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Environment and Communications Legislation Committee
27/02/2018
Estimates
ENVIRONMENT AND ENERGY PORTFOLIO
Snowy Hydro Ltd

Snowy Hydro Ltd

[08:31]

CHAIR: Welcome, Minister, and welcome, officers from Snowy Hydro. Would anyone like to make an opening statement?

Mr Whitby : Yes, I would. I'll give just a quick update to the committee since we last appeared. In December we released the feasibility study into Snowy 2.0 after our independent board of directors approved it. It's fair to say that it was a very significant body of work. We spent over eight months doing some robust economic modelling and significant analysis as well as cutting-edge engineering and design for the project. The feasibility study had significant input from a range of technical experts—including SMEC, our engineering consultants, and our market modellers, Marsden Jacob Associates, MJA—and some significant input from our cost and schedule experts, Turner & Townsend.

The results of the study concluded that it was technically feasible. We have a robust base case design. It can be built. More importantly, the study concluded that it was financially feasible. There is a strong business case, with in excess of eight per cent internal rate of return for the company in investing in the project. MJA market modelling has indicated there will be a robust demand in the future for the products of Snowy 2.0 in the electricity market space. Importantly, the study determined that Snowy Hydro can fund the project itself with a mixture of debt and internally generated operating cashflow. Also importantly, the project can come online with first power in 2024, which will help meet the future needs of the NEM.

I might take a moment to explain that Snowy 2.0 is a project for the future; it's not a project for the current state of the market. I think there's been a lot of commentary about the disruption that's currently in the marketplace, but this is looking forward for what will be required when a number of the existing old thermal generators are retired and we have increasing penetration of renewable energy. It is what we looked forward for, particularly in the economic work by MJA. We looked at what the needs of the market will be in that time frame. I just want to stress that point.

From here, we're targeting having a financial investment decision by the end of this calendar year. There's a significant amount of work that needs to be done to get to that point, including an extended geotech investigation program. There's significant work in terms of the detailed design for the project: going through a tendering process, looking at funding options and working those up and, ultimately, putting a case to our independent board, hopefully by the end of the calendar year.

Senator MOORE: Thank you. I'm actually here for Kim Carr. I'll just put that on the record. He wanted to express that he's sorry he's missing this opportunity to speak with the organisation. He'll talk with you later. He was very grateful for the briefings that you were able to provide. I'll go straight to Senator Keneally, because you talked in your opening statement about the report, and that is an area she is following. I just wanted to pass on those messages.

Mr Whitby : No problem. Thank you.

Senator KENEALLY: Thank you for being here today, Mr Whitby, and thank you to your team. I want to ask some questions about the MJA modelling report into the impacts of Snowy 2.0, which you mentioned in your opening statement. That was not released at the same time as the rest of the Snowy 2.0 feasibility study in late December 2017 but was instead released in January 2018. Did Snowy Hydro have any communications with the minister or the Prime Minister's office about the release of this modelling report?

Mr Whitby : I can say that Snowy Hydro consulted with all of its shareholders in relation to the MJA report.

Senator KENEALLY: So that's a yes—you had some communications with the minister and the Prime Minister's office about the release of the modelling report?

Mr Whitby : As I said, and as you would expect, we consulted with all our shareholders in relation to the release of that report.

Senator KENEALLY: In relation to the minister or Prime Minister's office, when did you have those communications, and was this communication verbal or written?

Mr Whitby : I don't think it's appropriate for me to go into communications with our shareholders. As you'll appreciate, we have a significant shareholding by New South Wales, a significant shareholding by Victoria and, at this stage at least, a small shareholding by the Commonwealth government.

Senator KENEALLY: Did the communication that you had with the minister or Prime Minister's office include any requests by the government pertaining to the documents to be released as part of the Snowy 2.0 feasibility study?

Mr Whitby : That's something that I have no personal knowledge of.

Senator KENEALLY: Can I put these questions on notice to you please?

