AGL Energy explores converting hydro power plants to pumped hydro

AGL Energy will explore upgrading three of its hydro power plants to run as pumped hydro facilities to capitalise on the price volatility that plagues Australia’s energy market.

AGL Energy will explore upgrading three of its hydro power plants to run as pumped hydro facilities, using its position as the largest owner of such sites to capitalise on the price volatility that plagues Australia’s energy market amid the transition away from fossil fuels.

The development underscores a growing trend by Australia’s largest electricity companies to fund and develop new projects that could capitalise on a wide spread in the cost of producing electricity during most days.

But while developing these so-called energy storage projects, which complement renewables, the pattern will do little to develop other forms of renewable energy generation such as onshore wind and solar. These projects are typically capital intensive and have much lower returns as Australia’s record proliferation of rooftop solar often pushes wholesale electricity prices into negative territory during sunny days.

AGL chief operating officer, Markus Brokhof said the investment landscape as a result incentivises Australia’s largest energy companies to prioritise projects that can dispatch electricity during peak demand periods or when the sun is not shining and the wind is not blowing.

AGL, Mr Brokhof said, has a unique advantage of being Australia’s largest owner of hydro power facilities, and the company will now examine whether these can be converted to pumped hydro.

“Firming capacity is key for us. It will allow us to use our trading capability. Being the largest private owner of hydro assets in Australia is a differentiator for us,” Mr Brokhof said.

Pumped hydro facilities work by using cheap, sometimes free, electricity to pump large quantities of water uphill. When the sun sets and demand increases – the wholesale electricity price increases – operators can release the water downhill turning a turbine that produces electricity.

Mr Brokhof said AGL will explore converting three existing hydro power sites to pumped hydro. But he warned for AGL to continue through with developments, Australia will need to tweak federal policy, specifically changing the Capacity Investment Scheme to include projects that can dispatch electricity for longer than a large battery.

The Capacity Investment Scheme is the government’s centrepiece energy policy designed to accelerate development of renewable energy and meet Labor’s ambitious policy of having renewable energy generate 82 per cent of the country’s electricity by 2030.

The scheme sees developers guaranteed a minimum return on new solar and wind projects. Should the wholesale electricity price fall below an agreed threshold, taxpayers will compensate the renewable energy project.

Should the wholesale electricity price exceed a metric, developers pay the government, a design which removes revenue risk from developers and accelerates investment.

But the design of the scheme is yet to be fully finalised, and developers are concerned pumped hydro projects may not be considered.

Currently the scheme is understood to prioritise batteries.

The Capacity Investment Scheme is supposed to remove the perceived revenue risk with new renewable energy projects, but it is unclear whether the model will overcome the hesitancy of companies like AGL and Origin to own large-scale wind farms and solar facilities.

Instead Australia’s energy companies are looking to develop renewable energy projects to near the point of construction where they will then hope to secure investment partners. Australia’s huge superannuation industry, with large pools of capital and appetite for lower returning but steady returns are seen as the most likely to invest.