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Environment and Communications Legislation Committee
Snowy Hydro Ltd

Snowy Hydro Ltd


CHAIR: We will now start our deliberations with Snowy Hydro Ltd. Welcome, Mr Broad. Do you have an opening statement that you wish to make?

Mr Broad : Not today. I think we're all pretty well informed.

CHAIR: Excellent. We'll go straight to questions. Senator Carr.

Senator KIM CARR: I'm not quite so confident that we are well-informed, Mr Broad; part of the process of the estimates is perhaps to improve that situation. Following the purchase of Snowy Hydro by the Commonwealth, I wonder whether you could advise the committee of the process now for the operation of the Commonwealth Procurement Guidelines and the Commonwealth bargaining policy in regard to the operations of the authority.

Mr Broad : It is my understanding that the rules that applied to us before would be the same rules that would apply to us now. We are complying with those rules and have a plan on procurement, and we are in discussion with the department on those details.

Senator KIM CARR: Would you just outline for me what that involves, from your point of view?

Mr Broad : Basically, it involves ensuring that we get the maximum Australian content in what we do. I can be very clear: we are very conscious of that, particularly in the mountains. We note that there's a lot of interest being shown by businesses in the mountains to bid for work.

Senator KIM CARR: I want to deal with that and follow that through for a moment. But, before I do, can I ask Mr Pratt: what is the arrangement in regard to the operation of the Commonwealth Procurement Guidelines for a statutory authority?

Mr Pratt : That is a matter which would be best directed to the Department of Finance.

Senator KIM CARR: I understand that, but what do you understand that to be?

Mr Pratt : In fact, I don't know the extent to which the Commonwealth Procurement Guidelines apply to a government business enterprise.

Senator KIM CARR: Will you take that on notice?

Senator Birmingham: We have a distinction from a statutory authority.

Senator KIM CARR: Okay; that is a fair technical point. Could you take that on notice? Given that, in fact, you are required to have that relationship with the corporation, could you take on notice what you understand to be the operations of the Commonwealth Procurement Guidelines and the Commonwealth bargaining policy?

Mr Pratt : Yes.

Senator KIM CARR: Those two; thank you. I notice that you had a meeting in Tumbarumba. You are having a series of meetings, Mr Broad, across the mountains with various communities. This issue of local procurement does come up at just about all the meetings, and you indicate that there are opportunities for local businesses to participate in Snowy 2.0. Have you got any sense yet of just how extensive those opportunities will be?

Mr Broad : Not until we get the final contractors decided upon. But I can assure you that we have a register set up online where parties show interest and they register on that register. We certainly will be working with our contractors to use those. I also note that, in your town of AdaminabyI think you had some connection to Adaminabywe had a wonderful town meeting down there; 71 people showed up and there was a lot of interest from the Adaminaby people not just for the contract work but the effect on the town. We also note with interest that there are some businesses moving into the mountains from outside in the expectation that they will be in a prime position to bid for work.

Senator KIM CARR: You're noticing that already, are you?

Mr Broad : Yes.

Senator KIM CARR: At Cooma, for instance, I'm told that there's been a change in terms of the real estate market.

Mr Broad : Yes, there has, but I also notice that there's been an improvement in value, particularly in the Polo Flat area where businesses want to locate. We're in discussions and, of course, we want to keep the Polo Flat airstrip operational.

Senator KIM CARR: I take it that those business opportunities go right throughout the region, through Jindabyne and Tumut and right through the district; is that the case?

Mr Broad : Very much so.

Senator KIM CARR: I'm also interested, given my other responsibilities in terms of Australian industry participationthis is an enormous engineering projectin the opportunity for Australian engineering participation. What do you see there as the possibilities?

Mr Broad : We've got two major civil contractors now. On one side there's Leightonsa very big, dominant Australian companyand Clough is the other consortium. We'll be seeking to source, obviously, the bulk of the labour from Australian labour. The market is very tight and the demand for these resources now has increased significantly, particularly in New South Wales but equally so now in Victoria. So we're very conscious of the impacts of that on the whole supply chain for labour to get this work done.

Senator KIM CARR: Does that mean, therefore, you will have to have specific policies in regard to skills acquisitions?

Mr Broad : We will need the best people in the world to build what we're proposing to build. It's hard to find in the world an equivalent model of the scale that we're doing here, so we need the best in the world. But we happen to believe very much that the Australian skills will be such that we will be very successful in having a significant number of the Australian workforce in this project.

Senator KIM CARR: What's your expectation in regard to skills shortages? What areas of skills shortages have you been able to identify already?

Mr Broad : Shortages not so much. We've got over 200 people involved in all the work being done nowprobably 250-oddand with the environmental work that we're doing in the mountains now, all the baseline work, again most of that is locally sourced, certainly within New South Wales but a large part is locally sourced. On the engineering side, we're getting combinations of Australians who may have worked overseas that are being brought home to do the work, which is great. So we haven't found a specific shortage so far. It'll be in the skilled labour, technical labour, in the civil side, when we get to that phase, where I think the shortages might come.

Senator KIM CARR: Do you anticipate having to recruit from overseas, to import labour, to meet the requirements of the project?

Mr Broad : Our contractors will make that call. People will be brought from all around the world to build something like this. I do reflect that we brought over 100,000 people here to build the original scheme and I think we're a better society for having brought them here.

Senator KIM CARR: A range of issues are associated with this. In terms of the feasibility study, what did you identify would be the requirement?

Mr Broad : The requirement for overseas?

Senator KIM CARR: Yes.

Mr Broad : Again, we didn't get down to that specific, because it would depend on the contractors. The contractors' skill base in Australia is particularly for civils and for tunnel boring et cetera, but the tunnel-boring machinery tends to come out of Europe or China.

Senator KIM CARR: As part of the contract discussions, will there be a requirement for skills trainingapprenticeships, for instance? In some parts of the Commonwealth now, state governments require apprenticeship ratios in terms of employment arrangements. Is that the sort of thing that you're talking about in terms of your contract?

Mr Broad : No, we don't anticipate having requirements, but we anticipate leaving a legacy of a very highly skilled workforce, and we do that in Snowy today. The values we have in Snowy developing particularly local kids are second to none and that requirement won't change.

Senator KIM CARR: Of course, as you say, some quite significant legacy questions have arisen as a result of this and those lessons surely would be learnt in the awarding of these contracts. That's why I'm asking the question: are you contemplating making it a condition of the contract to actually develop

Mr Broad : No, we're not requiring it, but we would expect it because that's part of good business.

Senator KIM CARR: In terms of the Commonwealth acquisition, some concern has been expressed that this would make the privatisation of the corporation easier. What do you say to that?

Mr Broad : Matters of ownership are not for me; I think they're more for the department and government.

Senator KIM CARR: Yes, I understand that. But what's the management's view on that matter?

Mr Broad : I don't think it changes it one iota.

Senator KIM CARR: In terms of the government's attitude, Minister, what's the government's view on the privatisation?

Senator Birmingham: The government has made and stands by a firm commitment that Snowy Hydro will remain in public ownership.

Senator KIM CARR: Under no circumstances will that change?

Senator Birmingham: Correct.

Senator KIM CARR: The final decision for the commencement of the project has been pushed back a bit, hasn't it?

Mr Broad : No. We've said consistently the end of November, early December, that sort of time frame, yes. Before Christmas.

Senator KIM CARR: It is before Christmas now, is it?

Mr Broad : No, I don't think I've changed from that. I give myself a bit of wiggle room. This is a very complicated process.

Senator KIM CARR: I just thought it was the middle of the year and it might have been

Mr Broad : No.

Senator KIM CARR: It hasn't moved at all?

Mr Broad : No.

Senator KIM CARR: So you'll expect the go-ahead to occur?

Mr Broad : I don't like to anticipate my board. The board has to be comfortable that all things come together.

Senator KIM CARR: So it's the board's decision that will give the authority to proceed?

Mr Broad : Yes.

Senator KIM CARR: Have I got that clear?

Mr Broad : Yes.

Senator KIM CARR: Is the board looking to the government for any assurances in regard to loan guarantees, for instance, or any other prerequisites?

Mr Broad : Not at this stage, no.

Senator KIM CARR: None at all?

Mr Broad : No.

Senator KIM CARR: What do you mean by 'at this stage'?

Mr Broad : We've got to do the final analysis. I don't want to pre-empt the final investment decision by suggesting that. But we've proposed this all the way along as being financed off our balance sheet. We don't have any guarantees for our borrowing. We don't borrow under any requirements of the state or federal governments.

Senator KIM CARR: Are you looking for a dividend holiday?

Mr Broad : We'll have that discussion with our shareholders at the appropriate time.

Senator KIM CARR: When's the appropriate time?

Mr Broad : When we understand the final investment decision and cost involved, and the financial options we'll put to our shareholders at that time.

Senator KIM CARR: The shareholder is the Commonwealth?

Mr Broad : It will be. The shareholder has always been the Commonwealth, but it'll have 100 per cent ownership from the end of June, yes.

Senator KIM CARR: But you are looking for a decision on the investment before Christmas. Are you saying that, between the end of June and before Christmas, you'll have to have a conversation with the Commonwealth about the investment decisions that are required?

Mr Broad : Absolutely. We keep our shareholders informed all the way along. We are very conscious of engagement, whether it be the Commonwealth or the three governments, in keeping them fully informed.

Senator KIM CARR: Of course it would be the case that you would keep them fully informed but I'm asking a different question. Is there a requirement by the board of any prerequisite from the Commonwealth for this investment to be made?

Mr Broad : We're not asking the Commonwealth for money but, as a shareholder, they have to agree to or sign off on an investment of this nature, yes.

Senator KIM CARR: Yes.

Mr Broad : That was the case prior to the Commonwealth owning it and it's the case now.

Senator KIM CARR: I'm seeking information here; I'm not making any judgement. As I say, this requires bipartisan support, doesn't it?

Mr Broad : Yes.

Senator KIM CARR: That would be one of the political criteria you're looking for?

Mr Broad : Absolutely.

Senator KIM CARR: You're looking for an understanding in regard to the policy environment?

