With the present government seemingly uninterested in the public benefits of the Lake Onslow pumped hydro scheme, Earl Bardsley identifies the five factors that interest private investors, most of whom will be seeking returns for overseas interests

By ;Earl Bardsley*

The Lake Onslow pumped storage proposal was always discussed in terms of a national asset. If it proceeded it was to be constructed by the government to provide New Zealand electricity security in dry years when there was reduced hydro power output in the South Island.

Operationally, the scheme involves pumping Clutha River water up to an expanded Lake Onslow reservoir at times of low power prices. Some of the stored water is sent back down again later to generate additional electricity when needed.

Evaluation of the scheme in this context is simply determining whether its overall national benefit is worth its significant construction cost. Unfortunately, the 2023 change of government resulted in termination of the detailed Lake Onslow business case study before it could be completed.

With this background, there was surprise when it was announced last year that a private sector consortium had set up with a view to building the scheme as a purely commercial project. The idea is being driven in part by Keith Turner, the inaugural CEO of Meridian Energy and previous chair of Transpower.

This commercial approach simplifies the scheme’s evaluation process to a simple measure of success or failure. That is, after due diligence will the necessary billions of private investment dollars be forthcoming so that construction can begin?

A case for investment

Aside from the collective expertise of those involved in the consortium, there are five factors that should encourage private investment for building the Lake Onslow scheme:

1. It would have a long lifetime of income generation with low operational cost.
   There is no significant sediment-laden river that could infill the expanded Onslow reservoir. In a similar situation, Australia’s Snowy 2.0 scheme is anticipated to function for 150 years.
2. There is already a significant amount of site information.
   The previous government-funded NZ battery investigation of dry year options was mostly concerned with studies around Lake Onslow. More than $20 million was expended on various aspects, including rock drill core evaluations for key locations. The consortium will no doubt make use of this information to help its case for investment. 
3. The large energy storage capacity will enable an additional income stream.
   Pumped storage schemes typically generate income from pump/generating changes over relatively short time periods, purchasing power at low prices and selling at higher prices. Various ancillary services like frequency keeping can also generate some further income.
   In addition, the Lake Onslow scheme is unusual in having a large energy storage capacity, making it the world’s largest such scheme by energy storage measure. It would more than double the current national hydro storage capacity. This storage factor is a commercial advantage because it enables extra income from long-term power security insurance contracts like those presently provided by Genesis for gentailer use of Huntly coal. In this way, the Onslow scheme could have a regular income component that is independent of needing actual power generation.
4. It is located near the main South Island hydro dams.
   During times of high lake inflows and high lake levels, having Lake Onslow nearby means there is reduced transmission distance for significant hydro power purchased by the scheme for pumping. A North Island Onslow equivalent would be disadvantaged at such times because sending power for pumping northwards from the South Island would create a bottleneck at the HVDC link.
5. It would significantly reduce fossil fuel electricity generation in New Zealand.
   Onslow’s cheaper power (when generating) would displace coal and gas generation in both fast- and slow response modes. This could be an attraction for those major investment funds that prefer green infrastructure projects that give financial returns while also reducing carbon emissions to the atmosphere.

A further factor that may encourage Onslow investment is the potential for coming increased frequency of periods of South Island hydro spill, favouring the economics of pumping at such times because of low electricity prices. If the scheme had already been built, it would have been in continuous pumping mode over most of January 2026 due to high South Island inflows and low power prices associated with spill.

The possibility of an increasing number of spill events is indicated in an Otago University study, concluding that more hydro spill will result from climate change effects over the South Island hydro catchments. In addition, increased solar and wind power developments are likely to lead to more spill when hydro lake levels rise due to reduced hydro generation at times of abundant wind and sun.

One potential negative that might be raised against Onslow’s commercial viability is the prospect of continuous loss of lake water through evaporation and leakage. However, both of these loss components will be relatively insignificant.

For evaporation, the local climate will result in a 65 square kilometre expanded Lake Onslow having evaporation loss that would be offset by a mean pumping rate that is only 1.2 cubic metre per second greater than the mean discharge rate for generation. This is a minor energy loss compared to the effect of the expected 70% round trip efficiency for the scheme.

