VZCZCXRO3284
PP RUEHPT
DE RUEHBY #0367/01 0990708
ZNR UUUUU ZZH
P 090708Z APR 09
FM AMEMBASSY CANBERRA
TO RUEHC/SECSTATE WASHDC PRIORITY 1355
INFO RUEHBJ/AMEMBASSY BEIJING 9437
RUEHUL/AMEMBASSY SEOUL 9767
RUEHKO/AMEMBASSY TOKYO 3496
RUEHWL/AMEMBASSY WELLINGTON 5733
RUEHBN/AMCONSUL MELBOURNE 6247
RUEHPT/AMCONSUL PERTH 4510
RUEHDN/AMCONSUL SYDNEY 4467
RHMFIUU/HQ EPA ADMINISTRATORS WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 CANBERRA 000367 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: SENV ENRG ECON AS
SUBJECT: SNOWY RIVER HYDRO SCHEME IN TROUBLE 
 
REF: CANBERRA 357 
 
¶1. (SBU) Australia's largest hydropower scheme is facing 
greater water shortages, decreased ability to raise capital, 
and competition from larger, more integrated power providers 
in the region.  Snowy officials are pessimistic about the 
independent future of the scheme, despite efforts to 
diversify their fuel supply.  The drive to privatize the New 
South Wales electricity grid will likely further hurt the 
scheme's competitiveness once it is completed. End Summary. 
 
¶2. (SBU) The Snowy Mountains Hydro-electric Scheme is one of 
Australia's most iconic infrastructure investments, begun in 
the 1950s as a nation-building project to secure water and 
electricity for the region.  It has a network of seven power 
stations, 31 generating units, 16 dams and 135 miles of 
tunnels and aqueducts dispersed over a catchment area of over 
1900 square miles in Kosciuszko National Park near Cooma in 
New South Wales.  Snowy Hydro Corporation (which owns and 
operates the scheme) was established in 2002 when the 
previous government authority was 'corporatized'.  It has a 
generation capacity of over 4300 MW, making it the third 
largest generator by capacity in the National Electricity 
Market (NEM).  However, reduced water flows in the region due 
to the ongoing drought (and attributed by many to climate 
change) means that capacity has actually been around 3000 MW 
on average since 2003.  Snowy Hydro also has two gas-fired 
power stations in Victoria (which generate over 600MW) that 
were purchased as part of a fuel-switching plan as hydro 
resources have declined.  Snowy Hydro has significant water 
and energy capacity but declining water inflows (either rain 
or snow run-off) mean both actual power generation and water 
releases have declined over the last decade. 
 
¶3. (SBU) Snowy describes itself not as an electricity 
generator, but as a leading supplier of "electricity price 
risk hedging products" to other NEM participants (retailers 
and other generators) who are seeking protection to limit the 
price risk they face in the volatile NEM.  Snowy Hydro's 
ability to draw on large scale generation at short notice 
means it is able to offer such contracts and generally hedge 
the risk it takes on those contracts by generating 
electricity as required.  Currently, the Snowy scheme 
provides less than 5% of Australia's total electricity demand 
although its capacity is significantly above this, partly 
because of decreasing demand in the region and physical 
problems in storing and transporting electricity. 
 
SNOWY AND THE NATIONAL ELECTRICITY MARKET 
----------------------------------------- 
 
¶4. (SBU) The NEM was formed in 1998 following the 
deregulation of the power industries of a number of State 
governments and the Commonwealth governments.  The NEM is the 
wholesale market for the supply of electricity to retailers 
and end-users in Australia, excluding Western Australia and 
the Northern Territory.  It was created to improve 
competitiveness in the electricity sector and to provide 
choice for consumers.  The NEM is still incomplete as both 
Queensland and NSW have resisted the privatization of their 
electricity utilities out of concern that prices could rise 
significantly.  Reform in the Australian electricity market 
has had a significant impact on Snowy Hydro's ability to be 
Qhas had a significant impact on Snowy Hydro's ability to be 
an important participant in the National Electricity Market, 
which accounts for around 93 per cent of electricity 
consumption in Australia.  Snowy Hydro's key competitors such 
as Origin Energy and AGL have been successful in expanding 
their generation capacity and customer bases through 
acquisitions and increased investments, 
but the privatization push would reduce the need for 
extremely high-reliability "hedging" products that Snowy 
currently competes well on. 
 
