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Hydro Tasmania - Marinus Link and Battery of the Nation

Dr Rosalie Woodruff MP

Dr Rosalie Woodruff MP  -  Friday, 2 December 2022

Tags: Hydro Tasmania, Marinus Link

Dr WOODRUFF - Thank you. Minister, hello.

Mr BARNETT - Hello to you, Dr Woodruff.

Dr WOODRUFF - You said previously that Marinus is going to bring down wholesale electricity prices. If that's the case, won't that bring down Hydro Tasmania's profits as well?

Mr BARNETT - Thank you, I will pass to the CEO to outline how Hydro will specifically benefit from Marinus Link and Battery of the Nation opportunities, following the historic agreement that we signed just a couple of months ago with the federal government and with the support of the Victorian Government. You're right, Marinus Link will put downward pressure on electricity prices.

Dr WOODRUFF - Wholesale? Can you just be clear? There's wholesale and retail. You're talking about wholesale? I am talking about wholesale.

Mr BARNETT - I am talking about the average customer in Tasmania. Marinus Link has advised that it is likely to bring down prices between $60 to $70 a year.

Dr WOODRUFF - That’s not what I am talking about. I am talking about wholesale electricity prices and the relationship with Hydro's profits.

Mr BARNETT - It will certainly have downward pressure on wholesale electricity prices. As I have said, Marinus Link estimated $60 to $70 for the average customer in Tasmania. In term of the benefits for Hydro, more generally, I will pass to the CEO. It is going to absolutely supercharge the opportunities for Hydro Tasmania to benefit as a result of Marinus Link and Battery of the Nation for a whole range of measures, but I will ask the CEO to respond.

Mr BROOKSBANK - Thank you, minister. Marinus Link is two interconnector links of 750 megawatts each. They will connect Tasmania to the mainland, more than tripling what we currently have in connection. They're both directions, so they will flow export to the mainland and import from the mainland. What it will allow Hydro Tasmania and other generators in the state is access to a much larger market than the market that is currently here in Tasmania. Our exports will have a bigger home than they currently have. It will also facilitate the building out of new generation on Tasmania through the development of new wind farms and solar farms, because they too will get access to that larger market.

It's also able to import energy into Tasmania. It's perhaps not as well-known as it should be, but hydro generation excluding coal, is the third cheapest form of generation in the NEM

Dr WOODRUFF - Excuse me, minister, I understand all that. I just have a question about wholesale electricity prices and their relationship with Hydro profits.

The minister has said wholesale electricity prices will come down with Marinus. Could you please tell me why that won't also bring down Hydro's profits? I don't understand.

Mr BROOKSBANK - Thank you, minister. As I was saying, the ability to import those lower energy prices into Tasmania will mean an opportunity exists for Hydro to maximise the capacity that it currently has in its existing hydro fleet. It will also be an investment signal for the Tarraleah and Cethana pumped hydro plants. That's how Hydro Tasmania will benefit. We will be able to use that cheaper energy sourced from the mainland to facilitate the financial business case and ultimately the running of Cethana.

The Cethana is a pumped hydro, which means that the water will come down the hill generating electricity, but it will need to be pumped back up the hill into the upper reservoir. Ideally, you want to do that at the cheapest possible price. So we are importing cheap electricity from the mainland, the solar and the wind, then using that energy to move the water back up the hill ready for generation.

Dr WOODRUFF - Thank you. Minister, I think the CEO is trying to assure us that the reduction in wholesale electricity prices you say Marinus will bring will not bring a reduction in Hydro's profits. Can you please explain how a fall in the wholesale electricity price is going to increase Hydro's profits?

Mr BARNETT - I'll pass to the CEO to respond again. But Hydro trades across Bass Strait, currently using Basslink and then in the future Marinus Link, which is 1500 megawatts, two cables of 750 megawatts. As a result of those opportunities by trading and successfully trading, it will be able to make considerable revenues and deliver considerable benefits to the people of Tasmania through Hydro Tasmania, which is owned by the State of Tasmania.

Mr BROOKSBANK - Thank you for the question. There are two products at the broadest level that Hydro Tasmania can sell. One is the energy - the megawatt hours; the other is capacity or peaking capacity.

