A reliable, durable and large-scale storage solution 10 min read
Australia's favourable natural geographical landscape and abundance of retiring mine sites provide a unique opportunity for pumped hydro energy storage (PHES) to play a key role in driving the energy transition in this country. By delivering consistent, long-duration, dispatchable capacity during peak demand, PHES can help stabilise the system when other technologies may struggle.
The past two years have seen a surge in the uptake of battery energy storage systems (BESS). However, firming assets such as BESS and intermittent generators such as wind and solar are constrained by weather conditions, redundancy and, in the case of BESS, capacity and duration limits. These constraints highlight the need for a more reliable, durable, large-scale storage solution to complement the other technologies.
In the first part of our pumped hydro Insight series, we explore the drivers behind the growing uptake of PHES in Australia, and highlight key considerations for developers, investors, financiers, contractors and other stakeholders assessing such projects.
Key takeaways
- There is growing interest in PHES as a long-term, firm, long-duration dispatchable asset that is unconstrained by weather, technology, asset life or capacity limitations.
- Approximately 20 PHES projects are actively being developed in Australia, with over 22,000 sites identified as suitable for a PHES.
- PHES projects are capital intensive and inherently complex in their planning, procurement, delivery and commercialisation. These factors necessitate careful planning, robust risk mitigation strategies and proactive engagement with stakeholders to ensure the success of PHES over the long term.
What's driving the uptake of PHES in Australia?
There is no doubt that interest in PHES as an energy generation and storage solution is growing. There are a number of key drivers behind this.
While BESS are an important part of the storage solution, they have limitations. Most BESS projects range between 200MW and 500MW, with larger projects, such as Melbourne Renewable Energy Hub's 1,200MW battery, still only half the size of Snowy Hydro 2.0's 2,200MW project. BESS typically provide around four hours of dispatchable energy before needing to recharge, while PHES can deliver up to 175 hours.
BESS also have a shorter asset life of around 20 years, with a steady degradation profile down to 60–70% of the nameplate capacity over time, whereas PHES projects are designed to last over 50 years. While BESS technology is still maturing on a utility scale, PHES has a long-established track record and doesn't face the same fire risk, making it a more sustainable option for long-term energy storage.
In 2017, the Australian Renewable Energy Agency and the Australian National University identified 22,000 potential 'bluefield' PHES sites across Australia, with an estimated energy storage capacity of 67,000GWh. Many of these sites are in areas with natural elevation differences that facilitate the construction of connected upper and lower reservoirs with minimal excavation. The proximity of these sites to natural water sources, such as rivers and dams, would allow these projects to leverage existing water systems to create the necessary reservoirs.
PHES can also take a 'closed-loop' form, where water is transported to a site away from existing river systems and cycled between the two reservoirs. This type of system can be located where topographical features support it, allowing for new PHES facilities to be co-located with solar and wind generation projects in renewable energy zones, boosting grid reliability in those areas.
The planned and accelerated closure of mine sites presents a unique opportunity for owners to repurpose aging mines into PHES projects. Sites such as Kidston, Mt Rawdon and Muswellbrook show how former mine sites can be transformed into PHES facilities, capitalising on rehabilitation obligations and the potential for long-term, revenue-generating assets.
Australia has over 60,000 abandoned mine sites, posing challenges for owners who must manage costly rehabilitation efforts on non-revenue-generating assets. With around 75% of mine closures being unplanned or premature, there is an opportunity to repurpose these sites into valuable operational assets. Many of these sites have existing excavated pits that can be used as reservoirs for closed-loop PHES, reducing excavation risk costs and supporting mining companies' rehabilitation goals through sustainable energy projects.
The Federal Government and most state governments are supporting private sector-led PHES projects through grants, concessional debt, revenue underwrites and streamlined approvals processes.
In NSW, EnergyCo's Pumped Hydro Recoverable Grants Program, which is part of the Electricity Infrastructure Roadmap, helps developers with the cost of early-stage feasibility studies. Additionally, developers can tender for Long-Term Energy Service Agreements (LTESA) in NSW and the Capacity Investment Scheme (CIS) across Australia. The NSW Energy Security Corporation (which received $1 billion in funding and will act as the state equivalent of the Clean Energy Finance Corporation) has been mandated to investigate co-investment opportunities with the private sector on energy storage projects, including PHES.
Although no LTESA or CIS have been awarded to a PHES project yet, the NSW Government has shown strong long-term support for long-duration storage with an updated position to the Electricity Infrastructure Investment Act 2020 (NSW). By retaining the minimum dispatch duration definition at eight hours and broadening the long-duration storage LTESA assessment criteria, PHES projects are positioned to benefit from future government support. Similarly, under the proposed South Australian Firm Energy Reliability Mechanism, PHES projects offering dispatchable energy for at least eight hours will be able to bid for contracts to underwrite a portion of their revenue, complementing other state and federal policies.
After the infrastructure boom of the past decade, the pace of the transport infrastructure sector has slowed, while demand for energy infrastructure has risen. Civil contractors with experience in metro, rail and road projects are now focusing on energy projects to capitalise on the available work.
The civil infrastructure required for PHES, such as deep excavation, tunnelling and the construction of underground caverns and access routes, is similar to that required for transport infrastructure. Contractors with heavy engineering, excavation and tunnelling experience, and an available workforce, are well positioned to apply their skills to PHES projects.
What challenges are emerging?
Despite strong drivers and the promising potential of PHES, the uptake and reaching contract close of PHES transactions has lagged behind short to medium duration BESS, wind and solar projects.
PHES projects are inherently complex and capital intensive, with several key challenges emerging.
