Legislative Council, Wednesday 22 March 2023

Ms FORREST asked the Leader of the Government in the Legislative Council, Mrs Hiscutt

With regard to proposed reform in the energy sector and Marinus Link and Battery of the Nation (BotN) in an answer to a Question on Notice from Minister Barnett on 10 November 2022, stated:
“The increased commercial opportunities from BotN will assist the business in maintaining the Capital Expenditure Program for existing and ageing assets and provide a stable, commercially viable future for the business.”

Question (a):
Does this imply Hydro’s current operating model (revenue/expenses/debt/ returns to government) will not provide sufficient funds to cover Capital for Expenditure for its ageing assets?
The Minister’s response further noted, “Without Project Marinus, the BotN projects cannot proceed.”

Answer:
Hydro Tasmania remains focused on producing reliable electricity, while profitably and effectively managing the risks faced by the business. Hydro Tasmania remains committed to an appropriate financial position and capital structure and works closely with the shareholder Ministers to achieve strong returns to the Government, while ensuring long term sustainable operations.
Hydro Tasmania manages the generation assets according to the Strategic Asset Management Plan (SAMP) and does not foresee risks in terms of investing in the current asset base under the current operating model.
The proposed investment opportunities in BotN projects are considered likely to deliver incremental value to Hydro Tasmania and State, subject to Final Investment Decision (FID).

Question (b):
Does this imply that upgrading (or ‘reimagining’ as Hydro describes it) an ageing basset like Tarraleah is not feasible without Marinus; and

Answer:
There are two realistic options for the future of the Tarraleah scheme:
• Firstly it could be retained in its current form and undergo extensive refurbishment and upgrading to ensure it can continue to operate safely and reliably into the future. In this case the scheme would retain approximately its current capacity and inflexible operating capability with only minor improvements. This is the likely investment scenario without Marinus Link.
• Secondly it could be redeveloped (reimagined), with an entirely new water conveyance arrangement and power station utilising the existing water storage (Lake King William) in a very different way to unlock much greater capacity, operational flexibility and energy efficiency from the same water.

This redevelopment option is unlikely to be feasible without Marinus Link.

A potential redevelopment of the Tarraleah hydropower scheme is one of the flagship projects for BotN. Redevelopment could potentially double the existing nameplate capacity of ~90MW. It could increase annual energy generation from ~630GWh to up to about 870GWh. The feasibility study showed the scheme could be redeveloped to increase capacity and flexibility to meet the valuable requirements in the future electricity market. This potential project is a great example of repurposing existing hydropower assets to better align to future market opportunities and to deliver more value to Tasmania from the same water resource.

The upgrade of components of the existing water conveyance system is currently underway and will provide flexibility for a range of future scenarios for the scheme. If redevelopment of the scheme does not reach a successful FID, these works will support the replacement of the entire water conveyance system which is required in any case to ensure the scheme can continue to operate safely and reliably into the future.

Question(c):
Is the current Tarraleah asset nearing the end of its useful life?
As noted by the Minister, BotN relies on high priced events occurring in mainland markets:

Answer:
As noted below in response to question (g), Tarraleah asset continues to be strategically managed by Hydro Tasmania under the SAMP, until a decision is made to either refurbish or redevelop the scheme.

Question (d):
Will the development of the NEM over time reduce the number of high-priced events;

Answer:
The National Electricity Market (NEM) is expected to transition to a significantly greater concentration of variable renewable energy generation. Due to the intermittent nature of renewable energy sources, the half hourly prices are expected to be highly variable/volatile during the day. For example when the wind isn’t blowing and the sun isn’t shining, the prices are expected to be higher. Conversely prices will be lower (or even negative) when there is excess renewable energy in the system, which effectively means being paid to consume energy from the grid.

The NEM will need access to flexible and on-demand capacity to keep supply reliable for consumers. Based on the current market structure and bidding mechanism, the high price events will be driven by the demand and supply and availability of reliable capacity. It is difficult to foresee the number of high-priced events, but the market is expected to be more volatile.
The flexible nature of the Hydro generation system will allow Hydro Tasmania to benefit from the price volatility

Question (e):
What does the Marinus modelling assume about the prevalence of high price events in the future?

Note 1.2 (i) of Hydro’s 2022 Annual Report notes on page 31 that the remaining useful life of assets and the residual value at the end of the useful life are reviewed annually.

Answer:
The high-priced events in the NEM are typically due to a lack of supply, high demand, or a combination of these factors. The modelling undertaken by AEMO and Project Marinus indicates that dispatchable storage resources like pumped hydro and batteries will play a vital role in supplying during low renewable generation periods. These resources will provide clean, affordable, and reliable energy to the NEM.

The number of instances of high price events will be contingent upon various factors such as, but not limited to, renewable development in each state, coal retirement trajectory and emission reduction targets. However, Hydro Tasmania are of the view that there will be sufficient number and duration of these events to warrant upgrades to make existing plant capacity more dispatchable and develop a pumped hydro plant.

Collectively, these projects will provide significant benefits to Tasmania through additional jobs and economic stimulus, improved energy security and improved connectivity.

Questions (f) What was the useful life of the Tarraleah power station; and

(g) what is the residual value at the end of its useful life immediately before the June 2018 announcement by Hydro to transform the asset?

Answer:
Hydro Tasmania operates its 30 hydro power stations on a going-concern basis; i.e. they are assumed to be operating indefinitely into the future. Hydro Tasmania operates a Strategic Asset Management Plan (SAMP) which communicates the business’ objectives, priorities and high level planning for the management and operation of its assets over the coming decade. The SAMP incorporates the corporate strategy and objectives along with a comprehensive understanding of the current performance, condition and risk of its asset portfolio. Use of the SAMP means that no hydro station will actually reach end of life (unless it has been strategically planned to do so), as refurbishment/upgrade/replacement activities will have occurred, resetting the useful life of the assets in the station.

As an example, Trevallyn Power Station operates four turbines. Turbines one and two have recently been refurbished and have useful lives to 2051. Turbines three and four are yet to be refurbished. They have a useful life to 2030 and the SAMP shows refurbishment work scheduled in FY2026/7. While we have used turbines to illustrate, all components of the power stations are treated in this way (e.g. including alternators, main inlet valves, control systems and transformers). As such, it is not possible to provide ‘a useful life of each power station’ in a meaningful way given the rolling program of upgrades, refurbishment and maintenance on the significant number of components of each power station.

The resetting process of the SAMP means that Hydro does not maintain a residual value on these assets. This rolling process with the SAMP also means Hydro Tasmania does not hold a demolition provision for each station. In terms of refurbishment costs for power stations, an overall capex budget is provided annually and the SAMP determines allocation and scheduling of these works.