Ms Kim : Our communications with our shareholders are confidential. We're not in a position to divulge the content of those discussions, but what we can tell you is that we have worked with all three shareholders and given all three shareholders the opportunity to comment on the release of any information material to the company.

Senator KENEALLY: Thank you. Was the delay of the MJA modelling report the result of Snowy Hydro not wanting to, or not being ready to, release the report?

Mr Whitby : As I said, we consulted with our three shareholders, and our shareholders wanted more time to consider the report.

Senator KENEALLY: So the delay was not the result of Snowy Hydro not wanting to release the report; it was that your shareholders wanted more time to consider the report?

Mr Whitby : That's my understanding.

Senator KENEALLY: So the reason for the delay—if I can be clear—of the MJA modelling report was not as a result of Snowy Hydro not being ready to release it but because shareholders wanted additional time to consider it?

Mr Whitby : That's my understanding.

Senator KENEALLY: I want to talk a bit about renewables, if I can, in relation to Snowy Hydro and some of the modelling in the MJA report. Snowy 2.0 is, as you have outlined, an electricity storage project. Can you confirm that the commercial viability of the project rests on the continued growth in renewable energy penetration in the NEM?

Mr Whitby : As I said in the opening statement, Snowy 2.0 is viable for the future which is coming. As everybody who is informed on this subject will appreciate, we have a situation where the coal-fired generation fleet is ageing, it does not appear that it is going to be replaced, and obviously we have commitments to meet decarbonisation objectives internationally et cetera. In that context there are various programs that encourage investment in new renewables, and, indeed, the prices of renewables are falling over time. Accordingly, that is the future market state that we are seeking to address with this project.

Senator KENEALLY: The MJA modelling report, as we've been discussing, assessed the impact of Snowy 2.0 on the broader NEM under two scenarios: one that had moderate renewable energy growth—and I think the report refers to that as the LRET+VRET scenario—

Mr Whitby : Correct.

Senator KENEALLY: and one that had higher renewable energy growth; the LT commitment scenario, it's called. Can you provide the share of renewable energy generation in the NEM in 2030 under the LRET+VRET scenario without Snowy 2.0, the LT commitment scenario without Snowy 2.0, the LRET+VRET scenario with Snowy 2.0 and the LT commitment scenario with Snowy 2.0. And I'm happy, Mr Whitby, if you'd like to take that question on notice.

Mr Whitby : Yes. Just to be clear: you're asking us to look at alternative scenarios?

Senator KENEALLY: I'm asking you to provide us the share of renewable energy generation in the NEM in 2030 under those two scenarios with and without Snowy 2.0. As I understand it, the MJA report provides projections for 2040. I'm asking for projections under those two scenarios, those two circumstances—with and without Snowy 2.0—for 2030.

Mr Whitby : We will take that on notice, but I will make the comment that it may or may not require—and I don't know at this point—additional work to determine it. I'll just make that comment.

Senator KENEALLY: I understand that. I suppose I'm operating on the assumption that if you can make projections to 2040 you must have data that can make projections to 2030.

Mr Whitby : That may be the case but I'm not sure, so I'm just making the point that it may require additional work.

Senator KENEALLY: Okay. The MJA modelling didn't include the government's NEG, National Energy Guarantee, policy—correct?

Mr Whitby : That's correct.

Senator KENEALLY: Bloomberg New Energy Finance have analysed the NEG policy and concluded that, if designed with emission reduction obligations determined by the government's emission reduction targets, it will result in only 1.5 gigawatts of new utility-scale renewable investment over the 2020s to 2030. If this is correct, how would that impact the business case for Snowy 2.0?

Mr Whitby : I think it's worth reiterating that the feasibility study did not assume the NEG. It was done prior to the announcement of the NEG et cetera, so the analysis doesn't include it. We are of the view that a well-designed NEG should enhance the viability of the Snowy 2.0 project but we're not assuming it in terms of the work that's been done to date.

