Senate Environment and Communications Legislation Committee, , 9:16:04 to 9:27:29
Technical discussion on the project's economic modeling, including Net Present Value (NPV) and the Weighted Average Cost of Capital (WACC) used for valuation.
Topics: Renewable energy, Energy prices
Speakers: Dennis Barnes, Speaker 33, Hon Sarah Henderson, Hon Murray Watt, Varun Ghosh
>> Um what is the current net present value
of the project? So as I referred to earlier the uh we've provided a range of economic economic modeling uh the net present value relies on an assumption of a cost of capital uh snowy too reduces the cost of capital of snowy overall because it provides resilient earnings. uh as we go through the discussions with the departments on the support required to complete the project uh we'll take on notice the question of a a business case or an MPV.
>> Okay. So the project benefit analysis released last week uh did not include an updated net present value. That is
think you're referring to was uh the benefits that acrew to the broader economy during construction and as a result of lower electricity prices rather than the earnings that acrew to
>> Um can I I'm going to press you on this because you would know this figure Mr. what is do you do you know the current net present value? I should perhaps
>> well net net present value relies on an analysis of the cost of capital and it relies on an analysis of an electricity market that does not yet exist and an asset that is 150 years. So there's
quite >> is it an increas increased or decreased
from 2024? So the the electricity market modeling we've done suggests that Snowy 2 is more required than it was in 2024. So the revenue acrew into Snowy 2 has
>> uh in terms of in terms of the modeling could we please get a copy of that modeling?
>> Chair can I just at that point I mean I'll leave it for Mr. Barnes to answer the question, but there's a number of figures and documents that Senator Henderson has requested and as Mr. Barnes has said, some of that information is commercial incompetence. Um, we need to remember that Snowy Hydro competes in the energy market with a number of other entities. Um, and I'm sure Snowy Hydro's board will take into account what they can and can't release publicly. And if Senator Henderson has any quibble with that, that's exactly the point Mr. Taylor made back in 2019 in refusing to release uh Snowy Hydro's business case at that point in time.
Well, and I think the appropriate way to manage this um is for those questions to be taken on notice. If there is an if it is not in the public interest for those documents to be um to be released under a request through Senate estimates, then that um that case can be made or those reasons can be set out and then um dealt with in in a similar way.
>> I'm going to try and be very quick.
>> Well, Senator Henderson, I just point out that you've been going now about 40 minutes on this. So, we're now running significantly.
>> Mr. Barnes, the net present value figure was disclosed in 2024 >> when when the business case was done then has that figure increased or decreased since 2024.
>> So the 2024 analysis was on a very specific market scenario and a very specific cost scenario. We have now considered the range of costs between 22 and 25 and we've considered a more wholesome range of revenue scenarios and also the understanding of how snowy 2 will work in the snowy hydro portfolio has reduced our cost of capital. So it's it would be misleading to give a single figure. There's a range of economic outcomes for Snowy too. In our annual report on Friday, they would have been they were considered as part of our impairment modeling and no write down or impairment is predicted.
>> Um so can you give me a range?
>> mean I can give you a range of the return on asset which is different to an MPV and we believe under a very broad range of scenarios recognizing the unique nature of the asset over 150 years. Yeah, >> the ranges.
>> Sorry, Mr. Buds. What I'm confused about is that when you did the business case back in 2024, you're able to give the net the um that that particular figure. And so given the cost blowout now to $25 billion, uh I would have thought that you would have done the work to establish a new
NPV. Well, we've done a range of economic modeling and recognizing that Snowy 2 is within a portfolio of other assets, it will be about 20% of our capacitor. We have a return range of between five and 6% modeled recognizing the limitations of the modeling. >> Well, the asset rate of return specifically for snowy 2 as modeled we believe to be in the range of 5 to 6%.
>> You've modeled it over 150 years.
>> Uh I mean it becomes academic after about 50 years. Yeah.