WATER MARKET NO IMMEDIATE ANSWER 
-------------------------------- 
 
¶5. (SBU) According to the Snowy Hydro General Counsel David 
Harris, Snowy's ability to develop alternate revenue through 
water trading is hampered because there is no real market in 
Australia for the supply of water as flexible prices. 
Instead, water allocation is typically by license and those 
allocations are limited (in theory - most irrigation sources 
have been hopelessly over-allocated) by regulations requiring 
 
CANBERRA 00000367  002 OF 002 
 
 
environmental water releases.  This imposes a fixed demand on 
Snowy Hydro as outdated licensing agreements mean that it 
does not own the water (it only has the right to 'divert, 
collect and release' water).  Selling for a profit would 
allow Snowy Hydro to upgrade its assets - which require at 
least A$100 million to keep them operating effectively in the 
future - but absent a renegotiated agreement it will be hard 
to do so.  In practice, Snowy Hydro (with one third of water 
storage capacity in NSW) provides essential water to inland 
irrigators and water for environmental releases, as well as 
flexibility for electricity generation - although these can 
be competing uses for the available water.  Under normal 
water inflow conditions, a total of around 2000 gigaliters is 
released into two state owned holding dams (Blowering 
Reservoir and the Hume Reservoir) in accordance with the 
Snowy Water License.  Both reservoirs are controlled by 
government authorities for release to irrigators.  The 
absence of a water market means that water cannot be 
efficiently allocated between recipients, including micro 
players such as license holders and major suppliers such as 
Snowy Hydro - which also cannot directly access funding for 
infrastructure improvements and expansions. 
 
¶6. (SBU) Harris told econoff that the inability to raise 
capital (when Snowy was corporatized in 2002, it still had 
A$800 million (US$560 million) of capital debt, of which the 
government agreed to pay off half) has meant that 
increasingly integrated power producers and marketers like 
Origin and AGL will have an advantage as the relative value 
of their "hedging product" (high reliability generation) 
declines with continued drought and climate change.  Harris 
said that he could easily see Snowy being bought out by one 
of the larger utilities sometime in the next decade as it 
struggled to meet environmental and market demands.  While 
more flexibility in water marketing might help, Harris said, 
he did not see a scenario where financial conditions improved 
that helped competitors less than Snowy itself.  Although the 
implementation of a carbon trading scheme would make Snowy's 
product more competitive, the low initial carbon price, and 
likely compensation to coal-fired power generators, would not 
significantly alter the economic realities for the company, 
at least not in the early years. Harris asked pointedly about 
the possibility of U.S. investors looking at the renewable 
energy sector in Australia, but agreed that current financial 
conditions in the U.S. would make expectations of large-scale 
investment very uncertain. 
 
¶7. (SBU) Comment:  The Snowy scheme is a national icon, and 
PM Rudd referred to the scheme on April 6 as an example of 
the glory age of "nation building" - a rhetorical device to 
sell his new A$43 billion (US$30 billion) government 
broadband network program (reftel).  The scheme's overall 
competitiveness, however, is not going to improve, and it is 
increasingly vulnerable to a takeover as the value of its 
assets fall.  Rising concerns about the health of the rivers 
its dams sit on will increase pressure to release water for 
environmental purposes, putting additional pressure on its 
generating business.  Whether a Snowy scheme operated by a 
"normal" Australian energy giant like AGL or Origin would be 
Q"normal" Australian energy giant like AGL or Origin would be 
seen as a failure is unknown, but the myth of the Snowy as a 
producer of clean energy for Australia's growth would be 
busted permanently. 
 
RICHE