Pumped Hydro: the next big thing in Australia’s electricity landscape

Resivior
15 May 2018

The rise and rise of renewable energy in Australia shows no signs of abating, with investment in clean energy technologies increasing 150% last year to reach a record high of $9 billion – mostly attributable to investment in utility scale wind and solar projects.[1] And as renewable energy generation becomes an increasingly significant part of Australia’s energy landscape, all eyes are now on energy storage to provide the energy security and reliability critical to the efficient operation of the National Electricity Market (NEM).

Mention energy storage to your average Australian, and they are likely to think of large batteries, such as Tesla’s 100MW lithium-ion battery in South Australia. However, a bigger, cleaner alternative to batteries is gaining traction in the industry, and it relies on a technology which is decades old: pumped hydro. 

In this article, we will be looking at what exactly pumped hydro involves, why many consider it to be the future of energy storage in Australia, and the key issues to be aware of at the feasibility stage.

What is pumped hydro energy storage?

Pumped hydro energy storage (PHES) is a hydroelectric energy storage system that utilises gravitational potential energy of water. In its simplest form, it will involve two reservoirs, one at a higher elevation to the other. During periods where low-cost energy is being generated, usually through wind or solar generation, energy is used to pump water up to the top reservoir. At times, where energy costs are highest, or otherwise when energy is required, water is released back down to the lower reservoir through turbines, thereby generating energy.

The case for PHES is compelling. Compared to batteries, PHES operating costs are generally low, no chemicals or rare earth metals (such as those required in the production of batteries) are required, the life-span of PHES facilities are higher and the energy storage capacity can be larger.

Pumped hydro in Australia

It is widely acknowledged that the potential for pumped hydro is greater in Australia than elsewhere overseas. Indeed, an ANU report released late last year found a staggering 22,000 potential sites for PHES across Australia. However, it is expected that once you begin to take into account a number of feasibility issues, this number drastically falls.

So what factors are important in assessing the feasibility of a potential site for PHES?

Geology and engineering

Fundamentally, the site will need to work from a geological and engineering design perspective. Certain sites will prove more challenging than others. Take, for example, the proposal to use disused gold mine shafts in Bendigo, Victoria, which raises a number of technical design challenges associated with an underground PHES system such as rock stability, unfavourable hydrogeology due to the size and shape of underground voids, the need for access shafts, tunnels and ventilation, and groundwater contamination. By way of a further example, the Cultana Pumped Hydro proposal in South Australia, which is proposed to be located on the coast with the sea taking the place of a lower reservoir, poses its own unique challenges due to geology, environmental impacts on marine ecosystems, tides and the corrosive nature of sea water.

Economic issues

Whether a PHES project is financially viable will turn on a number of economic and market factors. For example, does the required pricing volatility exist to capitalise on spot price arbitrage? Australia has some of the highest energy prices in the world which may assist with financial viability.

How will the project be financed? Many utility scale renewable energy projects are financed on a limited recourse, project finance basis. For this to occur for a PHES project, the underlying contracts (including land access, connection, EPC, O&M, and PPA) will need to be negotiated with counterparties on a ‘bankable basis’. The PPA – as the key revenue contract – is the most important contract from a bankability perspective, with project finance banks very focused on the credit strength of the offtaker, the term of the PPA, and issues such as change in law risk, and curtailment risk.

Is government support available? Government funding may be available, with ARENA proving to be an eager supporter of pumped hydro. However, any conditions attached to government funding will need to be factored into an assessment of bankability.

Will the project proponent seek to develop a PHES project in conjunction with its own renewable energy generation facility? By way of example, Genex’s Kidston project in Queensland involves a large-scale solar facility with 250 MW of PHES. Other PHES projects leverage energy from nearby wind farms.

The business case will also need to address intended revenue streams such as generating uncontracted revenue by selling into the spot market, selling cap contracts to specified offtakers (pursuant to PPAs) or providing support services to the NEM.

Site issues

It is recommended that a technical and legal due diligence of the site is undertaken. Key questions include: is the site proximate to the required electricity infrastructure including – if necessary – access to the National Electricity Market (NEM) grid, and does it have access to a reliable water supply of suitable quality? Ideally, the site will be located so that electricity will only be required to travel minimal distances in order to reduce transmission losses. Infrastructure easements may also be required depending on the site and project.

Environment and planning approvals

All PHES projects will require environment and planning approvals in place prior to the commencement of construction. Depending on the site, significant challenges or issues may include proximity to towns or residences and possible amenity impacts (such as visual impact, dust, traffic and noise), environmental issues, Aboriginal cultural heritage issues, and possible social and economic impacts. PHES projects utilising disused mine or quarry sites will need to address pre-existing contamination as well as site remediation obligations.

Regulatory context

The NEM is undergoing a period of rapid change and government policy is seeking to keep up. Project proponents and sponsors will need to keep abreast of recent developments in state renewable energy policy and targets, Commonwealth energy policy (such as the proposed National Energy Guarantee), and the likely interactions between the two.

Corrs has deep experience in all aspects of renewable energy projects across Australia, including regulation and approvals, project financing, power purchase agreements, construction and corporate advisory. Corrs also has live experience with advising sponsors of pumped hydro projects in Australia.


[1] Bloomberg New Energy Finance: <https://about.bnef.com/blog/runaway-53gw-solar-boom-in-china-pushed-global-clean-energy-investment-ahead-in-2017/>




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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