What Marinus will enable us to do is buy energy cheaply and store that in the form of water, but it also gives us access to the mainland to sell energy-neutral firming products and firming products on the mainland to support the variable renewable generation that will be built on the mainland. We get a whole new revenue stream or a whole new product stream that enables us to maximise the value of our capacity, both currently built and potentially to be built in the future with Tarraleah and Cethana. Those firming products are where the value will come from for Hydro Tasmania.

Dr WOODRUFF - Continuing with the wholesale electricity prices, for any given percentage change in wholesale prices, does the modelling that Hydro is relying on provide an indication of the percentage change in Hydro revenue and profits?

Mr BARNETT - Thank you for the question, Dr Woodruff.

Dr WOODRUFF - Is that clear? If wholesale electricity prices go down by 5 per cent or 10 per cent, is there modelling? There are a lot of smart people who are looking at this massive financial expenditure on behalf of all Tasmanians, so does that give an indication of the same drop in Hydro profits? Could you speak to that issue, please?

Mr BARNETT - Obviously it is technical and operational so I will pass to the CEO. As the CEO responded in an earlier answer, the benefits of Hydro Tasmania is not just the energy but the capacity; the fact that we have firming, the fact that we have dispatchable electricity. What is absolutely important and has been discussed at the energy ministers' meetings in the national arrangement is renewable energy. It is fantastic when the wind is blowing and the sun is shining on the mainland. What they don't have access to is dispatchable electricity. There is a massive demand, which is growing, for dispatchable electricity. This is what we have in spades, thanks to more than 100 years of pioneering efforts in Tasmania to build our Hydro system. Having said that, I will pass to the CEO.

Mr BROOKSBANK - Thank you, minister. There are essentially two projects that relate to Battery of the Nation: the Tarraleah redevelopment and the Cethana pumped hydro. Tarraleah's redevelopment financial investment decision point is June 2024 and Cethana's is towards the end of 2024, timed with when the Marinus financial investment decision is to be made. Between now and then, those very smart people you referred to will be answering that very question and many others.

The Tarraleah and Cethana projects have passed through their technical feasibility, so we know that there is an asset that can be built and can do what we expect it to in terms of providing additional capacity into the market, but we need to go through understanding the outcome and what it means for the cost of the build of those resulting from the announcements with the federal and the Victorian governments made in October this year. That access to cheaper debt obviously makes a difference to the business cases. At this stage, we are looking to present those business cases at the FID point, as I said, in June 2024 and in December 2024.

What we do know is that the value that dispatchable capacity that will firm both Tasmanian variable renewable energy and mainland variable renewable energy is what the National Energy Market needs and therefore it's a valuable product. We have work to do in order to build out the actual business case, remembering that at FID, that's the point when the board would be asked to make a decision around the investment in these assets.

Dr WOODRUFF - Thank you, that is interesting and useful. As I understand it, Hydro is not currently able to do the modelling to show the sensitivity of changes in the national market wholesale electricity prices and the relationship with future Hydro profits, and you are anticipating after you have prepared information in June that by December 2024 Hydro will be able to provide that information. Is that correct?

Mr BARNETT - Thanks very much for the question. There is a lot of analysis and work already being done with respect to this matter and that work and research is ongoing. There will be further work done in the lead-up to 2024 with respect to those projects and other projects. What is important to understand is that the existing Hydro assets can be used in a different and very effective and profitable way for the people of Tasmania through Hydro Tasmania. In addition to that, we have secured up to $1 billion in concessional finance as a result of this agreement, which will just improve the bottom line for Hydro Tasmania and deliver more funding and support to the people of Tasmania.

The chair would like to make a comment and then we will pass back to the CEO.

Dr WOODRUFF - Thanks, minister. It will also deliver more debt to Tasmania, which is why we are asking these questions.

Mr BARNETT - I am delighted to answer the question of debt at the appropriate time. If you give me another chance. We will go back to your first question.

Mr EVERY-BURNS - At the risk of over-simplifying, the wholesale price you're quoting is an average price over a year or a long period of time. The fact that the wholesale price may well level or fall with the new developments in the market does not mean anything other than the average price will do that.

