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Management of the Murray-Darling Basin system

CHAIR —Welcome. Mr Harris, do you or Mr Nolan wish to make a very brief opening statement?

Mr Harris —We are happy to do so. By way of introduction, Snowy Hydro Ltd is a Corporations Law company. The issued shares in Snowy Hydro are held by the Commonwealth, 13 per cent; the state of New South Wales, 58 per cent; and the state of Victoria, 29 per cent. Among other generation retail assets, Snowy Hydro owns and operates the Snowy Mountains Hydroelectric Scheme. Snowy Hydro is mainland Australia’s largest renewable energy generator. In calendar year 2006, the Snowy scheme accounted for approximately half of renewable energy produced in the mainland national electricity market.

The Snowy scheme is a joint water and electricity undertaking. For all practical purposes water cannot be released from the Snowy scheme without generating electrical energy, and the converse is also true—that is, that the generation of electrical energy requires the release of water. The Snowy scheme collects and stores water that would naturally flow east of the Snowy Mountains to the coast and diverts it through transmountain tunnels and power stations and then releases it west of the Snowy Mountains into the catchments of the River Murray and the Murrumbidgee River, where it can be used for town water supply, irrigation and environmental uses.

Snowy Hydro operates the Snowy scheme in accordance with the highly prescriptive Snowy Water Licence, which is administered by the New South Wales Department of Water and Energy. The Snowy scheme is operated as two separate developments from a water perspective: the Snowy-Murray development and the Snowy-Tumut development. We operate it from a water perspective as two separate developments only to protect Victoria’s half share of inflows into the Snowy-Murray development.

Importantly, the costs of maintaining, refurbishing and upgrading the Snowy scheme are met exclusively from Snowy Hydro’s electricity revenues. Snowy Hydro is a registered generator in the national electricity market and is also a leading supplier of electricity price risk hedging products, such as price caps and similar contracts, to other participants in the national electricity market—that is, retailers and other generators who are seeking protection to limit the price risk they face in the electricity spot market. Snowy Hydro’s ability to draw on large-scale generation at short notice means that it is able to offer such products and generally hedge the risk that it takes under those contracts by generating electricity as required.

Turning to water, from a water perspective there are two critical variables: inflows and releases. Storage volumes are simply the resultant of those two variables. With respect to inflows, the last few years have been characterised by critically low inflows that are well below any previously recorded volumes. Importantly, they have been well below the volume of inflows around which the scheme was designed and its capabilities were calculated—the so-called 1936 to 1946 design dry sequence.

With respect to releases, the Snowy Water Licence imposes on Snowy Hydro the obligation among many others to ensure annual releases into each of the River Murray and the Murrumbidgee River. The volumes of these annual releases are prescribed by formulae in the Snowy Water Licence. Under those formulae, during dry inflow sequences worse than the design dry sequence, which is what we have experienced since 1996, the nominal volumes of those annual releases—the by now familiar 1,062 gigalitres into the Murray and 1,026 gigalitres into the Murrumbidgee—are reduced to reflect the inability of the Snowy scheme to release more water than it has received in inflows. As at 1 September 2008 that dry inflow sequence reduction totalled 1,692 gigalitres. In other words, since the last time our storages were on target, which was 1996, inflows into the Snowy scheme have been 1,692 gigalitres less than the inflows received during the design dry sequence.

This point could be made equally starkly another way. Given the formulae in the Snowy Water Licence, for Snowy Hydro to be able to release the full 2,088 gigalitres of required annual release this water year the Snowy scheme would need to receive inflows at a level of around about 40 per cent wet chance of exceedence—40 per cent being higher than average inflows. Currently, inflows into the scheme are hovering around 85 per cent dry chance of exceedence. This means that for the remainder of the water year conditions would have to be about 15 per cent wet—a significant turnaround to say the least.

As I said earlier, storage volumes are simply the resultant of inflows and outflows, or releases. It should be obvious to all that, with inflows so far behind the design dry sequence, storage levels are bound to be low. As at 21 September 2008 active storage in the Snowy Scheme was a mere 550 gigalitres, or 10.4 per cent of the Snowy scheme’s active capacity. I should note there that 200 gigalitres came in during the last two weeks. If I had given you the figures as at 1 September, it would have been 324 gigalitres, or 6.1 per cent of active capacity.

CHAIR —So things are crook.