Mr Broad : Yes.

Senator KIM CARR: For instance, I've seen some public comments that have been made in regard to subsidisation of coal-fired power stations. Is that a factor that needs to be considered?

Mr Broad : No.

Senator KIM CARR: No consideration is required there?

Mr Broad : No.

Senator KIM CARR: In terms of the energy policy environment, is that a consideration?

Mr Broad : Of course, but we also take the best part of the risk profiles that we build for final investment decision.

Senator KIM CARR: So the funding of the transmission lines?

Mr Broad : Transmission is a separate issue. It is an issue for a much wider group of agencies to consider. That process is working its way through very, very constructively because the transmission that is being proposed allows renewables to be brought to market in a very efficient way. So that wider issue is being considered and the board will need to have confidence that that matter will be resolved in a constructive way to be confident to make a final investment decision.

Senator KIM CARR: That's right. That's what I'm talking about. There is a requirement by the Commonwealth to set down some parameters for you to be able to make the decision. Does that involve, for instance: are you required to fund the transmission lines?

Mr Broad : No. The transmission line from 2.0 to the connection point we will pay but not transmission generally, because that's like the highway, the super highway, for all the users.

Senator KIM CARR: I think that's entirely reasonable but the question is: that will need to be specified?

Mr Broad : Yes.

Senator KIM CARR: It won't be loaded up under your balance sheet?

Mr Broad : No.

Senator KIM CARR: Is there an understanding, though, in terms of the future role of the Snowy Hydro, that your job there is to actually make a profit rather than fill in gaps for the energy policies of the Commonwealth?

Mr Broad : We make profit by filling in the gaps; that's right.

Senator KIM CARR: But is there no conflict between those two objectives?

Mr Broad : No.

Senator KIM CARR: You don't see that there's a conflict there at all?

Mr Broad : No.

Senator KIM CARR: And are you seeing that that's a policy position that you need to have some certainty about?

Mr Broad : We are a government business and, as for the profitable nature of our business, we operate under the GBE and under Corporations Law and none of that's proposed to change.

Senator KIM CARR: Can I ask you: in terms of the environmental issuesI do want to thank you very much for hosting us at the authority's head office

Mr Broad : Our pleasure.

Senator KIM CARR: You briefed us on the question of the spoil from the tunnel. This is the proposal essentially at Lobbs Hole, and I note the public commentary on that matter in terms of the geological work that you've undertaken there. Is it the case that the actual geological work has been found to be more difficult than anticipated?

Mr Broad : No, actually. I know your particular interest in this matter. The geological work has allowed us to move the cabin in Lobbs Hole further west and away from the highway, which is to our benefit because the access into that cabin will be shorter. The geological conditions that allow that now are the rock strengths; they allow that happen. So that's a big plus. On other issues, the size of the fault, which you'd probably be aware of, is as big and as difficult as we initially anticipated; so we got no upside from that. So, no, I don't think there is, outside the parameters that we found in the feasibility study. But you can never be overconfident. One thing we've found out by visiting the best around the world is that you can never do enough drilling to check the geology. There's one in Iceland where I think the tunnels were over 70 kilometres. We have them out with us now and they did an enormous amount of testing but they missed one fault and the tunnel-boring machine got stuck. So you can never do enough.

Senator KIM CARR: What's the length of the tunnel that you're proposing?

Mr Broad : Total tunnels, just to be clear, will be in the order of 48 kilometres but the main tunnels will be 28 kilometres.

Senator KIM CARR: What's the diameter of these tunnels?

Mr Broad : Ten metres.

Senator KIM CARR: That hasn't changed, has it?

Mr Broad : It has changed a bit. We started at 12 and then came down to nine to see whether we could do it. The engineers couldn't get their comfort right to get all the hydrology right; so it's back up to 10 now.

Senator KIM CARR: And where's that spoil going to go?

Mr Broad : Primarily in Talbingo.

Senator KIM CARR: You've settled on that?

Mr Broad : That's our proposal. We've got to test that through the EIS process.

Senator KIM CARR: What's the scientific evaluation that you're using to demonstrate the validity of that process?

Mr Broad : We have the relevant experts, including the CSIRO, going through that scientific work now.

Senator KIM CARR: Who are the relevant experts, apart from CSIRO?

Mr Broad : I'll have to take that on notice and come back to you.

Senator KIM CARR: If you wouldn't mind. Quite clearly, what you're going to do with the spoil is a critical part of this project, isn't it?

Mr Broad : It is.

Senator KIM CARR: Do you have a fall-back position if the EIS fails in that regard?

Mr Broad : Yes, but it's very difficult. Taking it by road out of the park would be very difficult, yes.

Senator KIM CARR: That's outside the park itself?

Mr Broad : Yes.

Senator KIM CARR: Would that delay the project if that scientific evaluation

Mr Broad : Possibly. Again, I'm pre-empting what might come out; so I'd have to wait until the work comes forward on that. But our preference, our strong preference, is Talbingo, and all the early signs are that that will work.

Senator KIM CARR: I've only got a limited time today and I do really think this requires a lot more discussion. I'll serve notice that at the next round I'll want to put more energy into this. My reading of your forward plan is that this is just the beginning of the ambition, and the potential for this project suggests to me that there is enormous scope here in terms of a national project

Mr Broad : There is.

Senator KIM CARR: In terms of supply of energy to the nation. This is stage 1, is it not, in terms of the Snowy Hydro's possibility? Are you anticipating that there could be a third stage and a fourth stage?

Mr Broad : If you rightly recall, the MJA report, independent economic analysis, that we got prepared looked out to 2060-odd and, under those scenarios, with the massive penetration of renewables, then you would need a 3.0 and a 4.0 to sustain it. So we are, with our commitments, trying to look out very long term. When you have assets and infrastructure of this nature, you've got to take a long-term view and we've taken a very long-term view and we've looked through all the different cycles to argue a case. Whether that be 3.0 or Tassie Hydro or other hydros is still to be determined. Of course, other players are coming in, which is great; we would encourage that. I suggest that anyone interested in the subject should read that MJA reportI know you have. It's a very insightful report, looking at how the market has got to be flexed in the world that we're heading into. That sets the scene that we think will drive future investments in storage of various forms.

Senator KIM CARR: I've read these reports that say there are up to 2,000 alternative sites which could undertake the pump of hydro cheaper and more effectively. Do you have a response to those assertions?

Mr Broad : I think it's great that people are looking at other sites and we think we'd outcompete most other sites because we have scale. We sit between the two big markets. It's one thing to do all that but, when you have the massive amount of storage that we have175 hoursit's a massive amount of storage that can fill in the gaps. But we welcome all the others. We're very conscious of all those others that are being put up and we think that's great. We particularly love the one at Shoalhaven and, as in some of my old Sydney Water days, that's a great site. So there are lots of others coming around. But you've got to build dams and things. That comes with its own complexity. We have existing storages, as you know well, and I think we're in a very strong position, both economically and financially, to deliver this and equally so where those two storages can go to another two stages. So you have to think the incremental cost of building more would be even less than what we're paying now because, as you would appreciate, we have a lot of sunk infrastructure that allows you to expand it, and the economics of that will be very compelling.

Senator KIM CARR: I've got a series of other questions that I'll put on notice, given the time. But given the scale of what we're talking about, these questions of procurement I think are really important public policy matters. Mr Secretary, I do draw your attention to how serious this is and just the enormous potential there is for Australian industry participation as well as the regional economic implications for that part of the country, the immediate part of the country.

Senator Birmingham: Senator, whilst obviously, as you've heard from Mr Broad, the Snowy's mandate as a government business enterprise remains to act in accordance with their work as a government enterprise, the government is very cognisant of the opportunities for industry, for training and for skilling, as we know that Snowy are within their mandate, just as, for example, in some of the work around defence industry procurement, we've been looking at how we support skills development that aligns with that investment, not necessarily putting those obligations upon the contractors. But expecting that we must provide the pipeline of skills to support those contractors, we'll be undertaking similar analysis and work in relation to this project.

Senator KIM CARR: I repeat: this does require a bipartisan approach and the opposition is very keen to pursue these matters in that spirit. Given, as I say, the length of time it will take to actually get the full potential here, there needs to be an understanding that this development will occur across a range of governments in the normal course of the electoral cycle. The question about the contract development, though, is one that is very, very important. We're seeing, in a range of procurement issues now, matters of training, and questions around the supply chain development are normal parts of contract discussion. They're not narrowly commercial in the sense they were once understood. And that's why I think there needs to be a conversation about what the opportunities are, recognising that this is a project of such national significance.

Senator Birmingham: Thanks, Senator Carr. I know that Snowy appreciate the way that you and members of the opposition have engaged to date, as indeed have the government, to make sure that this is a project that can realise its full potential in the energy markets but also, as we saw with the original Snowy project, its full potential in developing human capital and our nation.

Senator STOKER: Looking at the feasibility study for Snowy Hydro that was put together by Marsden Jacob Associates, a projection is made about the feasibility of the project in that study. To do so was it necessary for you to make projections about likely electricity prices in the decade around the mid-twenties?

Mr Broad : The MJA report does two outstanding things which haven't attracted much commentary. Firstly, it says that the economic benefit of 2.0 is in the $5 billion to $6 billion type range. As long as your costs come below that, the overall economic benefit of doing 2.0 is very favourable. Secondly, it says it puts downward pressure on pricesin the order of 10 per cent. We had to get a feel for what the prices might look like to understand how the economics fit together. The feasibility study per se looked at the engineering and all of the technical bits. The MJA report tried to look at the economics. In my view it tries to challenge the mindsets of how the economic market might evolve over time.

We were very keen to have that in the public domain to guide discussions about how people might see it. That allows people to test the various ideas through the lens of a very hard-edged economic model, which I know is a bit out of vogue these days, but it gives a bit of an economic rationalist approach to how you might approach these changes that are coming at us.

Senator STOKER: In conducting that analysis does the MJA report make any assumptions about what the energy landscape looks like at the time the project is complete?