What we expect to see is that, on a temporal basis half-way through a day, you will have a very strong demand for power that can't easily be served and therefore the prices will be high. At other times, during the same 24-hour period, there will be a surfeit of energy, and prices may well be negative, which they are now. We are effectively being paid to take energy from the grid.

It is that shift that it is very different from the past. The future we are looking into has more than just the element of an average wholesale price. It is very much about how that average wholesale price occurs. It is very much about how big the peaks are and what the spread is between the peaks and the low-price periods. When you do the modelling on it, you then have to have the appreciation of that temporality of it and go forward. When you ask the question: will Hydro's profit fall when average wholesale prices fall -

Dr WOODRUFF - I did not say average, but thank you -

Mr EVERY-BURNS - It is the only way I can answer the question because in the previous world it would be almost one would follow the other. If the wholesale prices fell on average and you had to be a generator in the market all of the time, you would expect it. The outcome you are suggesting would be right. The revenue would fall and profit would fall but this is very different. This is about flexible assets. It is about Hydro assets. This is about understanding the new market, the very different market that is renewables based.

Dr WOODRUFF - Thank you very much. As I understand it then from this conversation, the board is not yet in a position, because the modelling has not yet been done because of the complexity of the things you have talked about, to make a conclusion about how the Marinus Link and the change in the wholesale electricity prices on the mainland will affect Hydro's profits. You cannot make any projections about that at the moment that are based on any modelling that you have done.

Mr BARNETT - Through you, Chair. I will take that and then pass to the CEO. The answer is yes, they absolutely have considered the benefits for Hydro Tasmania and the Government has likewise taken on board advice from Hydro Tasmania of the very considerable benefits -

Dr WOODRUFF - That is not profits.

Mr BARNETT - Excuse me, Chair, If I could finish my answer.

CHAIR - Yes, finish your answer.

Mr BARNETT - of the very considerable benefits for one, Hydro Tasmania and two, the State of Tasmania. I would ask the CEO to add to that answer.

Mr BROOKSBANK - Thank you. Through you, minister. I want to clarify: we have preliminary business cases. The point I was trying to make is that the investment decision is the final point when we will have an answer as to where these are investable projects or not. At the moment, those preliminary business cases are very positive. Tarraleah is the one that will reach fit in June 2024. Cethana is fit in December 2024. They are two independent projects.

Sorry about the confusion there. Our modelling indicates that the value of the firming projects that we will be able to offer into the mainland market will be accretive to Hydro Tasmania profits.

Dr WOODRUFF - Minister, my question relates to the ownership of Marinus Link Proprietary Limited. The Prime Minister, Anthony Albanese, said in a press conference on 19 October, that:

Commonwealth nominees will also join the Marinus Link board to reflect the federal government's 50 per cent investment and partnership in the project.

What exactly does the 50 per cent investment and partnership in the project mean?

Mr BARNETT - Your question is in a few parts, but I'll deal with the specific part at the end - the 50 per cent.

The 50 per cent refers to the commitment with the Tasmanian Government to concluding the environment and planning approvals processes, through to a financial investment decision in 2024. We are doing that on a 50 50 basis with the Australian Government.

Dr WOODRUFF - Minister, in relation to the Marinus Link Pty Ltd ownership, you said that the 50 per cent investment related to the project. Can you please tell me the dollar figure that the Commonwealth has invested already, the financial milestones they are promising along the way, and the delivery dates for those?

Mr BARNETT - I could if we were in budget Estimates in the middle of the year. This is a Hydro Tasmania scrutiny hearing, so we do not have that sort of information.

Dr WOODRUFF - This is about Marinus Link. The board which manages Marinus, that is definitely Hydro.

Mr BARNETT - No, I don't think so. Marinus Link is fully owned by TasNetworks, so you could have a look at that this afternoon. This is Hydro Tasmania. I'm more than happy to confirm your earlier remark regarding the ownership of Marinus Link, which the Prime Minister outlined in October that you referred to a couple of months ago. That's one-third each between the Commonwealth, Victorian and Tasmanian governments. It will be 80 per cent debt funded, 20 per cent equity. That 20 per cent would be shared one-third each between those three governments. I hope that assists the member.