Mr Harris —Things are crook. In terms of the current year outlook, despite September’s inflows coming in at around about average volumes, as at yesterday the snow pack is considerably below average for this time of year. With no significant increase in rain for the remainder of spring and a dry summer, as we would normally experience, it is most probable that we will finish the year with inflows once again well below average at around 2,200 gigalitres, which is equivalent to about a 75 per cent exceedence.

Frankly, the more worrying aspect of the critically low storage levels is that realistically there is little prospect of Snowy scheme storages returning to average levels within the next three years. Even under average inflows each year for the following three years, end of water year Snowy scheme storage levels will remain more than 2,000 gigalitres below average after that three-year period.

Turning now to the focus of your inquiry, your committee is charged with assessing options for sourcing and delivering water into the Murray-Darling system to replenish the Lower Lakes and the Coorong. Some have suggested that water within the Snowy scheme storages may be an option worth looking at. Yes, that is an option. In that regard, Snowy Hydro would make three points. First, none of the water stored in the Snowy scheme is owned by Snowy Hydro; it is owned by the interests who have an entitlement to releases from the Snowy scheme. This includes the states of New South Wales and Victoria, irrigators from each of those states and of course the environment. All of that water is pre-allocated, whether it is this year’s water or water over subsequent years. If water is sought to be taken from the Snowy scheme for the Lower Lakes and the Coorong, the owners of that water will have to be compensated or otherwise addressed.

Second, unlike any other option that you may be looking at, drawing water from the Snowy scheme necessarily involves impacts in the national electricity market. The most obvious impact is a reduction in the energy reserves available to the market. Water is our fuel for our generators. The less obvious impact but frankly potentially the larger one is the pricing impacts that unplanned hydro generation will cause for all electricity market participants, both directly through spot market price changes and indirectly through the hedge market.

The third point, though, in my view is the most important. It is that in times of drought it makes very little sense to be drawing water from the top of the hill. The security of all water entitlements, whether extractive or for the environment, is maximised by leaving water at the top of the hill and progressively drawing down from the lowest storage to the highest storage. I am not sure what the protocol is, but we have here a number of graphs and diagrams that illustrate a number of those points. We can table those and hand those out now and we are more than happy to take any questions that you may have.

CHAIR —So, in a nutshell, I do not think that we will be expecting too much water to be released from the Snowy Hydro Scheme to save the Coorong and the Lower Lakes.

Senator NASH —In terms of capacity and what you think you will or will not be able to do to deliver water over the next two or three years, give us a bit of a feel of what you think. You may well have covered this while I was out of the room.

Mr Harris —If you look at the handouts that we have just given, what illustration 6 shows is the effect of two things, the formula in the water licence which specify annual releases and the reduction in those releases on account of the dry inflow sequence volumes. That thick vertical green line is showing that we expect that, by the end of this water year, our inflows will have been 75 per cent dry or have had a 75 per cent of exceedence. We will put out on the Tumut development around about 767 gigalitres and on the Murray around about 828 gigalitres. That is contrasted with what would have been the full release had there been no dry inflow sequence reduction of 1,125 gigalitres on the Snowy-Tumut and 1,295 on the Murray.

The other interesting one is illustration 7, over the page. That takes our end-of-water-year water storage position as at 30 April this year. It is really looking at the next three years and, depending on the level of inflows, where our storages will be at the end of those three years. The black line you can see on the bottom is assuming that our storages will be in the same position at the end of three years as they were at the end of April 2008. To achieve that, we would need to get a 40 per cent wet year this year and two years at 61 per cent dry, just to maintain our position. In other words, if we have inflows that are less than that—bearing in mind that the last three or four years have been significantly less than those numbers—our end-of-year storages after three years will be less than they are today.

Senator NASH —Oh, God!

CHAIR —You have really depressed us.

Senator NASH —Just when you think it cannot get any bleaker! Sorry.

Mr Harris —This is a very bleak but powerful graph, actually, because our average end-of-year storage levels are 2,900 gigalitres, which is the red line. For us to get back to average after three years, we need three years of 24 per cent wet inflows—24 per cent wet, 24 per cent wet and 24 per cent wet.

Senator SIEWERT —That is 24 per cent above average, is it?

Mr Harris —Average is 50 per cent, so, yes, it is almost—

Mr Nolan —Twenty-five years out of a hundred would be wetter.