>> Seems a very
>> so the model cuts off in
>> country is not about that age. So seems strange. So 150 years you're modeling
it. Well, the asset life is 150 years. The modeling I think we do over 50 years to recognize that it's somewhat academic.
>> So in your MPV, do you use a weighted average cost of capital?
>> So I've given you the asset return rather than the weighted average cost of capital.
>> So that asset return is that return on equity or return on assets?
>> Return on asset.
>> Right. Um and so what what was the whack you used for the MPV calculation?
>> Well, we haven't done that analysis or published that analysis. So you haven't
used a whack or
>> well asset rate of return doesn't require
>> No, I know that but did you use a you've done a net present value calculation of some range is that correct?
>> Uh we we have uh so our whack as published in 2020 4 we would have published at 6.1%. >> Right? But given the nature of the Snowy 2 asset within Snowy Hydro, >> right, >> we believe it will reduce our weighted average cost of capital over time. We haven't brought that together into a
between five and 6% now just
>> well the integrated system plan that AMO use uses a range of 3% for regulated assets and 7 to 12% for unregulated assets. Snowy 2 is unregulated in that sense but it does have a very unique role in this future energy market.
>> Right. I'm just it's a little perplexing to me that the whack has reduced over the past two years given the cost of capital markets have seen interest rates increased considerably. So can you explain to me how
>> well I didn't say the could reduce.
>> Well well I think you did. I think >> you you've you said you've the structure of capital has changed such that you've been able to reduce.
>> No we believe that over time the role of snowy 2 in snowy hydro will reduce our cost of capital. We have reduce your
cost of well was does that mean reduce the whack or just I'm trying
>> well we're having
>> between cost of capital and the whack
it's done a business case or an analysis for publication which brings all of that together in 2024 in 2024 we did that we've now consider that to be quite a limited view of the role of Snowy 2
>> okay can you explain to me how the cost of capital for any type of analysis of this has reduced in the context of significantly higher interest rates including for the Australian government
area of not my expertise but the which we'd be happy to provide more detail on notice but the risk to our earnings within Snowy Hydro given the unique nature of the asset given it's not relying on water inflows uh reduces the risk in the business which would reduce the effective cost of capital for snowy hydro
>> I mean you haven't really been able to explain this issue. I mean, excuse my cynicism, but uh I mean, this is a project that's now one of the biggest blowouts in Australian history. Uh and it would appear that you're goal seeking or seeking to generate a particular whack to avoid a a right down. To me, that's the clear conclusion for the evidence you've given because it's very opaque. you're not really giving us uh transparency here to the public about how you could have a declining cost of capital in a market where Australian government bond rates in the past couple of years have gone up something like 140 basis points something like that you use you use the in into your whack an input in your whack is the uh is some kind of Australian government bond rate I >> that would be one of the inputs
>> be that would be one of our inputs
Right. And that's that's increased considerably. >> I mean, the only other way you'd probably get a significant reduction is if you're mcking around with debt and equity ratios. Have you changed your leverage ratio for your whack?
>> Consider in our annual report in the impairment section which is audited by our external auditor who had full information on the range of uh market scenarios and capital costs. and they affirmed that there is no impairment or write down as a result of that analysis.
>> They get it wrong time and time again. I mean, we you've also got an audit process here. I I'm just not quite sure why you can't disclose this committee uh the inputs to your WAC. So, what what government bond rate did you use this time relative to 2024?
>> I'd have to take the detail of this on
notice. >> You take that one on notice. You also take on the leverage ratio you've used uh the alpha that you've calculated or used in 2024 compared to 2026 and what that weighted average cost of capital was in 2024 relative to 2026.
>> We'll take it on numbers.
>> Do you do you benchmark have you benchmark your returns relative to like uh companies in the sector utility sector to calculate your work? uh mean
it we don't do that but I think I would bring the attention to the unique nature of Snowy 2. We identified earlier this year that there is no asset that will do what Snowy 2 does. The integrated system plan produced by AMO uses a wide range of cost of capitals.