The total leakage loss rate is less than evaporation, with NZ Battery giving a maximum estimated seepage from the lake of 0.75 cubic metres per second. Furthermore, most of this leakage is likely to discharge to ground surface near the Teviot River at locations downstream of the new Onslow concrete dam. Any such leakage loss is easily offset by making the equivalent reduction of discharge down the Teviot River from the new dam.

Perceptions

An encouraging aspect of the Onslow scheme as a commercial project is that there has been an evident change in its perception in some quarters. In particular, the gentailers were openly opposed to the scheme as a government enterprise. However, in November Meridian’s head of hydro development said of the Onslow commercial proposal “Those are the types of projects that the system will require in the future. So that's what we're all looking for.”

It may be that the gentailers were previously not so concerned about the scheme as such. Rather, they were worried about how it might be operated under unpredictable future government management.

Similarly, the present Government was pleased to terminate Lake Onslow investigations, along with the entire NZ Battery project. However, no objections have ever been raised over the possibility of the scheme as a commercial project. Indeed, the Government’s new Fast Track legislation will speed the process of consideration for consenting.

At the local level, the consortium has taken the time to first gain the necessary support of potentially impacted farming families around Lake Onslow. If the scheme proceeds, it seems there will thankfully now be better compensations involved.

Coming hurdles

The consortium lodged an application on November 9 for the scheme’s referral under the Fast-Track Approvals Act. The outcome should be known within the next few weeks.

If successful, a substantive application must then be developed and reviewed by an expert panel that will take into account various submissions. If a consent is gained it will include a range of conditions to be met.

Part of the commercial aspect is likely to include power supply and purchase contracts. The Onslow scheme is a net consumer of energy but in effect it alternates between being a power-demanding industry (pumping) and a hydro power station (generating). It is probably necessary, therefore, to have early confirmation of both power purchase and power supply contracts. This may initiate the development of some new purpose-built solar and wind generation.

The various hurdles all must be cleared to make progress, hopefully ending with gaining the necessary billions of dollars for construction. Keith Turner feels the required construction cost will be considerably less than the original $16 billion figure from the NZ Battery investigations. He also anticipates strong interest from large international investment funds.

National value

If the commercial scheme proceeds, it will bring with it various national advantages and disadvantages.

In economic terms, the greatest advantage is likely to be reduced power prices from providing emission-free security of electricity supply through future dry years. Contract prices on ASX now include a $30-50/MWh risk premium because the present electricity system would be exposed to expensive generation and shortage prices in a future dry year.

An unavoidable disadvantage of private construction is that much of the scheme operational profit will be transferred overseas. On the other hand, the construction cost and cost blowout risk is removed from the taxpayer. Any over-budget unexpected construction expenses can’t be simply added to the cost of the power sold because it would be priced out of the market.

Nor can there be any implication of an invisible contract whereby the government of the day is obligated to rescue the project if it runs into financial difficulties.

Private sector construction means that the Onslow scheme will be built just to the extent of providing the means of generating income – and no more. If the scheme went ahead, there would be opportunity for local or government funding of various water resource add-ons.

In particular, a recent report highlights that Dunedin does not have sufficient storage to maintain city water supply through an extended dry period. A narrow-diameter 17-kilometre tunnel could link an expanded Lake Onslow to the Deep Creek Dunedin water supply intake. This gravity-flow water would effectively provide complete climatic resilience of Dunedin’s water supply, like the Waikato River water pipeline does for Auckland now.

Regardless of who might build the scheme, the Lake Onslow project creates environmental impact because some wetlands will be lost. There is also a large operating range. However, even at maximum drawdown (to 700 metres asl) the lake surface area would still be about 30 square kilometres, which is considerably larger than the 8 square kilometre area of the present Onslow reservoir.

Looking to the future, Keith Turner sees the Lake Onslow scheme as an electricity security replacement for the ageing Huntly power station. In that case, it might be desirable to also have available a body of hydro water of last resort for the rare but potentially impactful event of an extended dry period. A possibility here could be a significant raising of Lake Pukaki, which Meridian may or may not have under current consideration.

Whatever the outcome of the private consortium proposal for Lake Onslow, it seems that a decision for the scheme will finally emerge, whatever it may be.

*Earl Bardsley is Associate Professor at the University of Waikato School of Science. He is the original proposer of the idea of pumped storage at Lake Onslow in Central Otago, as an alternative to burning coal and gas in dry years when hydro lakes are low. Bardsley spoke about the Lake Onslow idea in an episode of the Of Interest podcast in 2022.