Senator NASH —Can you just explain again the red and blue lines?

Mr Harris —The red line: 2,900 gigalitres is our average end-of-year storage. We have said, ‘To get from where we are now to our average storage, we need three years of 24 per cent wet.’

Senator NASH —That is 50 per cent plus the 24. Is that right?

Mr Harris —Three thousand, four hundred and twenty gigalitres is our target storage volume, so, to get to target storage, we need three years of 17 per cent wet.

Senator NASH —I am sorry I am not catching on to this very quickly. Can you just explain to me the 17 and the 24 per cent wet? Can you just explain how that works and why it is a lower figure to get a higher volume?

Mr Harris —Okay. Chance of exceedence works like this. A 99 per cent chance of exceedence is the driest-ever year, which in our case was 2006-07. A one per cent chance of exceedence is the wettest year. A 50 per cent chance of exceedence is the median year. So, if you are going below 50, from one to 50 per cent is a wetter year than average; from 51 to 100 is a drier year than average.

Senator NASH —Okay. So, the closer to one, the wetter it is.

Mr Harris —Yes. Just in terms of the reality of that graph, if you turn to illustration 3, on page 3, which is a plot of our actual annual inflows—which we refer to as the ‘sawtooth diagram’—you will see that, to even think that you are going to get three years of consistently wet when you look at that period of record, you are kidding yourself. As you can see, there is enormous annual variability in our inflows—

Senator SIEWERT —And it has been going down.

Mr Harris —and, at the moment, it is going the wrong way.

Senator SIEWERT —How much water are you planning to release this year?

Mr Harris —Our water licence largely prescribes our releases, so, again, turning to illustration 6, we have to release along that curve, depending on what inflows we receive. At the moment, we are forecasting to release on those curves where the green vertical line intersects those curves. If it turns out a bit wetter than that, we will have to release further up the blue or red curves; if it turns out to be a bit drier than that, we will have to release less than that.

Senator NASH —Senator Siewert, I am happy if you want to keep going.

Senator SIEWERT —I apologise for interrupting. You were taking a breath! So that water will still be released, and then that is to meet the other obligations that you were describing earlier in terms of who owns the water—who you release the water to.

Mr Harris —Correct. Once it is released from our scheme, it then goes into the resource set of either New South Wales or New South Wales and Victoria, in the case of Murray releases, and from there is dealt with according to state water-sharing plans, the Murray-Darling Basin agreement, allocations and so on.

Senator SIEWERT —You said just then that September had average volumes. The Bureau of Meteorology said this morning that they think it is around average but not exciting.

Mr Harris —In the last two weeks we have received about 200 gigalitres, which is extremely good, and we are very happy about it. There is a downside to that, though. If you look at illustration 8, which shows the latest snow pack readings, you can see that for our three reference courses, whilst we have 200 gigalitres in, unfortunately there is now not a lot of snow pack left.

Senator SIEWERT —That is the red line?

Mr Harris —Yes.

Senator SIEWERT —So it has been a rapid melt.

Mr Harris —With a few storm events, yes. We got a lot of water off the mountains.

Senator NASH —While we are on this, can you take us to illustration 9 and explain the forecast inflows? Is that the one you did before?

Mr Harris —No. We are happy to explain it.

Senator SIEWERT —No, we have not been to 9 before.

Senator NASH —That is fine.

Mr Harris —What illustration 9 is showing you is that, as the Murray-Darling Basin Commission and the state water authorities do now, prior to 2006-07 we used to work on dot point forecasts. We no longer do that; we work on ranges. In what this graph is showing you, the thick blue line that ends between September and October is our actual inflows to date. We have forecast out from there a dry scenario, which is the red line, which would end with us somewhere below about 92 or 93 per cent dry. The light blue line is a wet forecast, which would end the water year with us somewhere slightly above average inflows. The green line is our expected outcome, which is 75 per cent dry. You can see there the envelopes: the 10 per cent wet envelope—in other words, it has only been wetter one year in 10—at the top; the 99 per cent dry envelope, which is the worst year on record, 2006-07; and where we sit this year in relation to those envelopes.

Senator NASH —How often do you do these projections?

Mr Harris —Every fortnight.

Senator NASH —Do you go back and see how close you were to your targets?

Mr Harris —Yes.

Senator NASH —What is your accuracy rate, if you like, in your predictions?

