As the energy crisis in the National Electricity Market (NEM) continues to unfold, Snowy Hydro is being called on more than ever to keep the lights on and prices down. Snowy’s role as the NEM’s ‘insurance policy’, providing on-demand energy generation during the crisis, has significantly impacted our business.
CEO and Managing Director Paul Broad said Snowy Hydro strongly rejected commentary suggesting it is to blame for recent high prices in the NEM.
“These comments misunderstand the cause of the energy crisis, as well as Snowy Hydro and the nature of its generation assets,” he said.
Snowy Hydro is a relatively small supplier of energy owing to the fact that its principal source of fuel (water) is limited. In most years Snowy Hydro supplies between 2-4% of the total energy generated in the NEM, operating at critical times of peak demand and when there are unplanned baseload outages.
The current crisis has arisen due to shortfalls from suppliers of bulk energy, including coal, wind and solar. To help manage this shortfall, Snowy Hydro has operated its assets at record levels, effectively as a baseload generator.
“To blame high prices on Snowy Hydro for stepping into the void left by bulk energy providers is absurd,” Mr Broad said.
“Were it not for the actions of Snowy, prices would have been significantly higher. Our teams have worked tirelessly and closely with AEMO, the market operator, throughout this challenging period.
“In May this year, generation from the Snowy Scheme was almost double the previous monthly record. This was essential for maintaining security of supply in the NEM, but it is not sustainable.
“Snowy’s ability to operate in this manner is constrained by its fuel scarcity – we don’t have enough water to manage the ‘energy gap’ from other generators for extended periods,” Mr Broad said.
Snowy Hydro’s water resources must be carefully allocated to the highest value periods in order to keep the lights on. In other words, hydro generation has a high opportunity cost.
It is wrong to suggest that high prices could have been avoided, or that Snowy Hydro should have offered its generation at lower prices. Doing so would have caused our hydro assets to be dispatched ahead of other forms of generation with a cheaper cost of fuel. Not only would this not have made economic sense, it would have left the company unable to respond to critical demand peaks this winter and summer, further increasing the risk of blackouts.
The implication that Snowy Hydro enjoyed a financial windfall as a consequence of the crisis is also inaccurate. Most energy dispatched in the NEM is pre-sold to customers under short or long-term contracts. This is essential for stabilising the cash flow of generators and retailers and is part of the market design. It also means that a narrow focus on price outcomes in the NEM reveals little about generator profitability.
The steps taken by Snowy Hydro to help keep the lights on – depleting its reserves of available water – have in fact been detrimental to the company’s financial and risk position. Snowy Hydro rejects any suggestion it has been ‘profiteering’ from the crisis, or has in any way exacerbated it.
Snowy Hydro will remain focused on ensuring security of supply for the NEM during this challenging period.