Snowy Hydro – A renewable energy company?

February 4th, 2013

This article addresses the following questions from the community: “Is Snowy Hydro a renewable energy company?” “Why isn’t Snowy Hydro investing in wind?”, and “Snowy must being doing well out of green power?”

Is Snowy Hydro a renewable energy company?

Almost all of the electricity produced by Snowy Hydro is renewable hydro power, generated by the Snowy Mountains Hydro-electric Scheme. Only a very small portion comes from Snowy Hydro’s two gas fired “peaking” power stations in Victoria. The Snowy Scheme is the  “powerhouse” of the Snowy Hydro business making us a “renewable energy company”.  Our fuel is water.

However, the vast majority of Snowy Hydro’s revenue does not come from selling our hydro electricity, but instead from the electricity price protection, or ‘insurance’, contracts we sell to our various customers. These customers include the likes of Origin and AGL, but also households and businesses through Snowy Hydro’s electricity retail business, Red Energy.

These contracts enable Snowy Hydro’s customers to ensure that the price of their electricity is known with certainty, especially at times of high electricity demand when electricity prices can “spike” to very high prices (hence the concept of price protection, or “insurance”). Snowy Hydro uses both our hydro and gas fired generators to support the delivery of our contract obligations.

Thus, from a commercial perspective, Snowy Hydro can be thought of as an electricity price insurance business, powered predominantly by a renewable form of electricity generation.

What about Snowy Hydro benefiting from green power?

The rules for Australia’s mandatory renewable energy scheme, the biggest “green scheme” in Australia, are based on encouraging the construction of new renewable energy generation, such as wind farms.

Under the mandatory renewable scheme, electricity produced from renewable generators built after 1997 is eligible to receive renewable energy certificates (“REC’s”). REC’s can then be sold.

However, only a small fraction of electricity produced, from “old” renewable generators (those built before the renewable energy scheme commenced) is eligible to receive REC’s. Because of this, the vast majority of the electricity produced from the Snowy Scheme is deemed to be “old” renewable energy, and is ineligible to receive REC’s, hence we don’t earn “green” revenue.

This arrangement was put in place so that the program would strongly encourage the development of “new” renewables, but still provide “old” renewables with a small financial incentive to continue to maintain, and even improve, the “old” renewable generators.

Consistent with the intent of the mandatory renewable energy scheme, Snowy Hydro continues to make large, ongoing, investments in the upkeep, and the enhancement, of the renewable energy assets of the Snowy Mountains Scheme.

For example, increased renewable electricity production will come from the recent installation of new and more efficient turbines at Tumut 3 and Guthega power stations, and from new small hydro power stations at Jindabyne and Jounama dams.

Further small increases in electricity production will come from the installation of new and more efficient turbines at Tumut 1, Tumut 2 and Murray 1 power stations in the coming years.

Another important investment is the Snowy precipitation enhancement (“cloud seeding”) program, which will increase the amount of water available for Snowy Scheme generation, and hence increase our production of renewable electricity.

Why isn’t Snowy Hydro investing in wind power?

Snowy Hydro has, for some time, been actively exploring opportunities to invest in wind and other emerging forms of renewable power, such as solar and geothermal.

Snowy Hydro produces sufficient “new” renewable energy from the Snowy Scheme to satisfy its own current internal need for REC’s. This need arises mainly from obligations on Red Energy (our gas and electricity retailer) to buy “new” renewable energy to supply to its electricity customers.

This has meant that Snowy Hydro has not had any need to invest in wind generation to meet our own internal demand for REC’s.

Competition in the renewable generation sector has been very high. Anticipating a new and growing market in renewable energy, many companies have pursued the development of wind farms, but to an extent well in excess of need. And, more recently, various government incentives for household solar PV have resulted in the production of even more REC’s.

This has created a persistent excess of supply over demand. In short, it’s been unattractive for Snowy Hydro to invest large amounts of capital in wind farms.

It is also worth noting that even the largest of Australia’s electricity companies, Origin Energy, AGL Energy and EnergyAustralia (formerly known as TRUenergy), are impacted by the same commercial forces as Snowy Hydro when it comes to the renewable energy market.

Notably, none of these companies has a strategy of building and owning all of their own renewable generation, in fact quite the opposite. For example, AGL Energy, which makes much of its renewable energy branding and leadership, is progressively selling the wind farms that it builds.

The continued successful growth of Red Energy, together with the gradual ramping up of the mandatory renewable energy target, means a steadily increasing quantity of REC’s must be obtained by Snowy Hydro. At some point Snowy Hydro will need more REC’s than it can produce from its own renewable generators.

Electricity production from intermittent forms of generation, such as wind and solar, is expected to grow over this decade. If this growth materialises, then there may be opportunities for Snowy Hydro to partner with or invest in, some of these projects and utilise its fast and flexible hydro, pumping and gas turbine assets to complement the intermittent electricity production from new renewables.

Wind and other forms of renewable generation are very expensive to build, and Snowy Hydro has limited capital funding capability under its current ownership arrangements. This means that Snowy Hydro must give careful consideration to the availability and prioritisation of capital for investing in wind, or other forms of renewable generation. There may be other, more attractive, investment options that utilise Snowy Hydro’s limited available capital, such as upgrading existing plant and equipment.

All of the options and factors will continue to be considered, including buying the REC’s from others. Snowy Hydro will do whatever most effectively meets the needs and expectations of Snowy Hydro’s customers and our shareholders.

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