Snowy Hydro 2.0 facing $2.2bn cost blowout

The giant Snowy Hydro 2.0 expansion is facing more than $2bn worth of additional cost claims from its major contractors.

An 18-month delay to the Snowy Hydro 2.0 project was confirmed by Energy Minister Chris Bowen in June.

The Snowy 2.0 expansion has been hit with more than $2.2bn of additional payment claims, with its lead builders blaming the Covid-19 pandemic and surge in material prices for the cost hike.

A series of cost variation claims have been lodged with the government-owned Snowy Hydro by the Future Generation venture, comprising Italy’s WeBuild and Perth-based Clough, demanding a more than 40 per cent increase due to the spiralling costs.

The venture prepared a document late last year laying out what it believed to be the legal basis for the payment, and asking for deadlines to be extended.

The document cited unforeseen Covid-19 delays, productivity losses and surging raw material prices, and asked for an extension to complete the scheme citing a clause under its contract, sources told The Australian.

It is unclear whether that document included a single figure for extra costs on the Snowy 2.0 project, or whether the contractors have been including additional Covid-19 payments in their monthly payment claims.

An 18-month delay to the project was confirmed by Energy Minister Chris Bowen in June, with the new timeline blamed on a series of issues including bushfires and the pandemic hitting supply chains and restricting the availability of workers.

 

Snowy locked in a $5.1bn budget for the expansion in April 2019 under a turnkey contract which allows little room for major cost changes. While negotiations between the builders and Snowy are believed to be continuing, sources said both WeBuild and Clough faced substantial losses on the development should they fail to offset costs caused by the pandemic and supply chain issues, which had dramatically increased the price of raw materials such as steel, among other things.

Snowy acknowledged its contractors were facing significant cost pressures, but said on Sunday it had only paid what the builders were “contractually entitled to”.

“Snowy Hydro rejects the reported $2.2bn claim … Snowy 2.0’s EPC contractor, Future Generation joint venture, has been significantly impacted by external events, comprising the Covid-19 pandemic and supply chain challenges,” Snowy chief executive Paul Broad said. “Snowy Hydro has paid all amounts that Future Generation joint venture is contractually entitled to.”

The joint venture said: “We continue to work closely with our client, Snowy Hydro, towards the successful delivery of this project.”

The Australian understands representatives of the contractors lobbied former Morrison government ministers ahead of the May election about cost increases and Snowy’s unwillingness to accept variations to the contract based on their changed circumstances, but had little success.

Snowy locked in a $5.1bn budget for the expansion in April 2019.

Snowy had so far paid less than half of the amount claimed by its builders after assessing that the joint venture was not entitled to receive payment for the items claimed, an Australian National Audit Office report concluded on June 15.

While the contractors claimed about $1.7bn in 11 months from August 2019 to September 2021, Snowy paid less than $500m – or less than a third of the amounts sought by WeBuild and Clough. The payment gap between the two was attributed to an assessment that “the contractor is not entitled to receive payment for the items claimed and information the contractor presents in the claim sheets for calculating payment claims under the rules of credit does not contain the latest performance data”, the audit office report found.

But the vast gulf between the contractor costs claimed and Snowy’s original budget raises new concerns over the execution of the country’s biggest energy storage project, which is needed to ensure the power grid can move from coal to renewables while avoiding blackouts.

Cost tensions will sharpen criticism of the expansion, which was first championed by the then prime minister, Malcolm Turnbull, to stabilise the power grid and deliver cheaper electricity prices for households.

After locking in the initial price, the lead contractors have endured a perfect storm of challenging conditions, including rampant wage and material inflation, unexpected Covid-19 delays and elevated transport costs.

Snowy’s $5.1bn budget includes a $400m contingency factor but the company put the overall cost schedule under review in mid-April – after contractors are believed to have outlined the legal basis of their claims – with Mr Broad saying Snowy was assessing the impact of the Covid-19 pandemic.

It is understood other claims by the contractors centre around the speed at which the project was originally scoped, and whether subsequent variations to the scope of work are the responsibility of the contractors or Snowy.

Documents prepared by the joint venture for Snowy 2.0 show it was preparing to claim a “compensation event” due the imposition of Covid-19 lockdown rules on its staff, and citing a string of extra costs it was forced to meet during the construction period.

The price hike included rewriting management plans to accommodate Covid-19, the cost of incentivising people to work on a regional project in the Snowy Mountains during the pandemic, additional housing and accommodation to allow social distancing and the loss of productivity due to staff working from home.

Inflation hit many key materials needed for the complex expansion, which includes a power station 800m underground, with the builders saying there was an inadequate escalation provision given pandemic-related cost increases.

Snowy expects the project to deliver an 8-9 per cent return for taxpayers from 2025. The facility aims to add a further 2000 megawatts of generation capacity and 350,000 megawatt hours of energy storage to the NSW site in the Snowy Mountains.

The Coalition paid $6bn in 2018 to win control of Snowy after buying stakes owned by the NSW and Victorian governments.