Snowy 2.0 saga a stark case study for how not to implement Future Made in Australia policy

Jumbo, one of the tunnel-boring machines at Snowy 2.0. The recent federal budget included $7.1bn for the pumped hydro project.

Deep within the government’s 2024-25 budget papers is a revealing paragraph on the allocation of $7.1bn to support Snowy Hydro Limited’s “continued construction of Snowy 2.0”, the pumped hydro project initiated by the Turnbull government more than seven years ago.

Snowy 2.0 was originally touted as a four-year, $2bn project that required no taxpayer funding, but the 2024-25 budget provides the second massive allocation for the project. Seven years on, the lack of due diligence appears even more inexcusable, with the hapless Snowy 2.0 saga providing a stark case study for the Albanese government on how not to implement its sparkling new Future Made in Australia policy.

The promise of no taxpayer funding for Snowy 2.0 collapsed soon after SHL’s then chief executive, Paul Broad, said it would be funded off the company’s own balance sheets. In 2019, the board sought an equity injection of $1.38bn before it could reach a final investment decision, with the estimated cost then doubling to $4bn.

The board contended the additional funding was “critical to enable Snowy 2.0 to be delivered without jeopardising the company’s investment-grade credit rating”. The government dutifully complied, but naively expected the remainder of the project to be financed by SHL.

That expectation disappeared nine months later when Snowy’s rating was downgraded from A- to BBB+, with the credit agency warning of “a high likelihood of extraordinary government support (again)”.

Last August, that warning materialised when the project was “reset” due to extensive delays, cost overruns and contractor claims. The reset doubled the cost from $5.9bn to $12bn (its fifth increase) and adjusted the completion date (its sixth adjustment), taking it from mid-2027 for first power to December 2028 for full operation. The $5.1bn fixed-price contract for the main works was also replaced with a cost-plus contract, transferring future blowout risks to Snowy Hydro.

Energy Minister Chris Bowen. Picture: NCA NewsWire/Martin Ollman

Finance Minister Katy Gallagher. Picture: NCA NewsWire/Martin Ollman

At the reset announcement Energy Minister Chris Bowen and Finance Minister Katy Gallagher criticised the project’s previous secrecy, as well as its design immaturity when it reached the final investment decision. Still, the ministers committed to working with SHL to develop an appropriate capital structure to support the cost escalation. The $7.1bn budget allocation is the result of the reset, consisting of $2.6bn in equity and a $4.5bn loan.

The ministers say they are committed to transparency and honesty – “unlike the previous government” – but they have refused to disclose any reset details beyond their media release, claiming commercial confidentiality.

Likewise, the budget papers provide no details, simply citing “disclosure would impair Snowy Hydro’s negotiating position with third parties”.

It’s clear this second allocation won’t be the last time “extraordinary government support” will be required. As energy experts noted at the time of the reset, the $12bn estimate covers only the main works, excluding many other project costs, notably financing and transmission connection.

The hidden cost of Snowy 2.0’s transmission connection has been reported many times, but it’s worth revisiting the key numbers.

It’s evident that the government’s $4bn of equity injections and its $4.5bn loan don’t come for free. The cost of supporting the project is real and substantial. These funds have been directed to construct Snowy 2.0 rather than to other government projects.

Yet there is no certainty the loan can ever be repaid. The underlying financing cost for constructing Snowy 2.0 over nine years is estimated to be approximately $4bn, while financing costs compound by nearly $1bn for each year completion is delayed.

Snowy 2.0 was initiated more than seven years ago by the government of then prime minister Malcolm Turnbull, who visited the Cooma site in 2017. Picture: Alex Ellinghausen/Fairfax/Pool

Snowy 2.0 faces many construction delay risks. Florence, the infamous tunnel-boring machine, is at the top of the list. Florence has now completed 850 metres of the 16km headrace tunnel since being commissioned in March 2022. Even if Florence attains the pace of the two other tunnel-boring machines, it will take six years to complete the remaining 15km, three years after first power is scheduled.

We should also remember the equity injections for construction are additional to the government’s shareholder equity in SHL. That shareholding was valued at $7.8bn in 2018 when the commonwealth purchased all Snowy Hydro shares from the NSW and Victorian governments.

Forced to fund the skyrocketing costs, as annual dividend payments collapsed from around $250m to $84m in 2023, it must now rank as one of the government’s worst investments.

In the past four years dividends have depressed by $0.5bn to the point where they represent a meagre 1 per cent return on investment. Critics of Snowy 2.0 now sound like a cracked record on this hapless project, but when will the government stop relying on Snowy Hydro’s flawed advice and hopeful guesstimates and come clean on the project’s failure?

Treasurer Jim Chalmers recently announced that the Future Made in Australia Act will impose very strict policy frameworks and institutional arrangements to ensure robust implementation. In other words, the Future Made in Australia Act won’t be a free-for-all of taxpayer funds.

But without a robust due diligence approach belatedly applied to Snowy 2.0, a seventh reset seems inevitable, as do further allocations of extraordinary government support in future budgets.

Ted Woodley is former managing director of PowerNet and EnergyAustralia, and a board member of NSW National Parks Association.