2023 – Getting Australian Pumped Hydro moving – what needs to happen after the feasibility study?

Andrew Noble

Dams and reservoirs in pumped hydro energy storage (PHES) projects form part of the nation’s critical resource, and pumped hydro schemes are being widely promoted across Australia as a necessary part of the modern renewable energy mix. These PHES projects are essential to support Australia’s very large and rapid development of renewable energy projects such as wind and solar, and without such storage schemes the future electrical grids, with their growing saturation of connected renewable generators, will be lacking stability due to the intermittent nature of most forms of pure renewables. Such pumped hydro schemes can provide grid stability when the pure renewables are not operating by discharging hydropower in the generation mode from the water stored in an upper reservoir.

The resurgence of pumped hydropower projects in Australia leads to rapid learning curves for developers, most of whom are private entities, and with this the types and scales of development risks across all stakeholders are numerous and large. Prior to this current wave (or tsunami) of proposed projects, pumped hydro plants have not been constructed in Australia for decades and so generational experience of their development is lacking across all stakeholders. Coupled with modern and tighter environmental, social and governance (ESG) obligations, the pathway is complex.

Developers new to the industry, and even some experienced ones, often base their development pathways on overly optimistic timelines for the critical step leading up to financial close. This paper discusses the typical process whereby a pumped hydro developer has completed a feasibility study and is working towards its internal final investment decision (FID) and ultimately the Financial Close. This so-called ‘bankable phase’ is the juncture at which several Australian project developers currently find themselves, in Q3-2023, with only two of the >20 assessed Australian projects having started construction, and with none having started in 2022 or 2023. The timeline is often too optimistic to take account of the various checks and balances that other stakeholders impose on the developer.

How much geotechnical investigation for dams and storage reservoirs in a pumped hydro project is enough, and at what study stage should the data be acquired? These issues are discussed, and although there are several approval gates in the evolution of a project, the financiers’ perspective and the bankability of a project are critical steps.
Several Australian projects are currently churning in the bankability phase, with many others barely started and not yet engaged with prospective lenders. The issues currently being faced for the slow achievement of FID in pumped hydro are similar to issues previously seen on international conventional hydropower, but with added complexity due to the objective for the pumped hydro schemes being other than for the pure generation of electricity. A modern PHES scheme, operating within an increasingly renewables dominated grid, requires a higher demand for their ability to assist in the stabilisation of electrical grids and the offering of ancillary services. The commercial aspects for PHES are far more complex to model than generation-only hydropower plants.

Dam development in Australia always brings challenges, but when the several other disciplines required for a modern pumped hydro combine, the projects require very careful planning and early-stage financier foresight to have a credible chance of achieving FID within a reasonable timeline. What is important, is to plan the feasibility study with the subsequent steps in mind, in particular the contracting strategy. If the developer is contemplating taking the large step from feasibility to Financial Close, perhaps with an ECI element included, then the entire feasibility study should be planned with due consideration of what the lenders will be looking for and ensure there are no gaps to avoid back-tracking over old ground. From the first embryonic plan for a medium sized pumped hydro scheme until achieving FID, it is arguable that this period is longer than the construction itself. The paper explores the changing ESG risk landscape from the perspective of the project lenders.

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