Mr Broad : Yes, it just takes what's available publicly nowAEMO's publications on when things might open or close, it takes a view of where the states' regulatory frameworks might be. It puts that into its model. Given all of that noiseand that may changeand given what we know today, this is the landscape as presented in a market that's going to flex around quite a lot.

Senator STOKER: It doesn't take a static view of what's available in the current energy supply mix?

Mr Broad : No.

Senator STOKER: What would happen to that modelling? Would it improve the economic output or otherwise if there was a greater availability of high-energy, low-emissions baseload power in the market?

Mr Broad : We try to look through the cycles and look to what form of investment might come. The alternative to pumped hydro is open-cycle gas, fronted by batteries, to fit the five-minute grid peak period. You will see through that report that we constantly look at the alternative, which is open-cycle gas. We constantly try and look at how the other alternatives might evolve. What you also see is that, with some of the baseload, they struggle to flex up and down as intermittency comes in and out; so they try to model that as well. They try to put all of those bits together without being prescriptive. Again, through a rationalist approach, they try to put those bits together to see how that may unfold, and how 2.0 would fit into it.

Senator STOKER: In doing that, does the modelling reach any conclusions or views about how changes in what's available in the future energy market, in terms of the availability of high energy, low emissions coal baseload power, would affect the output or the benefits of Snowy Hydro 2.0?

Mr Broad : I think what it says is that a hydro plant with massive renewables will outbid any alternative, basically.

Senator STOKER: Does the technical nature of the project require access to energy from sources other than the operation of the project itself to be able to pump water uphill?

Mr Broad : No.

Senator STOKER: I noticed in some of your public comments, Mr Broad, that you have expressed enthusiasm for AGL selling the Liddell Power Station to Alinta. Is that because of any impact it has on the operations of the Snowy Hydro 2.0 project?

Mr Broad : I think the nation benefits most by having lots of competition. The more competition we've got in the marketplace, the better off consumers are going to be. I don't want to tell AGL how to do their business; nor do I want to tell Alinta how to do their business. Having Alinta come into the marketplace has been great. They have led the prices down. They have put us all on notice at a retail level about what can happen in aggressive, highly competitive retail markets. That's a good thing, not a bad thing. My enthusiasm is always about increased competition, which is always in the best interests of consumers.

Senator STOKER: Mr Broad, I hope AGL takes your advice. Thank you.

Senator WILLIAMS: Mr Broad, in your business modelling, what price will you have to sell electricity for to make the project viable?

Mr Broad : We do a lot of numbers on that. Storage value for us came out at roughly $25 to $35.

Senator WILLIAMS: $25 to $35 a megawatt?

Mr Broad : Yes, about that. What is interesting is that the cost of renewables is coming down dramatically. We looked at a thing called a firming product, which is new, and which is what we are now putting into the marketplace. We hope to make some announcement shortly. On that firming product we have wind at about $40, and us with a firming product of around $40 as wellaround $80. Those costs are coming down rapidly.

Senator WILLIAMS: Did you or anyone in the organisation state that if another coal-fired power generator was constructed it would make your project unviable?

Mr Broad : A long time back, when this scheme was first proposed, in the sixties, when thermals came into the marketplace and took out all the volatility, the argument for storage wasn't as great. But now, with massive renewables coming into the marketplace, storage is fundamental to it.

Senator WILLIAMS: That's fair enough, but if another coal-fired power generator was built, what effect would that have on Snowy Hydro 2?

Mr Broad : You'd have to have multiple ones. One wouldn't make any difference at all.

Senator WILLIAMS: One wouldn't make any difference; several might?

Mr Broad : If you really then walked away from Paris

Senator ABETZ: Doesn't it depend on size?

Senator WILLIAMS: That's a good point, Senator.

Senator ABETZ: Doesn't it depend on size, and the amount of energy?

Mr Broad : When you get down to scalescale on massive amounts of energythere are 4,000 megawatts of renewables that are going to be in the market by 2020. And that's scaling up. When they compete, a thermal plant's got to operate in the 90 per cent range to make any of the economics work. With that sort of penetration of renewables, unfortunately for thermals, they're in the 70s, and the economics of those change dramatically. So that's what it is.

We are happy for other competitors to come into the market. We factor in that analysis as to how we approach 2.0, and we are very confident of the economics. Again I encourage you all to read the MJA report, which tries to model these things forensically through the old-fashioned eyes of economic rationalists.

Senator WILLIAMS: Let's say, for example, that a six-unit 3,000-watt coal-fired generator was constructed, what effect would that have on Snowy 2?

Mr Broad : It would not make money.

Senator WILLIAMS: It would not make money?

Senator ABETZ: Snowy wouldn't make money.

Mr Broad : No, Snowy would. The new plant would not make money.

Senator WILLIAMS: You're saying the new coal-fired plant would not make money?

Mr Broad : We priced up HELE plants and looked at that relative to what we can do, and we looked at the price profiles over time. We've got to be confident. That's our investment decision that we've got to face, and we, with our firming products, will out-compete them, yes.

CHAIR: Senator Di Natale.

Senator DI NATALE: The Snowy 2.0 business case has an internal rate of return of about eight per cent; is that right?

Mr Broad : Yes.

Senator DI NATALE: What assumptions have been made about the level of renewables that will allow you to reach that eight per cent return?

Mr Broad : It's not renewables per se. What we've done in the modelling, the MJA report, is that we've taken the commitments of the federal government and the various state governments as a given, and modelled 2.0 against them.

Senator DI NATALE: What commitments are they?

Mr Broad : The commitments in Paris, the state based regulatory outcomes. We've put those into

Senator DI NATALE: Hang on; let's go through them. When you say 'commitments in Paris', are you talking about the

Mr Broad : The 28 per cent.

Senator DI NATALE: The 26 to 28 per cent reduction?

Mr Broad : Yes. Then, by 2060, the MJA model looked at the Victorian model, which I think had renewables going up to 40-odd or something. I can't remember offhand; I'll get you those details.

Senator DI NATALE: I think that's important. You've modelled it based on the Paris targets, but that doesn't tell us what the mix is going to look like.

Mr Broad : We're not into determining the mix. We're just a business saying that with that level of renewables we'll need that much storage, and we model.

Senator DI NATALE: Hang on; slow down. That level of renewables?

Mr Broad : Can get a 28 per cent

Senator DI NATALE: What is that level of renewables?

Mr Broad : With that level of renewables, if you put 28 per cent on the investment we see coming forward

Senator DI NATALE: I'm asking you: what is the level of renewables? That was the original question.

Mr Broad : As I said I'll come back to you on that. I refer you to the MJA report. It's all in there, but I'll get you the details and send them to you.

Senator DI NATALE: What I am asking is for you to be able to tell us about what the levels of renewables will benot the Paris targets, but the levels of renewables that you've modelled, to achieve that 26 per cent to 28 per cent reduction. It looks like you might have that.

Mr Broad : No, we don't have it available. I'll take it on notice and send it to you. You might want to read the MJA report. It's a very good report.

Senator DI NATALE: No, I'm asking you a question. If you can provide me

Mr Broad : I'll take it on notice.

Senator DI NATALE: Yes, provide to me on notice what level of renewables that you've modelled would achieve those Paris targets. Have you factored in what happens if Liddell stays open?

Mr Broad : No. We used the AEMO's projection of when various plants will be retired. I think that Liddell staying open would make very little difference.

Senator DI NATALE: You said you've modelled it, say, based on the Victorian renewable energy?

Mr Broad : MJA modelled it based on the 28 per cent. They took the state base, which is Victoria, and they modelled that, assuming New South Wales would follow their lead. But, again, I'll have to come back to you with the details.

Senator DI NATALE: But under the NEG we're talking about a 26 per cent target, which is lower than the Victorian target.

Mr Broad : We modelled it on the basis of what the states had in place today.

Senator DI NATALE: But that's lower than the national target.

Mr Broad : Again I'll get you the details of all of that.

Senator DI NATALE: But this is really critical here, because if your business case is based on emission reductions and the level of mix from state-based schemes which are higher than what is being proposed under the NEG, which is 26 per cent, then your business case is going to be fundamentally flawed.

Mr Broad : Just to be clear, Senator, this business case tops out in 2030. Post 2030

Senator DI NATALE: But we've got

Mr Broad : Post 2030, it tops out. For us, for this 2.0, it doesn't have material impact post 2030 in the business case. In the business case, the eight per cent tops out in 2030. AEMO's projecting, I think, that in 2032 Eraring is going to be retired.

Senator DI NATALE: But the NEG tops out at 2030 with a target of 26 per cent.

Mr Broad : In our original modelling, of the MJA

Senator DI NATALE: Which wasn't based on the NEG?

Mr Broad : We didn't have the NEG at that stage. When you put the NEG on top, the economics still stack up.

Senator DI NATALE: Hang on. How do you know that?

Mr Broad : I am happy to provide those details to you.

Senator DI NATALE: How do you know that? You've just cited Victorian targets. You say that the business case is based on the Victorian targets, not on the NEG.

Mr Broad : I said that by 2060 it looked at a much higher one of 40-odd per cent which was based on Victoria, not 2030.

Senator DI NATALE: But you just said this is based until 2030.

Mr Broad : Yes, it hasn't got Victoria in it. It's the legislation that we are compelled to do today. We are not trying to be the government and say what it might change to.

Senator DI NATALE: But if the government does change it to 26 per cent, as is proposed under the NEG, what happens?

Mr Broad : 2.0 still stacks up.

Senator DI NATALE: Based on what?

Mr Broad : Because with that level of renewables in the market, 4,000 megawatts coming into the marketplace today cannot stay on without renewableswithout pumped hydro or hydro storage of some form. It can't happen. The lights don't stay on, as we found out in South Australia.

Senator DI NATALE: Your business case is not based on that. Your business case states an eight per cent level of return, which is based on state settings, not the national setting, not the NEG. Does that mean that you will be revising down your rate of return if the NEG is implemented?

Mr Broad : No, not at all.

Senator DI NATALE: What are you basing that on?

