Snowy Hydro expansion could hit nearly $12 billion

The full cost of Prime Minister Malcolm Turnbull’s Snowy Hydro expansion could hit nearly $12 billion by the time the project is built and the federal government negotiates a buyout of NSW and Victoria’s stake in the scheme.

But the cost blowout, revealed in a new feasibility study, has failed to dampen the Coalition’s enthusiasm, with Environment and Energy Minister Josh Frydenberg on Thursday promising the technically challenging undertaking “will go ahead and ns will be better off for it”.

The study found the project was viable and could be switched on within seven years, contributing enough new electricity to power hundreds of thousands of homes and businesses as ‘s energy network transitions from coal to renewables.

Prime Minister Malcolm Turnbull’s plan to expand the Snowy Hydro scheme is going to cost more and take longer than expected. Photo: Alex Ellinghausen

However Snowy Hydro Limited refused to release three key chapters of the study covering commercial projections, business modelling and detailed cost estimates, citing commercial sensitivities.

The decision infuriated Labor, which said the public had a right to scrutinise the fundamentals of the project and its potential impact on household power bills.

Snowy Hydro Limited chief executive officer Paul Broad defended the exclusions but said he hoped to release one element – modelling of the benefits of pumped hydro over new battery and gas technology – in the new year.

Mr Broad agreed the project was “expensive, but it stacks up economically”.

It carried an initial price tag of $2 billion but the unexpectedly complex geology of the area has contributed to the cost rising as high as $4.5 billion. Another $2 billion would be needed to build new transmission lines to get the extra power to the grid.

The focus has now shifted from whether it can be built to the politics of how it will be paid for. Snowy Hydro Limited is part-owned by the NSW and Victorian governments, the latter of which has said it wants nothing to do with the expansion.

Mr Turnbull is prepared to buy the states out, which based on recent valuations would see NSW receive about $3.5 billion and Victoria $1.75 billion.

Fairfax Media understands the $5.25 billion needed to fund the takeover would be added to the nation’s gross debt, although the Commonwealth would enjoy full ownership of a lucrative asset.

The cost of the line upgrades would be borne by distributors and customers.

Snowy Hydro has said it can fund the construction through savings and borrowings, and is predicting an 8 per cent return on investment, meaning the project will ultimately pay for itself.

It means the total cost of the buyout, construction and new transmission lines associated with Snowy 2.0 could hit $11.75 billion.

Victorian Labor Treasurer Tim Pallas said his state did not want to be part of the Snowy expansion as a shareholder but would only sell in unison with NSW.

“As we’ve always said, repeatedly, we’re not fans of Snowy Hydro 2.0,” Mr Pallas said.

NSW would only say it was still “in discussions” over selling its stake.

Both states have baulked at a condition from the federal government that the proceeds can only be spent on “priority infrastructure projects”.

Mr Frydenberg said the costs of not proceeding with the Snowy expansion were greater than going ahead.

“It’s clear from the feasibility study that if Snowy 2.0 didn’t go ahead, then the costs would be much greater to n families because what would be needed to stabilise the system is more expensive diesel – more polluting diesel – and gas-fired generators. This is a renewables project, the largest of its kind of the Southern Hemisphere that will lead to lower prices and a more stable system.”

Pumped hydro works like a giant battery by using electricity during times of low demand – often in the middle of the night – to push water uphill so that when demand is high it can be released downhill through turbines to create quick and reliable electricity.

The expansion would increase generation capacity by 2000 megawatts – a 50 per cent increase on the existing scheme’s generation capacity

Energy economist Bruce Mountain, of consultancy CME, pointed to a finding in the feasibility study that found Snowy 2.0 has a so-called “round trip efficiency” of only 67 per cent.

“For each unit of electricity that they draw to pump water to the upper reservoir, they only produce 0.67 units – the rest is lost in pumping and production frictions,” he said.

“There’s no doubt that, economically, this thing doesn’t stack up.”

The Snowy Hydro Board will make a final investment decision in 2018.