Senator KENEALLY: Could you repeat that last bit? In relation to the NEG 'you're not assuming', 'you are assuming', 'you haven't done work on the NEG projections in relation to Snowy'? I just couldn't hear you.

Mr Whitby : What I said was that the work that we've done to date does not assume the NEG, but I made the comment that a well-designed NEG should enhance the value of Snowy 2.0.

Senator KENEALLY: The MJA modelling report states that the market benefits provided by Snowy 2.0 are greater at higher levels of renewable generation, which is consistent with the advice you're giving us this morning. I do understand 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. What percentage of renewable energy penetration maximises the market benefits of Snowy 2.0?

Mr Whitby : That's a question I would have to take on notice.

Senator KENEALLY: Thank you. The Snowy Hydro CEO has been reported that saying that the building of new coal-fired power stations represents a risk to the viability of Snowy 2.0. Is that correct? If so, can you please explain why this is the case?

Mr Whitby : Sorry; can I ask you to repeat the question.

Senator KENEALLY: The Snowy Hydro CEO has been reported in media saying that the building of new coal-fired power stations represents a risk to the viability of Snowy 2.0. It was an article by Rosie Lewis on Snowy 2.0 and coal power. Paul Broad warned in December 2017 that the economics of the scheme may not stack up if several new coal-fired power plants were built and a lot more base load was added to the National Energy Market.

CHAIR: Senator Keneally, it might assist the witnesses—I'm not sure—if you tabled the article to assist them in answering. They may not need it; I'm not sure. Also, in a minute we will need to go to Senator Rice.

Senator KENEALLY: Sure. Thank you. So is it the case that, if additional coal-fired power plants were built and a lot more base load was added to the NEM, the Snowy Hydro 2.0 would have its economic viability threatened?

Mr Whitby : Simply put: yes. As I said in my opening statement, Snowy 2 is a project assuming the world that most players accept, where coal-fired generation is ageing and retiring and there's increasing penetration of intermittent renewable energy. Clearly, if we have a reversion, essentially, to the past then of course under that scenario Snowy 2 is not viable. To link it back to this why this project wasn't done in the past: in fact, some of the early visions for this project were floated in 1966. In that time, new coal-fired plants were being added. Without impost or constraints on CO2 production, coal-fired generation in that time was the most economically viable way to provide electricity. I think that's a simple statement of fact.

Senator KENEALLY: Thank you, Mr Whitby. If I can make one clarification on the questions I've asked you to take on notice regarding these scenarios about which I've asked for modelling in 2030: I'm not asking you to do additional modelling. I'm asking you about the modelling that's already done, The MJA provides data for 2040. I'm asking for the 2030 figures.

Mr Whitby : Yes.

Senator KENEALLY: Okay. Thank you.

Senator RICE: What's the current estimate for the total cost of Snowy Hydro 2.0?

Mr Whitby : As set out in the feasibility study, the estimate of the costs of $3.8 billion to $4.5 billion.

Senator RICE: So it's a pretty chunky, substantial capital cost. Will Snowy Hydro 2.0 be required to recover its capital costs when it's bidding into the wholesale market?

Mr Whitby : As any other participant in the marketplace, we operate to try and make a profit, but that profit is constrained by the competitive pressures of the marketplace.

Senator RICE: In terms of your financial modelling, over what period of time will it have to recover those capital costs?

Mr Whitby : The best way to describe it is, as I mentioned in my opening statement, that we expect an internal rate of return of eight per cent on the project.

Senator RICE: From day one, when it's opened in 2024?

Mr Whitby : That's over the life of the project, looking out to 2030.

Senator RICE: So do you have an estimate of what the rate of return would be when it's first turned on in 2024?

Mr Whitby : Not a point estimate as such, no.

Senator RICE: But it would be less than your estimated rate of return.

Mr Whitby : Yes. It varies over time, obviously.

Senator RICE: Right. And ramping up later on?

Mr Whitby : It changes over time.

Senator RICE: Right. Would you be able to take on notice to give us that estimate of what the rate of return is likely to be over time?