Mr Broad : It's the level of penetration of renewables in the market that's forecast to occur between now and 2030. That's based around meeting the Paris targets and it's based around the state-based target.

Senator DI NATALE: So what is the

Mr Broad : Hang on; you want me to answer it. You keep talking over me.

Senator DI NATALE: Fire away. You're doing a good job at the moment.

Senator Birmingham: Thanks, Senator Di Natale. We don't need gratuitous commentary.

Mr Broad : Again I'll take it on notice and I'll give you the details.

Senator DI NATALE: You just asked for time to complete your answer.

Mr Broad : I completed the answer. The answer is quite simple: the amount of renewables in the market and the projected closure of baseload power stations are primarily what drives the economics. The targets were set in the MJA report around Paris and a state-based target at that time. If you look at the modelling, if you are particularly interested, I suggest you have a really close look at it. It goes right through the flexings of the marketplace and it says that by 2030 it tops out. That's why we talked about the extent to which the targets are increasedyou are going to need another pumped hydro. You can talk about 3.0. In 2040, with that equivalent, it could be this or it could be in some other form, or you're going to need more of it. That's the point about looking in the long term, to get some sense of how this might unfold.

Senator DI NATALE: Help me understand this. If the NEG is implemented and we have a 26 per cent emissions reduction target, it will lead to a very different mix of renewables in the system by 2030 than that which you modelled under the state-based targets. It's a very different mix; is that a fair thing to say?

Mr Broad : No; again you're getting confused. The mix is primarily determined by what gets closed. You close baseload and you don't assume that another coal plant is going to be built; it gets replaced as an alternative. The alternative is the most efficient that can be delivered in the marketplace at the time. In the base case we looked at the alternative being either hydro, us, or open cycle gas fronted by batteries. The MJA report says that the benefit to the community of 2.0 versus that is five or six billion. The cost of ours is 4 billion. So the economic value to the nation of building us is in the order of a billion. So we didn't get hung up on the way you approach it. We looked at what the market will be delivering at a particular time. Our market says, AEMO says, that Liddell closes in '23 and Vales in '28whatever those numbers are; I'll give you the detailbut roughly that sort of profile. As they are closed, what will be entering the marketplace to be competitive? We're a business. We're not trying to pre-empt the regulatory outcomes. We looked at that decision, and we believe that with us, 2.0firming up the alternatives that will come into the marketplacewill blow the 8 per cent out of the water.

Senator DI NATALE: But what the market delivers is determined by the regulatory outcomes.

Mr Broad : No, it's not.

Senator DI NATALE: What do you mean it's not?

Mr Broad : When you close a baseload power station what do you think it's going to be replaced with?

Senator DI NATALE: But if you've got an increase in the renewable energy target, it's going to deliver more renewables. If you've got settings in place that skew the investment towards one set of generation then that will make

Senator Birmingham: Senator Di Natale, I appreciate that the perspective of the Greens is that government regulation drives all outcomes.

Senator DI NATALE: It absolutely does.

Senator Birmingham: No, it does not.

Senator DI NATALE: It absolutely does. Of course it is going to determine it.

Senator Birmingham: Senator Di Natale, the cost of production drives outcomes. Regulation is a factor in the cost of production.

Senator DI NATALE: Yes.

Senator Birmingham: But it is not the only or determinative factor in the cost of production. As Mr Broad has indicated, the significantly lower cost to production for renewables is not a factor of government regulation, it is a factor that they have become more efficient in their construction. Large-scale solar can now be contemplated as a more efficient input potentially, and a range of other renewables have become more efficient. It's why they don't need ongoing subsidy necessarily into the future, which is the government's contention. It is why the likes of Snowy can then assess the market conditions, those market conditions determining whether the business case stacks up. It is for Mr Broad and the board to explain the business case and how that stacks up, which is what he's doing. But you are dead wrong to step in here and pretend that government regulation drives the cost of production. It is but one factor.

Senator DI NATALE: I haven't said that. Can you answer this for me? If we have a change of government and the renewable energy target changes significantly, or the level of renewables in the system has to change as a virtue of that, and the timetable for closure changes as a virtue of that, will that change the rate of return?

Mr Broad : The market changes all the time, up and down. We factored in what is projected closure now. We don't speculate what may or may not happenchange of governments, business decisions. We all got blindsided when Hazelwood closed. Everyone expected Hazelwood would close in about 2020, so the market moved and responded to that. In our view the market overshot, and wholesale prices have come off significantly since then. We believe that the penetration of alternative sources of energy is such that the underpinning of storages like 2.0 is incredibly sound. The economics is so much in our favour. As the minister says, it's the economics that drives the decision processes, and regulation is one input into that economic decision.

Senator DI NATALE: I agree it's one input, but it's a significant input. Again, I don't want it to appear as though I'm being critical of the scheme more generally. I'm just looking at the assumptions that it's based on. I'll put to you a very simple proposition. You've based a business case on the existing settings. As you say, there's a lot of uncertainty and a lot of change within this market. One of the factors, and a significant factor, is the emission reduction targets, which then flow on to the level of renewables and the closure of coal within the system. You're saying that the current modelling is not based on taking into account what impact NEG would have or, or the 26 per cent emission reduction target within the electricity sector, or indeed what a 50 per cent target would look like; you've based your modelling on the existing settings. Is that an accurate reflection?

Mr Broad : Yes.

Senator DI NATALE: Good. Therefore, if those settings change, your business case would necessarily change, wouldn't it?

Mr Broad : The world could change, there could be a recession. Anything could change.

Senator DI NATALE: The world could change. The world will change. We know that one of two scenarios will happen. Either the NEG, with a 26 per cent reduction target, will be in placethat change is being proposed by the government. Or a change of government will occur and there will be different settings. Your modelling doesn't take into account either of those absolutesthose things will happenit is based on current state-based settings. Is that an accurate reflection of what's going on?

Senator Birmingham: Senator, Mr Broad has encouraged you a few times to go and look at the business case, which includes risk profiling, as you would expect with such work. Yes, there is a scenario as to who wins the next election and different policy settings that might be adopted from there, but there is also the movement of time. This is a long-term investment and project. To purely focus on the outcome of the next election or the 2030 targets would be to look at a very short and narrow horizon compared to the benefits this project can realise. A design feature of the NEG, if implemented, is to give certaintyand that has been welcomed by manufacturers, businesses and otherswith a regular review mechanism that would see future targets or changes around the NEG set with a decade's notice to industry to be able to respond.

So there is the need for companies like Snowy to deal with the known facts as they can, which is what they are doing, and then risk profile according to how the world might change and the trends that exist at the time. The trends that currently exist, as you have heard, are that certain parts of the energy generation mix are becoming increasingly cost-competitive and, therefore, are taking up a greater part of the production cycle, and that is what they are responding to. A lot of your questions would be answered if you did, perhaps, some of the same type of research that Senator Carr seems to have done.

Senator DI NATALE: Thank you. Mr Broad, if we've got more renewables in the system, the rate of return increases, doesn't it?

Mr Broad : No. If you close the coal-fired power stations, as proposed, they will be replaced by something. With the alternatives of open cycle gas versus 2.0 storage type, the economics are in our favour. Inasmuch as the targets drive behaviour, I accept that behaviour, and inasmuch as the subsidies drive behaviour, I accept that argument as well; they are part of the mix. But as the economic equation moves, and as these things compete in and out of the market, we try to look through it with forensic, unemotional, commercial objectives. In that process we work out how the rate of return comes out. A publication which you may not have picked upwe put out the information last weeklooks at the internal rate of return and different forms of capital spend, and they range up to 10 per cent in different scenarios. So you test all scenarios. On balance, the scenario we put up at 8 per cent is the most probable scenario that we went with.

Senator DI NATALE: I'll ask that question in a different way. Will that 8 per cent rate of return change if we have an increased proportion of renewables in the system?

Mr Broad : It will change if the coal existing baseload is closed early.

Senator DI NATALE: Will a different set of targetsthat is, 26 per cent under the NEG or 50 per cent or greater under an alternative scenario with a different governmentmake a difference to the timetable for closure of coal?

Mr Broad : I can't answer that.

Senator DI NATALE: Have you done any work in that area?

Mr Broad : The MJA report speculates, but as independent economic analysts we are not commenting on that issue.

Senator DI NATALE: Will you be doing any further modelling based on the impact of the NEG on Snowy 2.0?

Mr Broad : We are looking at the NEG now, but the details are still to be sorted. When it is, we will certainly be putting it into our modelling.

Senator DI NATALE: So you are planning to look at what the NEG and the 26 per cent by 2030 target does to the rate of return?

Mr Broad : No; we look at the NEG and the firming products we put into the marketplace which underpin our business today. We do that todayno differentand we'll do it tomorrow, and we'll do it when 2.0 exists, and we're very good at it.

Senator DI NATALE: So you are going to model the 26 per cent target

Mr Broad : We model the investment that is going into renewables. They talk to us, because the only way they can make their investment work is if it's firm. So we look at that investment. They're making conscious decisions about their investment, and we talk to them about how that investment might work with the firming products, as all the others are.

Senator DI NATALE: But we talk to them as well, and they tell us what a 26 per cent target under the NEG will do in terms of their investment decision. I imagine you're having similar conversations.

Mr Broad : We talk to them more about when the closure of baseload happens and what they will do.

Senator DI NATALE: Will a 26 per cent target, as opposed to a 50 per cent target, have any impact on the closure of baseload?

Mr Broad : I've already answered that. I said it's not for me to judge.

CHAIR: I come back to you, Senator Di Natale.

Senator DI NATALE: My question goes to the issue of privatisation. I think the Minister made a statement that there is no intention to privatise Snowy Hydro Corporation; is that correct?

Senator Birmingham: Correct.

Senator DI NATALE: Have there been any plans or modelling around the privatisation of Snowy Hydro? Has the government done any work in that area?

Senator Birmingham: No, not to my knowledge.

