Pumped hydro only half the solution

October, 2017

By Matt O’Connor, Special Counsel and Zac Kerr, Partner

Not long after Malcolm Turnbull unveiled Snowy 2.0, Tasmania delivered its own pitch for a piece of hydro action by proposing 15 new pumped hydro sites across the Apple Isle.

Pumped hydro – or the pumping and storing of water uphill for use in hydro-electric generation at a later point – is a potentially elegant solution to the oft-stated criticism that renewable energy is too intermittent and weather dependent to be reliable. It’s essentially storage without batteries and seems hugely appealing given that solar farms generate most energy in the afternoon and wind farms tend to generate more at 3am when conditions are likely to be windier.

Neither of these peak generation times matches residential peak demand periods, and output is weather and geography-dependent. Somehow the energy system needs to cope with these mismatches and pumped hydro seems to offer a way forward.

However, it is only a realistic solution if the stored energy can be shifted efficiently to the regions actually needing it and at times when they actually use it. In Tasmania’s case, it has insufficient transmission capacity across Bass Strait, so investment in pumped hydro sites needs to be matched by an investment in transmission networks.

There is a “chicken and egg” element to solving this issue: Who will invest in storage without transmission capabilities? Who will invest in transmission without storage?

Nevertheless, transmission capabilities must be addressed as Australia’s energy system becomes more reliant on distributed generation. The market will increasingly fragment and the economics of the transmission grid must evolve to cope.

In addition to more incentives for investment in transmission, as recommended in the Finkel review, new regulatory frameworks have a role to play.

For example, transmission and distribution networks of the future could be split into two distinct parts: a web of smaller, independent residential systems (or “micro grids” like those being proposed by Horizon Energy in the Pilbara WA) and a larger network reserved for industrial and other large-scale users, on a least-cost / low emissions basis.

Such changes raise significant challenges for policymakers responsible for market rules and the incentive signals that drive timely investment in transmission and generation assets, however the issue is a critical one.

For example, those seeking to construct solar or wind farms won’t consider sites that lack easy access to an existing transmission network. However, these networks were built in an earlier, primarily coal-oriented, era and were designed to get electrons from coal-rich locations such as the La Trobe Valley or the Hunter Valley to the cities.

Renewable energies require an augmented network but such investment is unlikely without more certainty as to where the power generation of the future will take place.

Which brings us back to Snowy 2.0, Tasmania and pumped hydro: It is commendable that Federal and State governments are willing to invest in this technology on a large scale because it will underpin a reliable renewables-based energy market. However, it is only half the picture.

While we don’t know precisely what shape the future energy market will take, what is clear is that investment and regulatory frameworks must be developed more holistically and much more rapidly.

To this end, transmission (and distribution) network operators and generators alike need to be appropriately incentivised to make the right investment decisions. A whole-system approach is required, including an emissions target.

Much has been written about the paralysing effect of policy uncertainty on new investment but what isn’t uncertain is the place of renewables in Australia’s energy future.

Australia needs a clear strategy on transmission capabilities and a plan to implement it.

Contact Mills Oakley

Matt O’Connor | Special Counsel
T: +61 3 9605 0870
E: matt.oconnor@millsoakley.com.au

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