Mr Whitby : We can certainly have a look at that.

Senator RICE: Thank you. The Marsden Jacob report which you referred to stated that Snowy 2.0 will allow a coal-fired plant to operate in a more stable mode and that this will improve the economics of coal generation due to not being required to shut down or reduce generation during periods of high intermittent generation, low demand or both. That seems to be in contrast to your statements saying that you're planning on operating in an environment where coal-fired generation is likely to reduce. Do you anticipate that more coal-fired power generation could be used in order to support the operations of Snowy Hydro?

Mr Whitby : No. I would like to make a couple of comments. One is that the reliability and stability of the power system is the first essential requirement. Electricity, as I'm sure the audience knows, is such a fundamental input to consumers' lives generally and to businesses et cetera, so having a reliable power system is critical. One of the challenges as we go forward with intermittent renewables is that, because they come and go, it obviously creates the demand for storage. But what it also does is creates the requirement for coal-fired generation to flex up and down to fill in the gaps. Unless that can happen, the power system becomes more and more unstable. So it's important to have sufficient storage to minimise that. Otherwise, that thermal fleet will become more and more stressed and strained and you'll have more and more breakdowns et cetera. So, no, I don't think it's incongruous in that sense if you look at the power system dynamics. It needs storage to keep a reasonable reliability as we transition through to the longer term.

Senator RICE: What level of coal-fired generation in the grid has your modelling presumed over time?

Mr Whitby : As set out in the report, we assumed the exit of the ageing fleet as per the AEMO publicly stated information.

Senator RICE: So that's the ageing fleet. So all coal-fired generation?

Mr Whitby : Yes. I don't want to quote it off the top of my head, because I'll make a mistake, but it is set out in the report as what AEMO have announced according to information provided by participants. In that sense, in my view, I think it's quite a conservative assumption.

Senator RICE: Right. But you're going to be opening basically in that period of transition as the coal-fired fleet retires?

Mr Whitby : That's what our modelling is suggesting. We're looking to meet the market need according to that modelling, looking forward, based on those assumed retirements.

Senator RICE: But at least in the early period of your operation you're essentially going to rely on coal-fired generation to pump your water uphill. There are two things: how much are you going to be relying on that, and are you concerned about the increasing unreliability of coal-fired power given the ageing fleet and given their increasing unreliability with increasing temperatures?

Senator Birmingham: Senator Rice, that's making an assumption there. Obviously, the point is that the time when demand is low at night, for example, is the time when you would normally expect to be pumping the water back uphill. It is eminently feasible that, for example, wind turbines are creating surplus energy at night at a time when demand is low. That is a key point in the operation of something like Snowy Hydro and it's about creating that dispatchable energy for times when demand is high, which is why it complements in a technology-neutral way energy generation, whichever the source of that energy.

Senator RICE: Okay.

Mr Whitby : Just to reiterate the senator's point: when there's excess supply, that's when pumping is done. Whenever that is, whatever the source, it's a total system, and when there's a shortage it produces energy, obviously.

Senator RICE: So you're not concerned about the increasing unreliability of coal fired power? The minister was using the example of wind potentially replacing that increasingly unreliable coal fired power.

Mr Whitby : I'd simply make the point that reliability of the system as a whole is paramount. That's why Snowy Hydro is looking forward to see what the market needs are and what the products and services are that the market needs, given the changing dynamics. We seek to fill a market space in that sense.

Senator RICE: Okay. You said to Senator Keneally that you haven't modelled how the National Energy Guarantee would affect Snowy Hydro 2.0. Are you planning on doing that modelling?

Mr Whitby : When some more design details are available, I'm sure we'll look into that in more detail.

Senator RICE: Right. Do you feel that the NEG will affect your operation?

Mr Whitby : As I said before, for a well-designed NEG the two elements of it are the reliability, or the dispatchability, arm and the emissions reduction arm. Both those elements complement our operations generally. Snowy Hydro, as you're aware, is a renewable energy generator, with zero emissions. That's a positive for Snowy Hydro's operation. We are very dispatchable, and we pride ourselves on our reliability. So they are both, if you like, value-enhancing elements for our business.

