Snowy Hydro is facing an uphill battle, struggling against mounting costs for its landmark Snowy 2.0 hydropower project, the global economic downturn affecting energy prices, and poor short-term rainfall projections.
- Snowy Hydro’s credit rating has been downgraded and is unlikely to be upgraded again anytime soon
- It has been suggested the Federal Government may need to support the company in the future
- Snowy 2.0 is currently underway and is an expansion of the Snow Mountains Hydro power scheme
Credit ratings agency S&P has downgraded Snowy Hydro’s long-term issuer credit rating from A- to BBB+ and suggested additional Federal Government support for the Commonwealth-owned company may be required.
S&P points to “weak hydrological conditions” reducing Snowy Hydro’s power generation, which will be exacerbated by lower wholesale energy prices across the board because of the economic downturn caused by COVID-19.
The downturn also has longer-term implications for Snowy 2.0, which relies on a large price difference between peak and off-peak wholesale power prices for its profitability.
Snowy 2.0 is the expansion of the Snowy Mountains Hydro Scheme, which involves constructing a new underground power station between the Talbingo and Tantagara reservoirs in the Kosciuszko National Park.
S&P’s report notes “timely and adequate support from the Commonwealth will be critical in maintaining the financial metrics within our expectations for the ratings”.
It also hints the Federal Government may need to forgo dividend payments from Snowy Hydro, saying “flexibility” on dividends “remains vital in the event of of a prolonged weak operating environment”.
Finance Minister Mathias Cormann told the ABC the Commonwealth’s equity commitment and dividend policy remains unchanged.
“The pressures from COVID-19 and the decline in forward wholesale prices being experienced by energy companies are not unique to Snowy Hydro’s operating environment,” Senator Cormann said in a statement.
“S&P Global has noted that the stable outlook on Snowy Hydro reflects its view that the company, with strong oversight by its shareholders, will effectively manage its balance sheet amid the weakened operating environment, while capex peaks for Snowy 2.0.”
Mounting costs see price reach $6 billion
The Commonwealth has already provided $1.38 billion in equity for Snowy 2.0, which is now expected to cost as much as $6.2 billion.
Former prime minister Malcolm Turnbull originally suggested Snowy 2.0 could cost as little as $2 billion, but a subsequent feasibility study put the cost at $3.8 – $4.5 billion.
By the time contracts were signed, the cost had already risen to $5.6 billion, and continues to rise.
An additional $100 million in costs were added as part of the environmental approval process, with Snowy Hydro required to protect threatened species and undertake habitat rehabilitation after construction is complete.
The company is also facing an extensive repair bill after the summer bushfires swept through the Snowy 2.0 construction site and company town Cabramurra.
Ratings agencies cold on gas plan
S&P has also poured cold water on Prime Minister Scott Morrison’s idea of having Snowy Hydro build a gas power plant in the Hunter Valley.
Earlier this month, Mr Morrison demanded electricity generators come up with a plan for 1,000 megawatts of new dispatchable energy in time for the end of 2023.
If not, he threatened the Federal Government would intervene by getting Snowy Hydro to build a gas power plant at Kurri Kurri, which is a significant concern for S&P.
“We expect that Snowy will not undertake any other major projects [such as additional gas-fired generation] in a manner that would place pressure on the balance sheet of the company, or without appropriate support from the shareholders,” S&P said.
The credit ratings agency went on to say it is “unlikely” the BBB+ rating will improve any time soon.
Senator Cormann noted Snowy Hydro was developing plans, but said “any decision to progress this proposal is subject to further considerations by the Snowy Hydro Board and the Government”.