Pumping up case for Snowy 2.0

Having entered the electricity business through a $6 billion buyout of Snowy Hydro the Morrison government is living the maxim, if you can’t beat them join them. Fair dinkum! How else to explain a $12bn pumped hydro stake to underpin the reliability and economics of renewable energy projects that already get a subsidy. Snowy 2.0 shuts the gate on lower emissions coal, gas or nuclear forming the backbone of the national grid of the future once existing coal generators are retired. The project might make sense but there remains an air of political desperation with billions put at stake before the full financial case has been made. A measure of the fiscal prudence — or lack of it — in the latest deal is that another $1.4bn of capital has been promised from taxpayers so that dividend payments can be maintained while the project is being built.

Snowy Hydro surely will be needed to make intermittent renewable energy projects more reliable. But this is a post hoc solution to a problem that should not have been allowed to arise. It is a reflection of successive governments succumbing to demands for an electricity market revolution without a plan for how to get there. Politically, the go-ahead for Snowy 2.0 proves the Coalition is not willing to swim against the renewables tide super-charged by Labor and the states. In his search for the middle ground on climate policy the Prime Minister has embraced both ends of his split partyroom. Tony Abbott’s direct action, rebadged climate solutions, gets another $2bn over 10 years. Malcolm Turnbull’s Snowy 2.0 is touted as “fair dinkum” renewable energy even though, in truth, it is storage rather than generation.

Much has been said about the intermittent nature of renewables and what problems this creates for the national electricity market; issues abound with wastage in remotely located generation sites. The reverse side of wind and solar not delivering when the weather fails to co-operate is they sometimes produce more electricity than needed. Snowy 2.0 will give renewable energy projects a place to sell everything they produce whether it is wanted or not, leading to even more projects being built. The good news is it will allow the government-owned power company to offer “firming” contracts that will enable renewable energy projects to offer a more reliable product. Snowy 2.0’s business case for government is buying electricity at $40/MWh to pump water uphill and sell it later for $100/MWh.

The full business case for a promised 9 per cent return to government is still in the works; plenty of questions are unanswered. Will wind farms be eligible for renewable energy certificate subsidies for electricity they put into storage rather than market? Will Snowy 2.0 collect a subsidy when it discharges from the battery at times of peak demand? Taxpayers and energy users are on the hook regardless. As Judith Sloan wrote yesterday, the economics of Snowy 2.0 rest on the continuation of very high variable wholesale electricity prices. This sends a poor signal that prices are unlikely to return to levels that made local heavy industry competitive and profitable.