3-Party Covenant Financing Of ‘Semi-Regulated’ Pumped Hydro Assets

All credible scenarios of a decarbonising Australian power system with high levels of renewables rely on a portfolio of flexible, dispatchable storage and firming assets. Given our current understanding of costs and prices, such portfolios are thought to include short-duration batteries, intermediate-duration pumped hydro and gas turbines providing the last line of defence. The stochastic intermittency of wind, the synchronicity of rooftop and utility-scale solar PV, and stubbornly inelastic aggregate final demand serve to underscore this point. Wind and solar output need to be moved through space (networks) and time (storage). The storage asset class with the highest energy density, pumped hydro, appears to be facing structurally high capital costs with recent Australian estimates given via high profile projects under development (viz. Snowy 2.0, Borumba) being ~$6000/kW in real terms. Under-development will result in rising renewable curtailment rates and greater reliance on gas-fired generation. In this article, we focus on material reductions in the carrying cost of capital-intensive, ultra-long-lived pumped hydro assets through a semi-regulated, 3-Party Covenant (3PC) financing structure between governments, the consumer base and plant investors. When government bonds are included in 3PC financings, the post-arbitrage carrying costs can be reduced by almost 50%.