Senator KENEALLY: I go back to the line of questioning pursued by Senator Williams and Senator Stoker. Mr Broad, when we had Mr Whitby before us in February I asked him: 'So it is the case that if additional coal-fired power plants were built and a lot more baseload was added to the NEM the Snowy Hydro 2.0 would have its economic viability threatened?' Mr Whitby said: 'Simply put, yes'. Nothing you've said today contradicts Mr Whitby's evidence in February, does it?

Mr Broad : It's like all these things; it is how you put the question. If we massively put baseload power back in the system, like we did back in 1960, which made the original proposal not work, that would be the case. But then that assumes that the price for renewables isn't going down. We are saying today that we will outcompete any new coal plantwith no subsidies and no government guarantees; nothingon price and on viability as the markets unfold.

Senator KENEALLY: Indeed, Mr Broad, your points there were similar to the points that Mr Whitby made in February when he referenced the past, when new coal-fired plants were being added and without constraints on CO2 production. But my question still is: it would appear to me that nothing you've said here today contradicts Mr Whitby's evidence in February.

Mr Broad : He's my right-hand man; of course I'm not going to contradict him.

Senator KENEALLY: But I suspect

Mr Broad : But I think

Senator KENEALLY: With the greatest of respect, I think some senators may wish to try to suggest that you did.

Mr Broad : I think there has been a lot of misquoting of my good friend. There's a commentator who calls him 'the Whitby bloke', and we don't appreciate that very much. But I think you've got to put it in the right context. You're right; your question had lots of bits to it, and you've got to put the whole context around it. But we're confident. There's been a pass in the tipping point, and we've got to be conscious of how that unfolds. As a business, it's incumbent on us to make such investments. We've got to look incredibly long term to make sure that they stack up, and we do that.

Senator Birmingham: Senator, I think if I look at some of the commentary in this debate there are points of difference between the rate of return required for major new investments in coal-fired power, for example. You heard Mr Broad speak about having done analysis of investment in Snowy 2.0 relative to HELE-type models, or the like that exist, versus the rate of return required for existing assets that, of course, don't have the same immediate need for return on the capital investment that a new asset would.

Senator KENEALLY: Thank you, Minister. Mr Broad, you told Sky News on 21 December 2017:

Three more new coal-fired plants and the economics

of Snowy 2.0

wouldn't work.

Mr Broad : That's right.

Senator KENEALLY: You still stand by that statement?

Mr Broad : No, I don't actually. The price that we're getting for wind and solar has come down by an order of magnitude. In those days we were thinking of prices for wind and solar in the 70s and 80s; we're now getting prices in the 40s, 45s to 50s. So, as the market moves, you've got to readjust your sights.

Senator KENEALLY: So what's changed since December 2017? How would you rephrase what you said?

Mr Broad : The massive amount of renewables coming into the system is 4,000 megawatts and they're all looking for firming. So the market's moved; the market's moved.

Senator KENEALLY: Since December?

Mr Broad : The market's moved. Again, that statement was reflecting the days of the 1960s. So if you massively walked away from when we were heading down the Paris equipment route, if you moved away from all of that, it was that comment. But, even so, now we think strongly that the move has happened to the point where the investment stands alone and that the economics for us with renewables now works.

Senator Birmingham: The market has moved significantly.

Senator KENEALLY: I understand that, Mr Broad.

Senator Birmingham: The wholesale prices are down 30 per cent, compared to the same time last year.

Senator KENEALLY: I suppose, Mr Broad, what I'm trying to understand is that you told Australia through Sky News that three more new coal-fired plants and the economics of Snowy 2.0 wouldn't work. Are you telling us that it's now, whattwo? Is it one coal-fired power plant and the economics don't work?

Mr Broad : We are saying we can outcompete a new HELE plant today.

Senator KENEALLY: So, to be clear, you're saying it doesn't matter if any coal-fired power plants, or a dozen, are built. You can outcompete them?

Mr Broad : That's right. And I

Senator KENEALLY: Correct me if I am wrong, but did you testify to Senator Williams that, in fact, what would happen is that the coal-fired power plant would be economically unviable?

Mr Broad : Yes, that's what I am suggesting. It's not for us to judge all of that. Our analysis showsand again I refer you to the MJA report. I encourage those who are interested in the subject to look at it. It does that analysis really clearly. It looks at how an existing power plant, coal-fired plants, struggle to flex. As the minister points out, the short-run marginal cost for existing plants is very low. Brown coal is in the what, teens, isn't it, Rogthat sort of thing? Black coal is in the high 20s. In existing plants, you can make that work. But for a new plant you've got to get return on capital. From our perspective, it doesn't stack up.

Senator KENEALLY: I asked Mr Whitby about the MJA modelling report in February. I said to him exactly what you've just told us about the benefits provided by Snowy 2.0. I understand that the modelling shows that the benefits of Snowy 2.0 are greater at higher levels of renewable generation, which is consistent, as I said, with what you're giving us this morning. But I do understand that there comes a point where additional renewable generation will not see additional benefits from Snowy 2.0 because the scheme has large but finite capacity. So what percentage of renewable energy penetration maximises the market benefits of Snowy 2.0?

Mr Broad : Again, if you looked at that MJA report, by 2030, with the closure of existing baseload power plantsthat's Liddell and Vales and the pending closure of Eraringthat amount of baseload power out of the system and resumption is replaced by renewables or gas. However that combination happens, we cap out. So the benefits in 2.0 you will see flatten out. So it is finite. That's why we have suggested in briefings to Senator Carr and others that we've got to look further down the pipeline and look at possibly 3.0 and 4.0. So we're looking at over 6,000 megawatts of stored capacity in addition to what we already have. That's a massive investment. You've got to look through the cycles. I think one thing our industry probably hasn't done enough of is look long term. We're trying to, as objectively as we can, put into the marketplace the most objective assessment we can put it on it. Others can put the assumptions around that and get it tested. If others want things tested through the MJA, we are happy to speak to the MJA and get them tested.

Senator KENEALLY: As my colleague Senator Carr was just pointing out, that's three times the current renewable generation share. You have previously stated that the Snowy 2.0 project will support the uptake, of course, of the renewable energy in the NEM. You were talking earlier about your feasibility study. I understand that renewable generation was assumed to have reached as high as 60 per cent of the NEM by 2040. Will Snowy2.0 support a renewable generation share of 50 per cent or above by 2030?

Mr Broad : Of course it supports it, in a sense. Again, as I said to Senator Di Natale, you don't get hung up on the renewable target. The amount of baseload that comes out of the market determines the viability or not of 2.0. I just remind senators that we do this today. This is not new. The largest pumped hydro in the country today is us. Senator Carr knows it well. Down at T3 we pump enormously. The other weekend I was on my phone watching the trading markets go on. I think it was minus 1,000 there for a while and it peaked at $12 for a while. We were pumping like mad, both in Jindabyne and down at T3. We do that today, as well as our existing hydro. So we firm up in that we play in the market today. But as this is evolving and changing in a very dynamic world, you've got to be able to look through those cycles and then, obviously, take to your board the business case with all the probabilities and risk that that entails.

We were getting some criticism for not putting out the financials. We put out a significant amount last week in the public domain. We put out the pricing on our products that are sitting behind it. We put out the projected internal rate of return on different capital spends. We put out the products we are proposing to sell. We have gone an awful long way down the track of keeping people informed of what goes in behind us. This is not a trivial exercise. This is a massive exercise in terms of the projected scale of change in the world we're trying to give to our kids. We are looking at a world that's different and we're trying to project a world that gives certainty to those changes that people do need certainty about. That's what sits behind us.

Senator KENEALLY: Is it the case that the viability of Snowy 2.0 is higher with 50 per cent renewables than with 20 or 30 per cent renewables?

Mr Broad : Again, I keep repeating: it's not the renewable; it's about the amount of generation in the market which determines it.

Senator KENEALLY: According to the modelling in your feasibility study, what was the renewable energy share in 2030 with Snowy 2.0 in place?

Mr Broad : Again, I go back. It was the closure of the existing power plants which drove them on. Their closure was driven by a renewable target, but that's a secondary question.

Senator KENEALLY: Senator Di Natale may wish to follow up.

Senator DI NATALE: I know you keep saying that it's about the amount of coal that's in the system, but renewable energy targets determine how much coal. If you're putting more renewables in the system, that's going to speed up the transition away from existing coal.

Mr Broad : You'll have to speak to the coal generators about all of that. I am not sure. Well, you speak to them.

Senator Birmingham: There are many factors that determine the energy mix in the system, Senator Di Natale, and regulatory imposts are just one of them.

Senator KENEALLY: I want to come back to the point about coal. We heard today in the media that there are calls again from some senators for the government to build a coal-fired power plant. What if the government were to build a coal-fired power plant and write off the capital cost? How would that affect Snowy 2.0?

Mr Broad : I am sure our marginal cost now is growing because the price of coal is going up. If they built one in the Hunter, we would have black coal. I still think, because baseload power struggles to flexagain, I refer you to the MJA report. There are some wonderful graphics in there. They call them 'duck curves', which I don't want to get technical about. They look like the shape of a duck. They look at the profiles that happen when you have this penetration of renewables, and how the various units can flex. That's why gas and hydro come into their own in that respect. So our ability to flex within that market is a big determinant. That's why I keep going back to the fact that it's the amount of baseload in there which is the biggest driver, and it seems to have passed the tipping point in more recent times.

Senator Birmingham: That's where Snowy 2.0 is complementary to the NEG work that puts an emphasis on dispatchable energy, that recognises that it's not about the share of renewables per se; it's about the reliability within the system. That's where baseload comes in and, in the absence of that, ensuring that something that is dispatchable like pumped hydro is able to fill that void.

Senator KENEALLY: If I can go back to my question about the renewable energy share in 2030. I asked, according to the modelling in your feasibility study, what was the renewable share in 2030 with Snowy 2.0 in place. I note that I asked a similar question of Mr Whitby and he agreed to take it on notice, because at that point we were talking about the modelling that has already been done for 2040, which I understand MJA has done. I am asking for the 2030 figures. I've asked for them before. Can you please take that on notice?

Mr Broad : Sure.

Senator KENEALLY: Thank you.

Mr Broad : My apologies that they haven't got back. It's in the process, so it's on its way.