Dr WOODRUFF - Minister, under a Marinus future, would the Victorian price set the Tasmanian price, as it does now? If that's the case, would you expect the Victorian price to go down when everyone expects energy prices to double in the future? I don't understand how you would expect that will happen.

Mr BARNETT - Thank you very much for the question. I will pass to the CEO. Before I do, I will indicate how the market works.

When the wind is blowing hard or the sun is shining and there is a significant supply of electricity, the price is either very low or in fact negative, as the Chair indicated earlier. When the sun is not shining and the wind isn't blowing, it could be quite high. As a result of Hydro's assets, 100 years of pioneering effort and because it's dispatchable energy and because of its firming ability, as the CEO indicated earlier, we will have access to a new market. This provides opportunity for Hydro. The significant opportunity for Hydro is very substantial. Having said that, I will pass to the CEO.

Mr BROOKSBANK - Thank you minister, and through you, we are talking about a period of time that is at least 2029 and beyond. The forward market for energy pricing is a visible market through to calendar year 2025. The question asks for a large degree of speculation on how an interstate jurisdiction's pricing will flow, somewhere close to 10 years from now.

The Victorian and Tasmanian jurisdictions will remain separate jurisdictions. They're jurisdictions of the NEM. The interconnector will increase the capacity and the flow between those two jurisdictions. It is very difficult to compare the Tasmanian tariffs with interstate tariffs. They're structured differently. It's not a question that at this point in time, this far out, one could answer with any certainty. I'm certainly going to struggle to attempt to do that. There are different network tariff charges. There are different consumption levels. Victoria has made different announcements about what it will do to build out its own renewable energy zones. There are different levels of solar that will come into Victoria, which is the cheapest form of energy in the NEM now. We don't see that dynamic changing. Victoria will have far more solar than Tasmania will, both grid scale and rooftop solar. There are different levels of industry and types of industry in the jurisdiction. To answer that question 10 years hence cannot be done.

We have discoverable market for wholesale forward prices only out to calendar year 2025.

Dr WOODRUFF - Minister, recently in the Legislative Council GBEs in response to a question from Ms Forrest MLC, you said:

The increased commercial opportunities from Battery of the Nation will assist the business in maintaining the capital expenditure program for ageing and existing assets and provide a stable commercially viable future for the business.

Your reply suggests that Hydro's current operating model is not sufficient to provide funds to cover capex for its existing ageing assets. Is that correct?

Mr BARNETT - Thank you very much for the question. I wouldn't be reading into that answer the assumptions you have outlined to the committee. We have every confidence in the board and management of Hydro Tasmania to manage their assets efficiently and well. We expect that to continue well into the future for decades ahead and to grasp with both hands the opportunities that will flow from Battery of the Nation projects and likewise Marinus Link. I know the chair would like to make an observation in response to your question.

Mr EVERY-BURNS - Thank you, minister. Marinus Link, from our point of view, is very positively beneficial. It will make profit for the corporation. From our point of view, it is important for the corporation. Profit that flows from the operation of Marinus Link will support the existing assets, and the funding of new assets. It is positive and it is going to throw a positive business case. I do not have any doubt about that. The modelling I see does not give me any doubt about that.

What I fear is that if it does not go ahead, I do not know how Tasmania grows. I do not know how you continue to fund assets that are genuinely ageing. We are moving into a new world. There is a new world of renewables and new industry, and Marinus is a part of it, and the things that flow from that part of it. There is no down side in this, from my point of view.

Dr WOODRUFF - Thank you. Minister, I have another question seeking to understand on behalf of people. Your response to Ms Forrest also indicated that you said:

Without Project Marinus, Battery of the Nation projects cannot proceed.

Does that imply that upgrading the existing ageing assets, like Tarraleah, is not feasible without Marinus?

Mr BARNETT - You have referred to the Battery of the Nation projects, and there are a number of those. Tarraleah is one, Lake Cethana is another, and that is an estimated $1.5 billion, 750 megawatt pumped hydro facility. Tarraleah, on the other hand, is 110 megawatts - with the opportunity to redevelop it, subject to financial investment decision, to nearly double the capacity.

We have confidence in the board to continue to manage its asset efficiently and in a financially responsible way.