Lake Onslow estimated to cost between $8b and $28b, depending what's included

Friday, 31 March 2023

The Government released documentation on the Lake Onslow scheme late on Friday afternoon.

The pumped hydro scheme that the Government is investigating building at Lake Onslow in Otago would probably cost between $8 billion and $28b depending on what was included, according to a Cabinet paper released late on Friday afternoon.

The paper said officials had estimated the “base” construction cost of the power scheme at $8.7b, but that rose to $15.7b if an allowance for overruns and “escalation” in costs was included.

It put the “total project expenditure” – which would include all the above, along with the first 42 years’ operating costs for the power scheme and the cost of upgrading and operating transmission lines to its power station – at $28.7b.

The Cabinet paper also indicated the power scheme would take between seven and nine years to build after any final investment decision was made late in 2026, with officials’ best guess being that it would be possible to complete in 2036.

A shallow lake nestled high in the Central Otago hill country could electrify the country.

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Energy Minister Megan Woods announced two weeks ago that the Cabinet had agreed to draw up a detailed business case for the possible pumped hydro scheme in central Otago at the same time as agreeing to investigate an alternative set of power-storage initiatives that she indicated could be even more expensive.

However, the Cabinet paper that informed that decision, and the Ministry of Business, Innovation and Employment’s “Phase One” study that informed it, were withheld until they were released late on Friday afternoon.

The goal of the Lake Onslow scheme and the alternative being investigated would be to ensure that the country could get through “a dry year” without power shortages once fossil fuels could no longer be used to plug any generation gap from existing hydro generation.

However, the high cost estimates for the project appear to have damped an initially strong public appetite for the scheme, according to Stuff-reader polling which kicked off prior to the possible $15.7b construction cost being revealed.

Waikato University professor Earl Bardsley, who first identified the potential of the natural rock basin at Lake Onslow to create an artificial lake, said at the time of Woods’ announcement in mid-March that the business case for the scheme would need to take a “wide view of the national benefits”, given the cost.

That could include the economic gain from electricity being cheaper than it otherwise would be, and the general advantages of the green transition, he said.

Woods told colleagues in the Cabinet paper that neither of the options investigated by MBIE “performed well in the value for money criterion”, noting that both had large capital costs early in their lives, with benefits realised over a long horizon.

But she recommended progressing the Lake Onslow option to the detailed design phase, while continuing to investigate an alternative which involves a mish-mash of initiatives. A possible smaller pumped hydro scheme on the Upper Moawhango in the central North Island may be an option.

“There will be a cost to this. But, given the lead time to develop such an option, advancing work to the next phase will keep momentum up on the option and, should it continue to look prospective, avoid a delay in getting to a final investment decision,” she said.

“There is also a risk of loss of capability and institutional knowledge on that aspect of the project if work is paused,” she also told fellow ministers.

In any scenario, there would be a need for a very large investment in wind and solar generation over time to meet increased demand from electrification, and a continuing need for North Island peaking capacity to meet demand reliably during calm cloudy periods, she said in the Cabinet paper.

Woods said the Lake Onslow scheme would have a stabilising effect on the electricity market by adding to demand when electricity was abundant and prices were low, and adding to supply when electricity was scare and prices were high.

“It is likely that this will net in a downwards pressure on wholesale prices, compared to other scenarios,” she told the Cabinet.