Senator KENEALLY: Thank you, Mr Broad.

Mr Broad : The pigeons take a while!

Senator KENEALLY: I have other questions, but I don't know how long we have.

CHAIR: I know Senator Abetz has some questions. I suspect others do too. We'll go to Senator Abetz and we can come back to you.

Senator KENEALLY: That's fine.

Senator ABETZ: Do you want to keep going?

CHAIR: How long?

Senator KENEALLY: How long is a piece of string?

Senator ABETZ: In that case I will go. Thank you, Chair, and Minister and officials. Can you indicate to me how much energy will be consumed to pump the water up the hill? How do I put this? Let's say we've got one unit of energy to pump a certain amount of water up. That amount of waterhow much energy do we expect it will produce on the way back down?

Mr Broad : Thank you, Senator. I'll ask my good colleague Roger Whitby to answer, that 'Mr Whitby bloke'.

Mr Whitby : Thank you. The round trip efficiency of the plant is expected to be 75 per cent, approximately. So that means in terms of getting a unit of energy out you have to consume 1.3 units of energy in total, approximately, to get that one unit of energy out.

Senator ABETZ: So we consume 1.3 units of energy to produce one unit of energy?

Mr Whitby : Yes. So what it is doing is time-shifting energy basically, taking it from periods of excess and moving it to periods of shortage. You need that 30 per cent extra energy to cope for the energy losses in the process.

Senator ABETZ: Where are we anticipating we will get that energy from?

Mr Broad : Off-peak.

Senator ABETZ: So that's usually at night?

Mr Whitby : Whenever there is excess energy relative to demand.

Senator ABETZ: When is that usually?

Mr Whitby : It will be at a range of times.

Senator ABETZ: Yes, but usually?

Mr Whitby : No, I don't want to get into when it's going to be usually because, as we're seeing the dynamics

Senator ABETZ: But the business model

Mr Whitby : Let me finish, please.

Senator ABETZ: Yes, sorry.

Mr Whitby : The dynamics of the energy system are changing and we are seeing, for example, excess supplies when there are big fluxes of wind energy, when you have very windy conditions across big areas, picking up a number of wind farms, for example. That can be at all times of the day. For example, if it is also very sunny and you have solar farm outputs you can have excess of supply in the middle the day. So the traditional patterns of seeing off-peak overnight are changing. The short answer is: when there is excess supply you pump, and when there is shortage of supply—that is, high demand, you generate.

Senator ABETZ: In what you have just given me you have told us about wind, you have told us about solar, you have studiously avoided coal.

Mr Whitby : No, I didn't studiously avoid it at all.

Senator ABETZ: All right, if you didn't studiously avoid it, can I then ask you: could coal also be part of the mix to pump water up the hill?

Mr Whitby : Coal absolutely is part of the mix. In the current power system, most of the energy comes from coal. That's a simple fact.

Senator ABETZ: What do you expect in relation to the mix of energy that is used to pump the water up the hill? What percentage, in rough terms, is wind, solar, coal or gas, for that matter? Have you done any analysis?

Mr Whitby : It's completely dynamic because it depends on the combination of the events that are happening across the power system at any one point in time.

Senator ABETZ: So we've done no modelling on it?

Mr Broad : No, we buy off peak, instead of who's on. The way the system works, the way the market works, is that renewables get preference for coming on. So with the wind blowing a lot the renewables will get preference. That's why you get the minus $1,000. So the short-run marginal cost for a wind generator is zero. The short marginal cost for coal is not. So the economics of the coal plant is that they can't get that flex right. We're indifferent. We buy whatever is available from the market. That determines as a mixand it could change every half hour, every five minutes it can changethat change in dynamics. And it obviously includes coal. Eighty-five per cent of energy produced in New South Wales today is from coal. But as that dynamic changes and more renewables comes in, it becomes harder and harder for coal to compete.

Senator ABETZ: Have we done any analysis of the cost at which we might be buying the energy to pump the water up the hill?

Mr Broad : Yes.

Senator ABETZ: What does that tell us?

Mr Broad : I think the energy goesI'll double-check it for you; in modern times we're very conservative. We've looked at $40-odd to pump it. We can go to roughly $80 to $90 to sell it.

Senator ABETZ: And of course that price will be borne by the consumer?

Mr Broad : It's a very interesting point. The price gets determined for the consumer by the average price. So you get these peaks and troughs from time to timethe average price. So when you have large amounts of renewables or other sources where the price is very low, it pulls the average down considerably. That's why you'll see in consumers' bills, of which the energy makes up 30 per cent, the wholesale price is coming downno doubt in the wide world. It's down by 30-odd per cent, as the minister said. That's very important. That trend is incredibly important to how you model the world going forward. For us, it's these peaks and troughs that occur which, in themselves, don't provide a signal for consumers; they send a market signal for new entrants. So when that bounces around a lot, those who supply capacity or storage in the market look at that market and see whether that can underpin an investment they wish to make to sustain those fluctuations.

Senator ABETZ: I understand the Snowy 2.0 business model and how you want to proceed with that from the Snowy 2.0 perspective. But I suppose I'm looking at: how do we achieve the cheapest possible price for our fellow Australians for the energy that is so vital to their household budgets? It costs $40 to pump water up the hill, and then we get $80 to $90 when it comes back down. But that has to be borne by the Australian consumer. Sure it's in the average price.

Mr Broad : Just be clear on that, though. if you look at the MJA report, if it didn't have 2.0, the reason why the price is at $90 is not because we're doing anything, it's because demand is high. If you didn't have 2.0 it would most likely be significantly higher than $90. 2.0 flattens the price, brings the price down. Overall the MJA modelling clearly shows that, with or without Snowy 2.0, 2.0 will bring prices down by roughly 10 per cent. What it tends to do is flatten out the off-peak price and bring down the peak. So I would argue the counter to your argument, that we are operating in the best interests of consumers to minimise the prices for generations to come.

Of course without it, the alternative is open-cycle gas fronted by batteries, which on average is significantly higher. We run a series of gas plants. We understand the gas market and where that's heading. That is the driver. So we've got to keep all those in context. I don't want to mislead senators to suggest that in any way, shape or form this leads to higher pricesquite the opposite. All the independent work we've done clearly shows it.

Senator ABETZ: To take the point of Senator Di Natale, I think we'd all have to agree that the renewable energy target and regulatory impacts of that nature do in effect distort the market.

Mr Broad : All regulatory arrangements distort markets.

Senator ABETZ: Yes, right. Thank you.

Mr Broad : But sometimes, yes, there's an argument, and economics 101 tells you, when there's market failure there's a right for intervention. Now we can argue the toss about that.

Senator ABETZ: Yes. I agree with that.

Mr Broad : We can all do that.

Senator ABETZ: Agree with that.

Mr Broad : And if that happens in the market we'll price in that intervention. And if market prices it in, then they respond. And I always think of the oil shocks in the seventies, how then the efficient cars came in. So the market responds. And let me tell you, energy demand in New South Wales is still coming down.

Senator ABETZ: I remember these committees being used hour after hour with certain senators talking about peak oil, which seems to have disappeared from the agenda these days. But that is how things change. And Senator Di Natale is very quiet.

Senator Birmingham: Don't embark on that.

Senator ABETZ: We will continue. So the removal of the subsidies, when is that going to be, minister, 2020?

Senator Birmingham: The government's expectation and intention is that the renewable energy target runs out its life, which is that in terms of the incentive for new or additional investment, that peaks and essentially stops at 2020

Senator ABETZ: Yes, 2020. And so the market

Senator Birmingham: and phases out in that area to 2030.

Senator ABETZ: Yes. So the market then will become somewhat 'normalised'can I use that termthen?

Senator Birmingham: I think you could. And the expectation of those who are experts, in term of their assessment and analysis, is that there will continue to be additional investment in renewables post that 2020 point, which is where the economics of Snowy, as Mr Broad was outlining before, stack up because of the need for ensuring dispatchable energy within the marketplace as well. If you have that continued growth in investment in renewables, who are not able to provide that reliable dispatchable energy all the time, they have to be complemented by the ongoing production of baseload that produces greatest surpluses in the market, or other forms of dispatchable energy, such as batteries or gas peaking plants, which are more expensive to operate than the modelling suggests the pumped hydro is.

Senator DI NATALE: I just want to come back to this discussion that we've been having, just so that I'm clear. We've got more renewables in the system, whether that be through regulatory intervention or indeed market, which is changing very rapidly. That drives down the wholesale price of electricity. I just want to hear your statement on that, just to have that confirmed.

Mr Broad : More renewables in the market, when renewables are onthat's only 30 per cent of the timewhen more renewables are on, they tend to drive down the price, absolutely.

Senator DI NATALE: And that makes coal generation less profitable because we have many of these coal generators' end-of-life, significant maintenance costs. We would expect that to drive closure of those coal generators more quickly than they would otherwise be if we didn't have those increased renewables in the market.

Mr Broad : Again AEMO projects their understanding of how much renewables are coming into market, the physical life that they have projected out, when they expect, not us, these plants to be closed. I don't want you

Senator DI NATALE: No, I'm not asking about what the projections are.

Mr Broad : I don't wish to make any other judgment about other businesses making decisions about closing or not closing other plants.

Senator DI NATALE: Let's just talk theoretically here. We're just talking theoretically. When there are more renewables in the market it drives down the wholesale price of electricity and it makes coal generation less profitable. And in those circumstances we expect to see the rate of return for Snowy Hydro to increase. That's a fair statement, isn't it?

Mr Broad : The amount of renewables that we expect in the market, from what we know todaynot theoretically, not hypothetically

Senator DI NATALE: But you have already said this market is changing so rapidly.

Mr Broad : Do you want me to answer or do you not?

Senator DI NATALE: But I'm asking you

Mr Broad : I'm giving the answer.

Senator DI NATALE: what the theory of this is, the theory that underpins it.

Mr Broad : The theory is based around the reality that when baseloads are currently closing the projection is that they will be replaced by renewables, whatever the target is.

Senator DI NATALE: Yes. I am not talking about the target.