CHAIR —Yes, we want to know what is going to win the fourth at Randwick!

Senator NASH —I am only asking, Mr Chair, about—

Senator SIEWERT —More importantly, you want to know who wins tomorrow.

Mr Nolan —Probably the thing of note there is the range from wet to dry. In terms of falling within the forecast range, usually we are pretty safe, but it is a very big range.

Senator NASH —What percentage of time do you reckon that you land on the expected figure? I just want a ballpark figure.

Mr Nolan —In the last 12 months, I think there were probably about three or four where we were very close, but we spent most of them below expected.

Senator NASH —Below but within the range?

Mr Nolan —Going back another year, we had a number of months where we actually went below the dry forecast outcome, which is a very unlikely outcome.

Senator NASH —Thanks.

Senator SIEWERT —What planning are you doing? The numbers seem to be going south below that average line. On the inflows, are you redoing your modelling? I am referring to this diagram.

Mr Harris —Illustration 3?

Senator SIEWERT —Yes, illustration 3. Are you starting to redo your modelling? Is that what I heard you say before?

Mr Harris —The most important thing that Snowy Hydro has done is that a number of years ago we invested in gas fired generation, which is a number of things. It is a water substitution strategy for us. In other words, we foresaw this occurring. The dry inflows started in 1996. We have been progressively getting below target since 1996, so in the early 2000s we constructed a power plant and bought another power plant—both in Victoria—to enable us to meet our energy market requirements with, frankly, reduced fuel from water. We also, with the support of the New South Wales government, started a cloud-seeding program over the mountains four years ago. I am not saying at all—do not get me wrong—that that is going to address this scale of problem; it is not, but it is at least something. With that cloud-seeding program, we had just been seeding over the Snowy-Murray catchment. This year the New South Wales government amended our enabling act to enable us to seed over a larger area, including part of the Snowy-Tumut catchment as well, so we are doing that. Like most water authorities, I would assume, we are looking at our models and our predictive tools. We have not yet come to a conclusion on whether in fact the last 10 or 20 years are statistically different from the 103 or 105 years for which we have records, but we are working through that and looking at that, yes.

Senator SIEWERT —Did CSIRO do the sustainable yield work in your catchments as well?

Mr Harris —Yes, they did. In fact, our data and models were an input into their modelling.

Senator SIEWERT —What did they show in terms of the likely reduction in yield?

Mr Nolan —Off the top of my head, I could not tell you.

CHAIR —You can take that on notice if you do not have that information.

Mr Nolan —Not to hand, no.

Senator SIEWERT —That would be appreciated.

Mr Harris —Just out of interest, about five years ago, prior to commencing the cloud-seeding trial, we assembled a group of 15 eminent scientists in various disciplines. Their work suggested that over a 30-year time frame our inflows would decline by about two to three per cent annually.

Senator SIEWERT —Has the decline been consistent with that or greater than that?

Mr Harris —At the moment it is greater than that. Whether it is just a cycle or there is more permanent climate change behind those numbers, frankly, we do not know.

CHAIR —Mr Thompson from Murrumbidgee Irrigation spoke in favour of cloud seeding today.

Senator SIEWERT —Mr Harris, over what period of time are you doing the cloud-seeding trial?

Mr Harris —Originally, when we started, it was to be a six-year trial but largely a statistical exercise. When the government this year decided to expand the size of that, we had to also increase the length of the trial. It is now going until 2014.

Senator SIEWERT —As I understand it, the results have been around a 10 per cent increase. Is that correct or am I misunderstanding?

Mr Harris —We have to be a bit careful about that. We actually will not know the answer to that question until the end of the trial because it is designed around statistical requirements in terms of randomised seeding. We only seed two out of every three storm events. We also need a certain number of seeding hours each year so that it is statistically valid to compare that period of time against previous periods of time. We are also doing a chemical analysis of the trial, where we analyse the cores of the snow pack. When we seed we put up a seeding agent and a tracer agent, and the proportion in which those agents fall on the ground in the snow indicates to us whether or not seeding has been effective in creating additional snow. Those percentages you were talking about are seeding traces we have analysed from the snow pack. That is step 1 in a three-step process. In other words, we have analysed that snow pack and we now have to extrapolate that across the target area and then put that through a run-off model to work out how much additional water is in our dams as a result of that. We do not have the numbers for that.

