As the world shifts from fossil fuels to variable renewable energy such as solar and wind, long-duration storage is essential to contain excess renewable energy and access these reserves during times of need.
In Australia, as we phase out coal-fired power stations, the requirement for what they provide—in power output, frequency control ancillary services, inertia—will not disappear with them. Instead, the need for these services will only grow as we integrate more variable renewable energy sources into the grid.
Pumped hydro energy storage is uniquely positioned to fill these roles, ensuring that Australia’s energy system remains stable, reliable, and resilient in the face of this transformative shift.
“Pumped hydro is the key to a successful energy transition,” said Malcolm Turnbull, President of the International Hydropower Association (IHA), in his opening remarks for the webinar discussing the IHA’s guidance note on how to de-risk pumped storage hydropower (PSH) investments.
Pumped storage hydropower is uniquely suited to address this issue as a proven cost-effective, low-impact renewable energy storage technology that can provide flexibility and resilience at scale. It is the largest form of renewable energy storage, providing more than 90% of all stored energy worldwide.
Malcolm cited the 2016 blackout in South Australia as a defining moment for the necessity of pumped storage hydropower. The widespread power outage exposed the region to the vulnerability of relying on renewable energy without adequately planning for storage after transitioning from coal to wind and solar power.
The problem these projects face is that at the point of time when they are seeking funding, they come with risk profiles which have prevented projects funded solely with private equity from fully investing in this renewable energy storage solution that is crucial to achieving net zero goals.
Not enough projects are making it to financial close, and when they do, there is a long tail of cost and schedule overruns that stalls development and discourages investors.
As GHD’s National Sector Lead for Hydropower, I was part of the IHA’s global working group focussed on addressing the key challenges surrounding the development of projects. Members of the working group helped create the IHA’s guidance note for key decision makers to de-risk pumped storage investments. The guidance note delivers recommendations to reduce risks and enhance certainty in project development and delivery. It also equips key decision-makers with the tools to guide the development of pumped storage hydropower projects and unlock crucial finance mechanisms.
A webinar held by the IHA, with speakers including Malcolm and myself, provided an in-depth discussion on the guidance note, including its usage and strategies to ensure successful project execution. Here are our biggest takeaways.
Pumped storage hydropower projects have planning and permitting requirements that vary depending on location, necessitating local government support to facilitate smooth developments. Land acquisition and construction may have significant ecological and cultural impacts that would require community engagement to gain social license for projects to move forward.
“You need to have local government coming in with all the bits that are unrelated to digging holes in the ground to pump water through, things like roads, bridges, even housing and education for people’s families. All these things need to come together, which means you need to have community buy-in and say to the local government, this is a priority, we need to make things work,” said Roddy Cormack, Senior Associate at Dentons.
Olivier Tricca, Power Engineer for the European Investment Bank, noted the environmental and social risks of pumped storage hydropower. “Yes, the environmental and social impact of pumped hydro is lower than hydro powerplants, however, this should not be dismissed upfront. It is very important not to underestimate the environmental risk and carbon footprint associated with pumped storage.”
Olivier also spoke on the role of pumped storage hydropower in decarbonisation: “It is a huge risk to overestimate the participation of pumped storage in the decarbonisation of the grid. It has to be proven that pumped storage is needed as part of grid flexibility, of storage strategy and as part of an overall renewable policy involving storage.”
The IHA guidance note recommends using the Hydropower Sustainability Standard to help assess and certify the sustainability of projects, as “the only acceptable pumped storage is sustainable pumped storage.”
Hydropower projects are interconnected networks of dams, tunnels, reservoirs and other major mechanical and electrical components, each with their own set of complex geotechnical risks to manage.
Technical professionals may be familiar with the risks specific to these separate components, but how they operate together within the context of pumped storage hydropower projects brings a new set of interfaces and risks to manage.
Joaquin Benjamin Jimenez Labadie, Global Head of Dams & Marine Works at Acciona, highlighted the issue of a potential labour resource gap. “All the projects have been launched at the same time around the world, in Australia, the UK, Spain, Canada and the US. That’s an issue. There’s not many people and experienced resources to bring to those projects. The scarcity of those specialised resources globally has significant risk to maximise the delivery of these projects. The lack of expertise can lead to not having the right design, safety issues and efficiencies in the operation.”