Senator RICE: Yes, but you haven't actually done the modelling of how the particular NEG is going to impact on it?

Senator Birmingham: Senator Rice, I'd also refer you to the modelling work undertaken by the Energy Security Board, which does have a look at some of the benefits that Snowy Hydro would provide, or that Snowy 2.0 would accrue as part of a NEG structure. There has been modelling work undertaken by the Energy Security Board in that context, looking at how the two operate in sync with one another for the very reasons Mr Whitby has outlined. Of course, if you're looking at reliability and dispatchability as well as emissions targets, a project like Snowy 2.0 is perfectly situated to assist in meeting both of those objectives.

Senator RICE: Do you believe that Snowy 2.0 would benefit from an increased renewable energy target?

Mr Whitby : I think it's not really Snowy Hydro's place to—

Senator RICE: But do you believe that it would?

Mr Whitby : I think the more that intermittent renewables enter the market over time, that there will be more and more need for storage projects in general, whether those be Snowy 2.0, or Snowy 3.0 or alternative projects.

Senator RICE: Given that the renewable energy target would, in fact, increase the amount of renewables, it sounds like you're saying that you think that that would benefit Snowy Hydro?

Mr Whitby : Yes. Again, assuming that there are market based arrangements to manage that, then I think the simple answer is yes.

Senator RICE: Thank you.

Senator Birmingham: There are, I think, the reasons that Mr Whitby rightly outlined: you increase the intermittency of supply and you have greater demand for dispatchable backup at the times when that supply is unreliable.

Senator RICE: Yes. Thank you.

Senator MOORE: Mr Whitby, I'm going to put a couple of questions on notice, of course, but I just want to ask about transmission a little. Some of that covers Senator Rice's questions, but follows on. Is the current transmission capacity available adequate to transmit the power you produce?

Mr Whitby : Is it adequate to—

Senator MOORE: Transmit the power you produce.

Mr Whitby : I'm sorry, I'm a little hard of hearing.

Senator MOORE: Is the current transmission capacity available adequate to transmit the power you produce?

Mr Whitby : With the current configuration of the Snowy, yes it is. The simple answer is yes. We could deliver additional capacity from the existing scheme into Sydney, to the north, and we could also transmit, under most scenarios, additional capacity from the Snowy scheme to the south, into Melbourne, but we're constrained. That's limited by the current configuration of the transmission system.

Senator MOORE: Right. At the moment that's the situation. But as you said, you are looking to the future. You're an organisation that is looking to the future?

Mr Whitby : Yes, I would make the general comment that the transmission system—and I'm talking about the high-voltage transmission system, not the distribution system—was essentially configured for the power system as constructed over the last 20 to 30 years, which hinged mainly upon the delivery of coal-fired generation to the load centres. That system, obviously, is undergoing transition, where some of those plants are retiring, and there's increasing penetration of intermittent renewal. That transmission system is not configured for that and, increasingly, as more intermittent renewables of wind and solar et cetera enter the market, it will have to be adjusted for the future, for the common benefit of our system and the consumers.

Senator MOORE: And that is the planning process that you have to go through.

Mr Whitby : Yes. I'm aware that the relevant regulatory bodies, including AEMO and the Energy Security Board, are looking at the moment at compiling an integrated system plan. That looks forward over the next decade or two.

Senator MOORE: I understand that the final investment approval for Snowy 2.0 by your board requires an assurance that the necessary transmission investment will occur. Are there any problems that you could see in getting that approval?

Mr Whitby : I just mentioned that regulatory bodies are looking at what needs to be done for the broader power system. Clearly, transmission in the current market arrangement is a common-carriage service; it's for the common good. Snowy 2.0 isn't viable without broader transmission upgrades, so that is something that's being worked on the moment.

Senator MOORE: Can you indicate what kinds of problems could occur?