Senator SIEWERT —Are you comparing your long-term average rainfall with that of areas outside the district that you have been seeding?

Mr Harris —The statistical method is looking at two areas. We are looking at the Snowy Mountains area itself to determine the effectiveness of cloud-seeding in that target area. We are also doing that in a downwind area to prove, if you like, that there are no downwind effects of seeding post-frontal cloud as opposed to frontal cloud, which is not what we seed.

CHAIR —As far as the people of the Lower Lakes are concerned, what are the chances of getting your water out of Snowy Hydro Ltd?

Mr Harris —Really that is up to government in a way, in the sense that you can see from our graphs how much water we do not have.

CHAIR —Say it as it is.

Mr Harris —As I said, there are a couple of key issues if looking at water out of the Snowy scheme is an option. The couple of key issues there are, firstly, electricity market impact—and, frankly, impact on us in a commercial sense—and, secondly, all of that water is actually owned by someone else, whether it is owned for this year’s water or whether it is from future years’ allocations. That has to be dealt with.

CHAIR —So, without putting words in your mouth, if I were holding my breath waiting for a big heap of water to come down from here to the Lower Lakes, I might go blue before it gets there.

Senator SIEWERT —But, as I understand it, that is the amount of water that will be available. What I just heard you say, twice in fact, is that when you deliver that water it is up to those people who control that water to make an allocation. If they want to make an allocation contrary to what they normally do, they can. That is a political process or it is whatever, but it has nothing to do with you.

Mr Harris —Precisely.

Senator SIEWERT —If, however, the government want to go back to you and tap you on the shoulder and say, ‘We want more,’ that is a different matter, isn’t it? So there are two options here. One is that they take it out of the existing allocation and, if there is a better melt than what you expect, that is a bit of a bonus, or they can go back and say, ‘We want you to draw down your storage,’ which has the implications of what you have just said.

Mr Harris —But you have got to understand that our system is not a year-by-year system. We continuously account our system. What you have said is correct in the sense that, if we put out whatever those numbers are on that graph for downstream water use, that is this year’s water for them. Under water-sharing plans or whatever the equivalent is in Victoria, that is this year’s water for them. If you seek to draw water out of the Snowy scheme in addition to that water, that can be done as well but you are actually taking next year’s water from those same users, be they environmental, town water supply or irrigators. That can be repaid and so on.

Senator SIEWERT —So you are borrowing against future allocations.

Mr Harris —Yes.

Senator SIEWERT —Could the government then come back and say, ‘On top of all your other licence commitments, we want you to give us a bit more’? Is that when it starts kicking into all the issues you were talking about in terms of increased pricing of energy et cetera, because you do not have access then to the resource?

Mr Harris —Yes. In terms of the numbers of this year, we have to put them out. So that water is coming out anyway, depending on where we end up in the water year. My comments about the national electricity market impacts are about if the government then want us to release water in addition to that, where that is unexpected in the electricity market. All electricity market players, because they are subject to price volatility in the market, have basically hedged their position based on certain assumptions, which include Snowy scheme releases. So, if the government come along and say, ‘We would actually like more water,’ if that is different from the expectations that participants have in the national electricity market, that will mean that there is a discrepancy between their hedged position and what the actual forward price curves or whatever are, and people will incur financial impact from that.

Senator SIEWERT —I understand. You are then weighing off the Coorong against electricity generation—in a crude form.

Mr Harris —That is exactly right, and that is why in answer to the senator’s question I said that it is a matter for government, because they are the things that governments weigh up.

Senator SIEWERT —But only if they decide not to try and negotiate that allocation. The point there is, if there is more water coming out of the system beyond there, that is when those other issues come into play, isn’t it—beyond that allocation of water there, which at the moment you have got on just before 75.

Mr Harris —If you seek to draw out more water than is required to be put out, yes—in simple terms.

Senator SIEWERT —Thank you. I just thought I would clarify that.

CHAIR —I appreciate your assistance, Senator Siewert. As there are no further questions, that concludes today’s hearings. Thank you, Mr Harris and Mr Nolan, for making yourselves available, and thank you to all witnesses who have appeared today. To Hansard, Broadcasting and the secretariat, thank you very much. This weekend we are all cheering for the Radcliffe children, who are dancing at a competition in Tasmania. Good luck to them. And go, Cats!

Committee adjourned at 3.44 pm