Mr Broad : And that replacement needs firming. That firming will come from storage in large part and multiple storage sources from lots of different alternatives, of which 2.0 will be a big player.

Senator DI NATALE: And finally, as we heard from Senator Keneally, there were reports today of government intervention in terms of coal-fired power. If there was a new coal generator built and it was heavily subsidised because, as you have said, the economics don't stack up, it wouldn't be built if left to the market. If a new coal-fired generator was built, would that decrease the rate of return for Snowy Hydro?

Mr Broad : I don't know that, if one came on, it would change it much at all. If you replaced existing fleet with new ones and they were massively subsidised, of course it does. But that's walking away. We factor those things into our analysis. And we understand that the economics is now changed, and that underpins our investment.

CHAIR: The committee will suspend for 15 minutes and we will continue on with Snowy at 10.45. Thank you.

Proceedings suspended from 10:29 to 10 : 46

CHAIR: I call Senator Abetz.

Senator ABETZ: Can somebody assist me with the term 'the cost of storage'? Claims have been made that the cost of storage from Snowy 2.0 is $25 per megawatt hour. What does the 'cost of storage' tell me?

Mr Whitby : It's a way of representing the capital cost of the project in an annualised energy turnaround.

Senator ABETZ: So that's the capital cost, and not the cost of pumping?

Mr Whitby : No; it's the equivalent. The cost of pumping is an operational cost, effectively.

Senator ABETZ: I was told that the cost to pump it was $40.

Mr Broad : The cost of pumping, at $40, is an estimate of what we think we are going to buy off peak. There are lots of times when, would you believe, someone pays us to pump; the price is a minus.

Senator ABETZ: It just tells us how silly and distorted the market is, but we won't go there; that's another issue that is not for you. You deal with what the market provides, and government sets the regulations, et cetera. So the cost of pumping is $40. Should one add to that a capital cost component?

Mr Whitby : No.

Senator ABETZ: Or does that include it?

Mr Whitby : You are looking at one element of the revenue stream for the business case. People focus on the storage component, which is the arbitrage between peak prices and off peak; the differential between buying and selling. That is only one component, a smaller component, of the business case, the expected revenue stream. The other critical components are, importantly, providing reliability and back-up to the power systemso selling reliability productswhich unfortunately hasn't come into the debate this morning. The reliability leg of the NEG, for example, potentially enhances that element of the business case. Nevertheless, that's a very important part of the revenue stream, as is providing ancillary services to keep the power system stabilised.

Senator ABETZ: I'm trying to get a hold on the total or in globo cost because, as I understand it, transmission lines need to be upgraded.

Mr Broad : That's a separate issue; transmission is separate altogether. Transmission is about, as you would appreciate, delivering product to market. The transmission that is in place today is a transmission that has been there for a hundred years, effectively.

Senator ABETZ: But will it need to be upgraded? Will there be an extra cost?

Mr Broad : Absolutely. There will be a cost to all participants in the market. At that sort of level for us it will be a very small part of the time. All the other participants in the marketthe renewable players, the coal playersare already constrained getting out of the mountains today. The transmission is massively underscaled for the world we're moving into.

Senator ABETZ: So it will have to be upscaled. That will have a cost attached to it.

Mr Broad : Yes.

Senator ABETZ: How will that then be reflected in the overall cost of the Snowy 2.0 scheme? I'm trying to get the cost of the pumping, the capital cost of the dams or whatever we're doing up there, and also the transmission line costs and upgrades. Do we have an in globo figure?

Mr Broad : Just be clear: the cost of transmission cannot be tied to 2.0. There is only one user of that transmission. You will not get all the other changes that are going on in the marketplace without transmission. It's like saying: 'I'm going to build a factory in Sydney and you're going to charge me for the upgrade of the M1 to Melbourne'. It is the same argument.

Senator ABETZ: But if you are the only factory at the end

Mr Broad : We're not the only factory.

Senator ABETZ: All right. So who else is up there in the Snowy Mountains?

Mr Broad : No, the upgrade in the transmission network

Senator ABETZ: No, not the network. Just from Snowy to link to

Mr Broad : The interplay between the states are the beneficiaries of that, so for 95 per cent of the time we're not on. We're only on for five per cent of the time, roughly.

Senator ABETZ: All right. For that five per cent of the time, what is the cost?

Mr Broad : The user will front a cost for the network. You take five per cent of the capital cost of the network, if you want to put a Snowy thing on it, but that doesn't mean anything. It's a common good for all users. The beneficiaries are ultimately the consumers

Senator ABETZ: Just because it's a common good?

Mr Broad : The regulator sorts that out through the regulatory outcomes. Roughly 47 per cent of the bill is network charges to mums and dads today. That's a regulatory outcome. That becomes part of the regulatory stetting. The regulators work that out and they decide the network of today, the network of the future and how that fits within a regulatory outcome, which has ups and downs in it. So it will be some investment the networks want to do. They'll say no. With some investments they will say yes. The upgrades in the transmission will be exactly the same process.

Senator ABETZ: Just because it is a common good does not mean that it doesn't come without a price attached to it. Somebody will have to pay that price.

Mr Broad : Absolutely.

Senator ABETZ: Ultimately one assumes that that will be the consumer; is that correct?

Mr Broad : Half the bill alone is network charges.

Senator ABETZ: I am talking about Snowy. We got a $40 figure on pumping the stuff. We got a $25 figure for the cost of storage. Will Snowy 2.0 require new transmission lines off the mountain into the grid?

Mr Broad : Yes.

Senator ABETZ: Who will bear the cost of that?

Mr Broad : Snowy plus all other participants will need an upgrade in transmission. That's determined independently. The cost, like all transmission, because it's a common good, is spread across all users. How much of that is attributed to Snowy? It gets washed in the common good argument.

Senator ABETZ: Has it been factored into the price that ultimately the consumer will pay when you say that you can sell it at between $80 to $90? That was the figure I was given. Will a subsidy be paid by government or somebody else for the transmission enhancements?

Mr Broad : I repeat: the price for 2.0, the wholesale price of $80 to $90, is a peak price for peak demand. It's nothing to do with transmission. It's about keeping the lights on. What is clearly shown is that, without 2.0, how do you keep the lights on?

Senator ABETZ: That's not the question or the answer.

Mr Broad : The modelling shows that, without 2.0, it will be open cycle gas, which is a significantly higher price. Good luck if they want to build it. That happens today. It's interesting that in New South Wales today 85 per cent of the power is generated from baseload coal. You think: why do you have these price events where it goes to $13,000 today? Why does that happen? It is because demand exceeds supply.

Senator ABETZ: Yes, we know all that.

Mr Broad : It's no different to what's going to happen in the future$13,000 happens 0.001 per cent of the time. So it doesn't come through to prices; it's just a signal for capacity. That's my argument for 2.0.

Senator ABETZ: How do we get the energy off the mountain into the grid?

Mr Broad : Just the same as we do it today. There's a transmission line. All consumers pay for transmission lines today.

Senator ABETZ: But will it need to be enhanced for Snowy 2.0?

Mr Broad : Yes.

Senator ABETZ: Thank you; we've established that. Who is going to pay for that? Will that be a cost visited upon Snowy 2.0, or will it be a cost that, let's say, the New South Wales state government or the network distributor transmitter in New South Wales; I don't know their name

Mr Broad : TransGrid.

Senator ABETZ: TransGridevery state seems to have a different name. So the TransGrid would just do the upgrade for you?

Mr Broad : No. TransGrid has a capital program. It goes to the regulator and says: 'These are the capital investments we wish to make'. The regulator says that's appropriate or not appropriate. They give a rate of return based on that. Then those costs are spread across all consumers, who benefit from that transmission.

Senator ABETZ: That's understood.

Mr Broad : And for 2.0, the upgrades in the networks that occur as a result will be in that same model. The AER commented the other day on a fired build spend for TransGrid. The commentary said that part of TransGrid's investment will include upgrading for the lines north and south, which include 2.0, but equally include the others.

Senator ABETZ: But we still don't have a figure on that. At peak you hope to sell at $80 to $90 wholesale.

Mr Broad : Not hope to sell. We just modelled $80 to $90 as a view of the market. The market can go to $13,000.

Senator ABETZ: I am aware of that. So where does this figure of $80 to $90 come from, and what did you say earlier this morning?

Mr Broad : That was in our modelling, to get this right. As Roger just pointed out, the economics is driven by all the products we are going to sell, which are the same as we are now.

Senator ABETZ: Yes, we know that.

Mr Broad : So trying to pull out bits and pieces of that to underpin it doesn't wash. As you would know, you've got to put in the total revenue streams and the total cost.

Senator ABETZ: But you pulled out a figurenot my figure, your figureof $80 to $90 at peak.

Mr Broad : I'm just trying to inform you of what was in the modelling, how we got there. I am also informing you that the cost of the renewables is coming down significantly.

Senator ABETZ: Yes, you have said that a number of times. You are still not answering.

Mr Broad : And we are firming that up. The question of how the rate of return gets driven is that total revenue, total cost, gives you rate of return.

Senator ABETZ: You have said to us earlier this morning in evidence, on oath, that $80 to $90 was the peak selling priceif I recall correctlythat you were anticipating. Was that your evidence this morning?

Mr Broad : Yes.

Senator ABETZ: Thank you.

Mr Broad : But again, it's taking things out of context. I am sorry for interrupting.

Senator ABETZ: It's okay if you do; just don't allow me to do it. Keep answering. I am very flexible. I don't mind interruptions because it assists the flow.

Senator Birmingham: If it is an important point of context to make you should do so, Mr Broad.

Mr Broad : The context is that that price is a signal for new entrantsand I will have to double-check this0.001 per cent of the time.

Senator ABETZ: The peak?

Mr Broad : Yes.

Senator ABETZ: Right. So that is the figure of $80 to $90 that you provided earlier. The point I was trying to get to, despite being told of the virtues of other elements of Snowy 2.0I admire your advocacy, but I am just trying to nail down a few issuesis: are we assuming that we can sell at peak at all times? Mr Whitby is shaking his head, so for Hansard that would be a 'no'?