Mr Whitby : As I've indicated, just at a high level, the current Snowy scheme is limited by what it can export back to the north and south by transmission. So clearly, it's not economically feasible—or technically feasible, for that matter—to create a project of the size and scale of Snowy 2.0 and connect it into the power system without that broader transmission upgrade.

Senator MOORE: So the problems would be not having the broader transmission—

Mr Whitby : Yes. It's simply not viable or feasible.

Senator Birmingham: Senator Moore, the government's position is that all transmission investment should go through the usual regulatory processes, which include cost-benefit analysis and community consultation. But I would also note that Minister Frydenberg has publicly stated that the government is prepared to sit down with relevant parties, such as AEMO and TransGrid, to assist in working out the best way forward.

Senator MOORE: What are the time lines for receiving those assurances about adequate transmission infrastructure for Snowy Hydro to proceed? In the plan, do you have time lines for how you have to that, including the process that the minister has just outlined?

Mr Heferen : With Snowy Hydro, the government, TransGrid, AusNet and AEMO—who are essentially the parties that will be involved in working out the transmission requirements for Snowy 2.0—the aim is to ensure that there is sufficient certainty in place for the Snowy board to make its final investment decision—is it in October?

Mr Whitby : We're aiming for—by the end of this calendar year

Senator MOORE: Mr Whitby said the end of the year, so I take that as December.

Mr Heferen : As Mr Whitby said, for 2.0 to go ahead it needs augmented, or more, transmission, and the aim is to ensure that whatever needs to be sorted out is sorted out by the time the board needs to take its final decision.

Senator MOORE: Mr Whitby, this will be my last question, and I will put the other questions on notice. Currently, do you believe—and it's not an opinion that's based on your scientific planning; I'm not asking for an opinion—the current regulated investment test for transmission process is adequate to provide approval for the transmission asset Snow 2.2 needs to be viable?

Mr Heferen : Sorry to cut across you,. Senator, but the question about the RIT-T really goes to the proponents of transmission rather than the generators. With the utmost respect for the Snowy, Snowy is a generator. I'm sure they would have a very objective view on this, but the question that costs—

Senator MOORE: That was the objective view I was after, Mr Heferen—that objective view is one of the key players in this process.

Mr Heferen : Their board will have to come to that view. But the issues about the transmission really belong with both TransGrid, in New South Wales, and AusNet, as the main transmission provider, but also with AEMO, as the planner for Victoria.

Senator MOORE: Does the Snowy board discuss the transmission process?

Mr Whitby : Clearly, transmission is, as I said before, one of the key attributes that we need to resolve. So yes, obviously, there have been discussions regarding transmission, as it's a critical dependency of the project.

Senator MOORE: But you don't believe that the board would have an opinion about whether the current test is adequate to provide the process.

Mr Whitby : In one sense, it's not really up for us to determine because, as Mr Heferen has pointed out, it's not our processes.

Mr Heferen : The current test is quite a complicated test, but the bottom line is the test is, essentially, a cost-benefit analysis to ensure that energy is delivered to consumers at the lowest possible price, given the range of alternatives available. And so, as the minister mentioned earlier, the government's clear position—that the cost-benefit analysis to ensure that energy is delivered to consumers at the lowest possible price given the circumstances—has still got to be the fundamental underpinning of the question of new investment.

Senator MOORE: And Snowy 2.0 can't proceed without having that fixed—the Snowy 2.0 process is dependent on upon having that right.

Mr Heferen : It certainly needs the transmission, yes.

CHAIR: Thank you, Senator Moore. I want to firstly thank the representatives of Snowy Hydro for doing the committee the courtesy of coming along, noting that it's not a government agency or a GBE. It is very much appreciated by members here. That, save for the energy outcome, concludes the examination of the Environment and Energy portfolios, and senators are reminded that written questions on notice are due by close of business on Friday, 9 March. Thank you all for your attendance.

Proceedings suspended from 09 : 06 to 09 : 09