordon Wymer says. “So there’s huge demand. We’ll be several times oversubscribed.”
Questions over the economic case for 2.0 are also dismissed.
“The internal rate of return is 8.3 per cent. When you think about putting your money in the bank and get 1.5 per cent, you can put your money into Snowy and get 8.3 per cent and with gearing it could be about 11 per cent,” Broad says. “I mentioned at a Macquarie Bank function even Macquarie might put money into that.”
The issue of whether Snowy should fund transmission for its own expansion touches a nerve. “We’ve said this 150,000 times. Transmission is for the common good. Everyone benefits from it. We use it about 10 per cent of the time and the other 90 per cent it’s used by everybody else, particularly on the renewable side.”
The prospect of competitors being crowded out of the market is also fanciful, according to Broad, given the exponential growth of renewables needing to be firmed up. Snowy estimates 30,000MW of new wind and solar will be online in Australia by 2040, based on current projections.
“There’s no crowding of the marketplace here, let me tell you. The federal government doesn’t have any control over the market. If you’re suggesting that will come through us and 2.0 that is just blatantly wrong,” Broad says. “I can only rationalise that someone is trying to undermine my business. That’s the only rational argument I can put.”
If it feels like a long haul to deliver on Snowy 2.0, Broad is showing no signs of fatigue. “You’re sitting down there at Tumut-3 and you see that mighty thing turned on so quickly … and the power of the water is just incredible. To be able to harness that for the next generation is amazing.”
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