There is a way to address the labour resource gap in conjunction with the social impact. Providing the opportunities for reskilling and retraining is really important for local community buy-in and building out a workforce for the future. I think we’ll be building these projects for many decades to come.
In most liberalised markets that are looking at developing long duration storage projects, the value of pumped storage hydropower projects have not been fully rewarded for the services and benefits they provide and their critical importance in grid stability and energy security in the transition to variable renewable generation.
Daire Reilly, Commercial Director at Brookfield Renewables, said that the biggest risk he sees is that “there may not be a bankable revenue stream available to developers”.
Appropriate market mechanisms must be put in place to incentivise investments in long duration energy storage and enable revenue certainty.
Governmental support, such as removing regulatory barriers, streamlining licensing, and providing physical infrastructure like access roads, also encourages capital investment.
Cost escalation is another important consideration, as these projects can take eight or more years to finish, meaning material and labour costs may grow well past the initial quoted prices because of inflation.
In today's era of pumped hydro development, these assets are more likely to operate in liberalised electricity markets, but private developers are currently not incentivised to pursue these projects.
Policymakers must engage with the market to design a framework that enables private investments in large energy storage and ensures clarity on timelines and targets. There need to be revenue streams that project long-term returns and account for potential cost overruns for private developers and financiers to have confidence.
Daire Reilly cited the UK government’s cap and floor scheme as an example of a market intervention to support the bankability of projects. “The government will set a floor revenue, which allows the developer to have absolute certainty that regardless of what happens in short-term markets, they will have a minimum annual revenue, and in return, they agree to pay back anything over a cap. Any mechanism like that which gives developers a long-term view on minimum revenue or an average revenue and allows them to plot that against their development costs and assess project return is very beneficial.”
As the guidance note says, “While the private sector is ready and able to deliver, to do so at the required scale, the market needs to be private sector developed but public sector enabled.”
The scale and complexity of pumped storage hydropower projects make it difficult to start addressing risks and pivot to more appropriate strategies deep into development.
Project developers need to practice comprehensive upfront planning as early as possible, when they have the best opportunity to influence cost and risk factors. In these early stages, they can understand where they can gain a better understanding of their project’s interface challenges and constructability, tackle sustainability concerns and figure out costs and schedules.
The IHA recommends considering the procurement strategy and appointing a complete single delivery team as early as possible, including the owner, designer, contractor, original equipment manufacturer, and others, so they can focus on de-risking the project.
The risk profile of hydropower projects can make them incompatible with traditional fixed-price construction contracts where one party takes all the risk.
Owners, suppliers and investors need to collaborate to achieve clarity on how risk will be fairly allocated throughout all the parties. This process should also ensure fair, transparent and the most economically advantageous conditions for everyone involved while reflecting and fostering the environmental and sustainability aspects of the project.
It’s essential to understand the overall complexity and select appropriate contract frameworks that will ensure that boards, insurers, and financiers are comfortable with the approach from the outset.
In the Australian context, none of these challenges are insurmountable – we’re a dynamic, flexible and innovative country. To tackle these challenges, we need closer government and private collaboration to develop these exciting, yet complex projects.
As we move forward, it’s crucial that everyone is part of the journey, especially our Indigenous communities and regional host communities, and critically, we need to improve gender diversity in the sector.
Pumped storage hydropower projects present fantastic opportunities for engagement and the creation of truly diverse project teams. In Australia, we’ve had a bit of a lost decade in terms of the energy transition compared to some other countries, but we’ve been rapidly catching up. My hope is to see good projects built with diverse participation, ensuring that the benefits of this energy transition are shared widely.
The insights shared here only show a glimpse of the derisking guidance provided for the development of projects and the ways they can be mitigated, as outlined by the IHA’s guidance note. Project leaders and other key stakeholders in the energy sector should read the document in full for a more robust breakdown of recommendations for getting started on project delivery with confidence.
The guidance note was developed under the chairmanship of Chris McMonagle, Global Business Development Manager at Bechtel and the Secretariat of the IHA, with the coordination of Rebecca Ellis, Senior Energy Policy Manager at IHA, and through the concerted efforts of the global hydropower community representing corporate, technical, financial and legal sectors of the industry.
You can download the guidance note here.
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