After the blizzard: In a post-Snowy 2.0 world, what role does Snowy Hydro play?

详细摘要

Now that we know Snowy 2.0 is going ahead, what role will Snowy Hydro play in the market? A cultural reset is required: Snowy needs to act like a public company.

With the benefit of hindsight, the investment in the Snowy 2.0 pumped hydro project won’t earn its cost of capital but that is far from unusual in the business world – even if the totality here is large.

Everyone from BHP and Rio Tinto to AGL Energy and Origin Energy has made dud investments at one time or another. Snowy Hydro itself was valued at about 3.5x book value (book $2 billion, price paid $7.1 billion net) in 2018 when the New South Wales and Victorian governments sold to the federal government.

It’s probably worth more today. That excess supports Snowy’s new balance sheet…. Well, not really. But accountants are clever. And, as discussed below, book value is not the point. Never has been.

The relevant question for me is what role Snowy will play in the market going forward. As shown in Figure 7 Snowy remains the largest supplier of firming power in the NEM. It is also, by customer numbers, the fourth largest retailer.

Snowy will also supply the Tomago smelter with roughly 1 gigawatt (GW) of firmed power, about 8 terawatt-hours (TWh) a year against a retail book of about 10 TWh, though as discussed below that supply sits in a separate portfolio.

So, looking forward, Snowy is going to be a bigger player in the market:

– Supplying around 18 TWh including the ring-fenced Tomago portfolio, compared to operational supply in the NEM of 187 TWh in the most recent 12 months.

– Well placed by virtue of its firming capacity to support more variable renewable energy in NSW and even in Victoria.

– Once the federal government puts in another $8-10 billion, reasonably well capitalised, with book equity around $23 billion against Origin’s $10.1 billion and AGL’s $5.3 billion.

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