PHES projects typically require large areas of land, which can lead to complex environmental impacts, particularly biodiversity, water resources and, potentially, cultural heritage, and significant challenges with site access and spoil management. As a result, they require more detailed environmental impact assessments and complex approvals processes compared with BESS projects. In addition to state planning approval and environmental licences, PHES projects often require approval under the Environment Protection and Biodiversity Conservation Act 1999 (Cth), as well as being subject to any remediation obligations under any relevant mining tenements and approvals if located on a mine site.
Securing land tenure is another significant challenge, especially when land is required within national parks, is over land held by Aboriginal land councils or land where native title is still active.
Water entitlements and licences, crucial for establishing reservoirs, are also a key consideration, particularly for closed-loop projects. While some states, such as NSW, have introduced a special category of water licences for initial fills, these licences may come with restrictions that limit pumping from nearby water sources to periods of high flow, presenting programming challenges. In addition to securing the necessary approvals and resources, early engagement with traditional owners, landowners and local communities is essential for obtaining a social licence to operate.
We have seen a continuing shift in risk transfer across energy and infrastructure. For PHES, in particular, this has been driven by a limited pool of experienced civil contractors with PHES experience in Australia, a lack of competition among original equipment manufacturer suppliers, and supply chain impacts and increasing demand for energy projects. A consequence of this shift has been the growing use of disaggregated contract packages, including in PHES procurement.
By splitting contracts, developers can distribute risk among multiple parties and limit exposure to contractor insolvency, with each contractor focusing on their specialist area. Ideally, this improves quality and efficiency, at a more competitive price. However, this approach can create challenges, particularly for developers and financiers, introducing interface gap risks between the contractors, and resulting in smaller sizing for caps and security packages.
Transport infrastructure procurement has traditionally been driven by state governments, creating a concentrated and aligned purchasing power that drove well-understood risk profiles. The energy infrastructure market is comparatively more diffused, involving a mix of government and private developers, contractors of all tiers and international entrants. This has meant that 'market standard' positions are fluid and highly bespoke contracts are being developed.
An added complexity is that PHES procurement to date has been led by government-developers who are able to use collaborative commercial models with unfixed, variable cost elements. This is more difficult for private developers with limited funding sources who are required to demonstrate bankability to financiers. A balance will need to be struck between developers' and financiers' desire for firm pricing and transferred risk, with the contracting market's calls for flexible, uncapped, commercial models.
The contractor-led market has brought with it a rise in collaborative contracting in the infrastructure sector and the market is evolving. As an example, NSW and Victoria have adopted incentivised target cost models in infrastructure procurement projects, and Snowy 2.0 shifted from a traditional engineering, procurement and construction model to an incentivised target cost model. While the rise in collaborative contracting has not involved a full-scale move from wrapped lump sum to alliance models, there is an increased focus on fair risk allocation, considering each party's ability to manage risks.
In the PHES space, risk associated with input material costs, labour costs and underground work have been the particular focus of collaborative risk-sharing arrangements.
- Input material and labour costs: PHES projects rely on significant quantities of materials such as concrete and steel, but supply chain issues and material cost escalation could increase project prices and timeframes. Additionally, the scale and construction duration of PHES projects requires substantial labour compared with other assets, with the remoteness of some projects potentially necessitating relocation packages and project-specific camps to attract skilled workers. Enterprise bargaining agreements can mitigate these challenges. However, the long construction period on PHES projects means that enterprise bargaining agreements are more likely to be renegotiated during delivery, reopening labour costs and creating the risk of industrial disputes. Given market changes, sensible and targeted risk-sharing mechanisms should be considered upfront to optimise value for money.
- Underground work: PHES projects are complex and involve extensive subterranean work. While owners and developers can undertake geotechnical investigations prior to construction commencing, those have limitations, so a geotechnical risk-sharing mechanism is often needed. Geotechnical Baseline Reports are commonly used to set the agreed baseline conditions for tunnels and reservoirs, which serve as the test for any time or cost adjustments.
Site selection is crucial for PHES projects, as suitable locations are often farther from existing grid infrastructure, leading to higher and more variable grid connection costs compared with BESS projects. Developers must ensure clarity on connection fees payable by a developer to the relevant network service provider and carefully consider the terms of connection agreements.
Additionally, developers should be aware of the generator performance standards and how they align with other regulatory approvals for the project.
A key challenge for developers is monetising storage projects and accessing debt capital markets. In the second part of our pumped hydro Insight series, we will explore the challenges, considerations and opportunities that developers, financiers and stakeholders face in monetising and creating stable revenue streams for PHES projects. Stay tuned.
Actions that you can take now
If you are considering entering the PHES space, as either a developer, investor, contractor, or financier, it is important to consider the following:
- Strategic site selection: rehabilitating existing assets, such as former mines or cleared agricultural sites with low biodiversity and cultural heritage value, and easy access water supply, may reduce planning delays, simplify environmental approval, and, for mine sites, limit the need for extensive excavation.
- Early engagement: engage early with all relevant parties, including local government, the community, traditional owners, landholders, consent authorities, regulators, contractors, geotechnical experts, financiers and government programs. The work done early in the project, and through concept and procurement processes, is crucial to the success of your PHES project.
- Monitor the market: as more PHES projects emerge, market trends in commercial models, risk profiles and offtake strategies will evolve.
- Adapting to changing regulations and government policies: we expect the regulatory landscape and government policies will evolve to better support PHES projects. Staying updated on these changes will be key to your project's success.
Keep an eye out for future Insights in the pumped hydro series, where we will expand further on the offtake and financing strategies that will underpin the bankability and revenue generation of PHES projects.