Do the costs of hydropower outweigh the benefits?

Hydroelectric is already a significant part of Australia’s energy mix, accounting for more than 20% of renewable generation, according to Clean Energy Council figures.

Well over a hundred hydroelectric generators exist across Australia, with a growing number of pumped hydro schemes under construction. Yet there are big question marks about the value for money they offer.

After all, clean energy generators face plenty of competition.

As coal-fired plants are decommissioned, commercial-scale wind and solar farms are taking their place. Hydrogen projects are underway. Gas is shaping up as the firming energy source we need to negotiate the clean energy transition.

So, where does that leave hydroelectric power and pumped hydro storage? With their geographical limitations, tough tunnelling challenges, budget over-reach and long build times, can these projects be viable going forward?

Snowy Hydro 2.0: back on track after a year’s downtime

In 2023, blowout costs on the Snowy Hydro 2.0 budget were getting close to $13 billion.

The ambitious pumped hydro project, in the NSW Kosciuszko national park, is more than twice the size of any other pumped hydro project worldwide.

Major delays mean the 2000MW scheme won’t be supplying power to the grid until the end of 2028, seven years later than originally planned. In February ‘24 ‘Florence’, the tunnel boring machine which held up work for a year, finally restarted work.

Chief Operating Officer at AGL, Markus Brokhof, says it’s worth the wait. He points to hydro’s ability to firm up intermittent wind and solar in the NEM.

“Hydropower plays an important role in Australia’s energy mix with the ability to provide renewable high-capacity baseload, peaking power, and the potential for long duration storage via pumped hydro.”

Tim Buckley, Director of Climate Energy Finance (CEF), regards cost blowouts as inevitable in today’s inflationary market. Yet he places Snowy Hydro 2.0 “in a league of its own”.

With the cost of grid connection left out of the project’s budget estimate, the scheme has been beset by “financial mismanagement and massive understatement of costs”, he says.

“This amounts to deception and incompetence. I won’t tar all hydro projects with the same brush, but this one has been sorely lacking in accountability for taxpayers.”

The role of pumped hydro in Australia’s energy transition

A handful of pumped hydro energy storage schemes exist in Australia. This includes Queensland’s Wivenhoe, and NSW plants Shoalhaven and Tumut 3. Snowy Hydro 2.0 is also underway, along with the 250MW Kidston project in Far North Queensland.

Buckley sees no increased role for hydroelectric power generation in Australia’s future. Pumped hydro storage, on the other hand, has a “small but important” role to play in firming up intermittent renewables in the grid.

Pumped hydro works as a ‘closed loop’ system, he explains. This means it has no additional water requirements once built and is not adversely affected by drought conditions.

“Yet demand is smaller than anticipated five to ten years ago, because of expansion in the large-scale battery market,” he says.

“Big technological disruptions in the battery market has seen a 50-100% increase in battery installation per annum. This means large amounts of pumped hydro won’t be needed going forward.

“A smart grid will match variable demand to variable supply, so tech will play an increasingly larger role. This negates the need for large amounts of pumped hydro storage.”

According to Brokhof, AGL does see pumped hydro as central to Australia’s future energy needs. The company is factoring in pumped hydro to firm up its renewables portfolio by 2035.

“AGL and our JV partner, Idemitsu, are progressing with advanced development studies into the development of a 400 MW pumped hydro facility in Muswellbrook, NSW, which will add important hydro generation and long duration storage for Australia.”

Assessing the economic value of hydroelectricity assets

In terms of financial viability, Brokhof highlights the longevity of hydroelectric and pumped hydro assets once they are completed.

“While the upfront costs of new hydropower are significant, the lifespan of hydro assets can be fifty years plus with relatively low operating costs,” he says.

“As the largest private owner and operator of hydropower in the NEM, our hydro assets provide critical flexibility and optionality within AGL’s diversified portfolio of generation assets.”

Climate Energy Finance specialises in financial analysis of renewable projects. So, Tim Buckley has extensive experience in evaluation of green energy investments.

In his opinion, accurate assessment involves looking at overall value for the energy system.

“If you only look at cost, you ignore the wider system impact. Solar is by far the lowest cost in terms of generation. Yet the sun goes down every night, so the grid needs a variety of energy sources to support grid firming capacity.”

According to Buckley, pumped hydro storage is part of the firming solution. He sees small, targeted projects as a better risk management option for Australia.

“A large number of small proposals are currently on the table. Yet I do question whether they can even go ahead without future government support. I don’t see a strong enough market signal at the moment,” he says.

“What will help the industry? Realistic capital cost estimates, confidence from engineering firms they can build the project at the proposed price, and fixed price contracts.”

Time will tell if Snowy Hydro 2.0 will overcome its challenges and provide Australia with reliable energy on demand, or succumb to mounting financial and logistical pressures.

Additional sources:

• Snowy Hydro’s 2.0 fortunes might finally be turning as drilling gets back on track | Energy | The Guardian
• 250MW Kidston Pumped Storage Hydro Project - Genex Power