Snowy Hydro closes in on a contract agreement with WeBuild for the troubled mega project

An agreement between Snowy Hydro and WeBuild is close as the two parties work through compensation claims by the Italian developer of more than $2bn.

Snowy Hydro 2.0 is close to completing its contract negotiations with WeBuild as agreement nears over the Italian developer’s compensation claim of more than $2bn.

Snowy Hydro chief executive Dennis Barnes in May said talks over converting a contract with WeBuild to a so-called cost-plus arrangement was under way.

The Australian understands significant progress has been made and an agreement is on course to be struck this month.

The contract agreement will provide some clarity over the cost of the 2000MW pumped hydro storage project in NSW, but it will be a relief to the industry which is increasingly alarmed about Australia’s energy transition, due a lack of storage capacity.

Snowy Hydro 2.0 has been beset by delays and cost blowouts, and Mr Barnes in May said he could not provide any update to cost estimates but confirmed the project would now not be operational until 2029.

The cost plus arrangement would see Snowy agree to pay for the costs of the project plus an agreed profit margin, but with agreed incentives to complete the project. Critics of the switch said moving to such a model exposes it to further blow outs, though sources said the previous model did not prevent compensation claims from WeBuild.

Snowy Hydro was previously earmarked to cost $5.9bn, but soaring global inflation, geological issues and compensation claims by WeBuild will increase the build cost.

Snowy Hydro chief executive Dennis Barnes.

The Australian in August 2022 reported that WeBuild and then partner Clough were claiming more than $2bn in compensation due to the Covid-19 pandemic and a surge in material price.

Sources with knowledge of the situation said the compensation dispute was yet to be resolved, but Snowy Hydro was confident of striking a compromise to seal the new contract before the end of the month.

Snowy will negotiate compensation claims, but is likely to have to swallow additional costs.

The new agreement must be presented to federal Energy Minister Chris Bowen this month before a public release.

While elevated costs will inflame pressure on Snowy, energy industry figures are far more focused on ensuring the project is delivered according to its latest schedule.

Snowy 2.0 has been beset by problems, but the government-owned entity insists much of the problems were outside of its control. Snowy has specifically blamed 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.

Climate Change and Energy Minister Chris Bowen.

Australia’s energy market can, however, afford no more delays amid a rapid exit of coal from the country’s National Electricity Market. Developers are pushing ahead with plans to build new wind and solar generation projects, the country’s firmed storage capacity is well behind necessary pace.

Australia needs a significant increase in storage capacity to be able to dispatch electricity when the sun is not shining or the wind is not blowing.

Batteries could fill this role, but a shortage of critical minerals threatens to curtail their rollout.

Batteries will also not have the scale of Snowy Hydro 2.0, which is so large that once complete it would be able to provide enough electricity to run large swathes of the grid on its own for about a week.

Without Snowy, wholesale electricity prices are on course to be volatile. When conditions are right, significant increases in zero-emissions generation sources will mean the wholesale cost of electricity is in negative territory. But without a significant increase in storage, Australia’s grid will endure significant upswings — piling pressure on households and businesses.

The trend would be exacerbated by the scheduled closures of coal power stations, which are under mounting economic and social pressure. Coal power plants operate throughout the day, and while earning a lucrative return during periods when there is little renewable energy generation — they are making significant losses during sunny and windy days.

Tunnel work under way on the Snowy Hydro 2.0 project.

The pattern would add additional pressure to bills and stoke the threat of blackouts. With heightened concern, Mr Bowen has moved to push for progress on Snowy 2.0. The Australian understands Mr Bowen recently held meetings with senior executives at WeBuild to reinforce the importance of the project to the country. Mr Bowen in May toured the development, spending a night at the camp.

There appears growing confidence that Snowy is making progress. In May, Mr Barnes said work would soon begin to drill and blast a cavern for the project’s power station and the project had completed about 6km of tunnels.

Still, the complexity of the project looms large. difficulty, Snowy Hydro is having to modify one of its tunnelling machines to excavate an inclined pressure shaft and line it with specially-designed concrete segments.

Snowy Hydro is also battling difficult geological conditions, which have complicated the development.

This year, another large tunnel boring machine, known as Florence became bogged in soft ground that forced work to stop.