Mr Whitby : Yes. Maybe I can clarify it. The $90 is the assumed price received for the storage component. When in the market the modelling is determining that we are generating the modelled price that we are selling at is $90 and when we are buying energy the assumed price is $40, that does not mean that we are all the time on some defined basis generating at $90 and all the time pumping, on the other hand, at 40. It is the modelled outcome.

Senator ABETZ: Yes, but I understood that pumping was the average cost at $40

Mr Whitby : The assumed pumping average price.

Senator ABETZ: Right.

Mr Whitby : The modelled average price.

Senator ABETZ: The 80 to 90, I understood you to be saying, was the peak and not the average. That is why I wanted to know what the average

Mr Whitby : It is the assumed modelled average generation price.

Senator ABETZ: Right. I will have to check Hansard.

Mr Whitby : You are

Senator ABETZ: I think

Mr Whitby : I think, with respect

Senator ABETZ: I have either misunderstood

Mr Whitby : you are assuming that there is some corresponding to what is not normally known as peak and off-peak in the current marketplace. That is not the case, and I have tried to make that point.

Senator ABETZ: So this $80 to $90 figure is the average price that you believe you will be able to sell out at?

Mr Whitby : Correct.

Senator ABETZ: Right. Not the peak?

Mr Whitby : Correct.

Mr Broad : Just to be clear: that is why I keep mentioning the fact that the price can go to 13,000 from time to time.

Senator ABETZ: And if that happens, it is zero.

Mr Broad : It can go to minus

Senator ABETZ: You are telling me that some people might actually pay you to buy their energy?

Mr Whitby : It goes to minus 1,000 at times.

Senator ABETZ: All right. I'll leave it at that and place a few more questions on notice. Thank you very much.

Mr Broad : Thank you. We'd love to invite you down to the scheme and show you around.

Senator ABETZ: As a young boy whose father worked at the Hydro-Electric Commission in Tasmania, I can tell you I've seen my fair share of power stations. But I'm more than happy to see others.

Mr Broad : We have bigger and better ones than the Tasmanian one!

Senator ABETZ: Bigger, possibly; better, no.

CHAIR: Senator Keneally.

Senator KENEALLY: I want to talk about the National Energy Guarantee. I note in the last round of estimates I asked some questions about the NEG and the MJA modelling. The MJA modelling did not include the government's NEG because the model had not been released at that time. It has been released just recently. Now that you have seen the NEG modelling, obviously you have been tracking it. Has this new paper that has been released by the Energy Security Board taken into account your views on an emission guarantee design?

Mr Broad : We are very supportive of the NEG. We think the NEG is going down the right path. What has been released so far is a discussion paper and an awful lot more work needs to be done before it will be finalised. We will wait until all that comes through. We see the NEG, on balance, being very positive for 2.0 because of the firming component of the NEG.

Senator KENEALLY: In your submission to the Energy Security Board on the NEG prior to that last high level design paper that has been released, you wrote about the emission obligation of the NEG. You said that Snowy Hydro's preference for the emissions guarantee is for a market based approach that provides economic incentives for achieving reductions in carbon emissions. Market based schemes provide flexibility and allow participants to decide how to best meet policy targets. Given what you have just told us, is that one area where you think more works needs to be done by the Energy Security Board on the NEG?

Mr Broad : I think the paper is a very, very good start. This is a complex exercise, but market based solutions are what we would prefer. We do not believe that you get the best outcomes by intervening. We think the structure has got to be right. It has got to be market based and have the market incentives right to get the best outcome, yes.

Senator KENEALLY: So back to my question: has this new paper taken into account your views on that market based design, or would you like to see more work done?

Mr Broad : I think more work needs to be done. It is being done. I think it is a fabulous start and we are all actively participating in putting suggestions forward. But, ultimately, it is a matter for government. We will proactively play our part. But we think it is a great start. We have issues about parts of it, but I don't wish to go through those in detail here; it doesn't really add to the debate. We think it is a great start.

Senator KENEALLY: You would not go so far as to say that the NEG design now includes a market based approach that provides economic incentives?

Mr Broad : No, I would. I would say that. Just how far it goes and where it eventually

Senator KENEALLY: So you would say that?

Mr Broad : There are lots of technical issues. Yes, I think it is. I think it is still primarily market based. It has the right sorts of incentives. As I said, I am on old rationalist; I would probably take a more extreme view of the market than the modern-thinking interventionists today.

Senator KENEALLY: Snowy also said in the submission to the Energy Security Board that these market based schemes provide fungible trading instruments which allow financial and risk mitigation products to develop. Does the NEG emissions guarantee as it is currently defined in this high level design paper include those fungible trading instruments which allow financial and risk mitigation products to develop?

Mr Broad : Yes, I think it did. Yes.

Senator KENEALLY: Would you describe the emissions obligation under the NEG as a clearing house?

Mr Broad : I think that the emissions determinant is a matter for government; it is not for us. We accept whatever the government of the day determines.

Senator KENEALLY: Maybe I am not being clear. You have just told us that the NEG design that was recently released includes a market based approach and that it does seem to include fungible trading instruments that allow financial and risk mitigation products to develop. Would you describe that as a clearing house?

Mr Broad : The clearing house I think you are getting to is the concept of making transparent those trades. There are a couple of different arguments as to how that might unfold. We have a viewand this is not easy to work outthat, like an exchange, there is an argument for transparency on that, and I think it is in the interests of consumers to have that.

Senator KENEALLY: This notion of a clearing house is important to have thatas you have just pointed totransparent and open process whereby participants in the NEG can have a platform where those exchanges can take place.

Mr Broad : I think that is a great idea, yes.

Senator Birmingham: But it is important to understand what the exchanges you are talking about under the NEG are. They are exchanges in relation to energy contracts.

Senator KENEALLY: Energy contracts designed to reduce emissions.

Senator Birmingham: And meet reliability targets. The NEG is an integrated policy proposal.

Senator KENEALLY: I understand that, but the clearing house is largely around, as I understand it, meeting the emissions targets. The reliability guarantee is dealt with in other ways under the NEG.

Senator Birmingham: Senator, they would rightly be questions for the department rather than Snowy in terms of the design elements of the NEG. We can step through that during the day.

Senator KENEALLY: You do not have an answer for me, Minister, as a representative of the government?

Senator Birmingham: You are getting into details around the design elements of the NEG. I would rather make sure we had the right officials at the table to ensure we give you accurate answers.

Senator KENEALLY: Okay. My reading of the NEG is that the reliability measures are dealt with in one way and the emissions targets are dealt with in another and that this idea of a clearing house or a market based approach that provides the economic incentives for achieving reductions in carbon emissions is what this clearing house or this exchange platform is meant to provide. These questions go to Snowy's views as expressed in their submission. If we can go back to this idea of a clearing house for the NEG? If the NEG emissions obligation has trading instruments and it is a market based approach, Mr Broad, would you say it is a form of an emissions trading scheme?

Mr Broad : No, I don't think it is.

Senator KENEALLY: And how is it not a form of an emissions trading scheme?

Mr Broad : If you go through the specifics of an emissions

Senator Birmingham: I am not sure how your question is not really asking for an opinion either, Senator Keneally.

Senator KENEALLY: I feel we are playing a semantics game here, Minister. We are talking about a clearing house where you have a market based approach that provides economic incentives for achieving reductions in carbon emissions for the exchange of contracts on an open and transparent platform. How is that not an emissions trading scheme?

Senator Birmingham: There is a registry under the NEG to record transactions, as you would expect under that type of proposal. Ultimately, as I said, the place to ask questions about the NEG is when we get to that session with the department. You can, of course, ask Snowy about their submission and the aspects that are relevant to their work, but I think a rolling series of opinion related questions is not a good use of the estimates committee's time nor is it in keeping with the standing orders.

Senator KENEALLY: That is quite admirable, Minister. Mr Broad, back to your submission. What we have learnt from your evidence here today is that Snowy supports a market based approach that provides economic incentives for achieving reductions in carbon emissions and fungible trading instruments which allow financial and risk mitigation products to develop and that that type of clearing house platform, open and transparent, is something you believe the NEG needs to offer.

Mr Broad : That is our submission, but just to be clear, we think the two parts to the NEG are as important as the other.

Senator KENEALLY: I am not suggesting they are not.

Mr Broad : When we talk about that, the fact they are going to be linked is really important. We are heading down a track where not being linked creates its own disasters. The fact is NEG is very clever in the way it is going to get those together. That is not an easy task, and the complexities of that are still being sorted out with the department and all the relevant players. I think we have some of the best thinkers in the land putting their mind to it. I don't think we can get too far ahead to judge anything until that next lot of papers come out and we see it in detail. The suggestion that they are not linked is not correct; they will be linked in some form. The way we see it, and it might be different

Senator KENEALLY: I understand that reliability and emissions reduction is linked in the NEG. My point is that there is a different trigger, as I understand it, for the reliability target that gets pulled in order for government to ensure that reliability is met and that what we are talking about here is trading or transactions to meet emissions obligations on this platform.

Senator Birmingham: Senator Keneally, firstly, the design elements are not conclusively settled. That is still a processthat is being worked through as part of the COAG Energy Council's work. Secondly, it is not trading as you seek to present it; there is, indeed, a registry of energy contractsa registry of energy contracts in many ways using the existing AEMO energy contract platform that provides the type of transparency of outcomes.

Senator KENEALLY: A market based approach, is it, Minister?

Senator Birmingham: Thirdly, the outcomes that are clearly expected relate to meeting the emissions obligations as well as the reliability obligations.

Senator KENEALLY: So a market based approach that provides economic incentives for achieving reductions in carbon emissions?

Senator Birmingham: It is a market based approach, the NEG, absolutely in terms of ensuring that we get the lowest energy prices possible for the nation whilst guaranteeing reliability and meeting our emissions reduction targets.

Senator KENEALLY: I think we will leave it there for the moment. Thank you, Chair.

CHAIR: That will conclude us on Snowy Hydro. Thank you, Mr Broad, Mr Whitby and company.