Economic justification of the Snowy scheme

• Published in: Energy policy Vol. 29; no. 11; pp. 927 - 937
• Main Author: Lunney, H.W.M
• Format: Journal Article
• Language: English
• Published: Oxford Elsevier Ltd 01.09.2001; Elsevier; Elsevier Science Ltd
• Series: Energy Policy
• Subjects: Applied sciences; Australia; Cost benefit analysis; Earth sciences; Earth, ocean, space; Economic data; Economic justification; Economic models; Electric energy; Energy; Energy economics; Energy market; Energy policy; Exact sciences and technology; General, economic and professional studies; Hydroelectric plants; Hydroelectric power; Hydroelectric power plants; Hydrology; Hydrology. Hydrogeology; Inflation; Irrigation; Natural energy; Political systems; Snowy Mountains; Studies; Australia; Oceania; Snowy Mountains; Hydroelectric power plant; Project evaluation; Payback time; Profitability; Energy economy; Inflation(economy); Cost benefit analysis; Case history; Aqueduct; Case study; Discounting; Dam; Lifetime; Technicoeconomic study; Water engineering; Critical study; Investment
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/S0301-4215(01)00019-2

The Australian Snowy Mountains Hydro-Electric scheme was constructed in 1949–1973. Its major goal was to augment the nation's universally approved irrigation resources. The entirety, as well as all kinds of detail, was designed by “Kelvin's Law”, the best cost–benefit technique then available. Economic triumph appeared certain. Later, three major studies of economic doubt emerged (i) by Rose (ii) by Davidson using a critical discount rate of 7% (iii) by McColl. The solution to these doubts, after the experience of 50 years of the Snowy Scheme, is offered. There are two major factors. First, the installations show a longer life than nominally accepted, much longer than the 70 years set for repayment. Second, the art of cost–benefit analysis did not at the time incorporate inflation, so the critics were unable to take it into account. The inflation rate in 1949–1999, not large but monotonically increasing, is 5.8%. Thus Davidson's 7%, which is also the rate of Snowy repayment to government, becomes a “real” rate of 1.2%. Using these concepts, the Snowy becomes, ex-post, a brilliant investment. Yet even this is considered besides the point. A “teleological principle” is advanced, beside the conventional cost-benefit, that “if the political purposes of the originators are achieved, and at the same time there is some arrangement for repayment”, the scheme is justified. It is shown that, for the Snowy, this is so.