The cancellation of the Central West Pumped Hydro Project in New South Wales (NSW) has raised a sharper question about the role of hydro in Australia’s clean energy future. Atco’s decision to walk away from its 325 MW, eight-hour storage plan was not about technical feasibility but economics. Falling battery prices, faster construction timelines, and a market leaning towards modular storage left the pumped hydro proposal stranded before it could move past approvals.
It is not the first sign of strain. Snowy 2.0 has become synonymous with delays and ballooning costs, while smaller hydro projects are finding it difficult to secure funding or confidence in an energy system that increasingly values speed and flexibility.
At the same time, batteries are scaling across the country, from suburban community units to grid-scale projects supplying multiple gigawatts of storage. They are cheaper, faster to deploy, and able to stack revenues from grid services in a way hydro cannot. Yet hydro carries advantages batteries still cannot match: decades-long lifespans, stability, and the potential for storage measured in days rather than hours.
The question is whether the economics and policy settings will keep those advantages relevant, or if hydro is entering a prolonged pause until the market demands what only it can provide.
Why hydro projects are struggling
Large-scale pumped hydro has always faced formidable barriers, but today those barriers are magnified by the speed of change in the energy market.
The first issue is cost. Building a hydro facility needs major civil works, tunnelling, reservoirs, and transmission upgrades. Even with government backing, the upfront capital needed is measured in billions, with a payback horizon stretching over decades. Investors looking for quicker returns are steering clear.
The second challenge is time. From planning to approvals and construction, a pumped hydro project can take seven to ten years to deliver. In an energy transition where the grid needs firming capacity immediately, those timelines are a mismatch. Batteries can be designed, financed, and operational within a fraction of that time, capturing market opportunities that hydro cannot reach.
Geography is another constraint. Suitable sites are limited, often in environmentally sensitive areas, and require water resources that may be contested. Engineering risks are high, and once a site is locked in, there is little flexibility to adapt the design if market conditions change. The track record reinforces the problem: Snowy 2.0, once seen as the flagship project, has been plagued by spiralling costs and repeated delays, undermining confidence in hydro’s ability to deliver on time and on budget.
Together, these pressures have left hydro in an increasingly narrow corner of Australia’s storage landscape. It is not that the technology has failed, but that it cannot compete on the terms that now dominate the market.
Where batteries are winning
Battery storage has surged ahead because it aligns well with the needs of today’s grid. The most obvious advantage is cost. Lithium-ion prices have dropped sharply in recent years, and with new chemistries like sodium-ion and iron-air emerging, the trajectory is still downward. That makes batteries not just cheaper to build, but also less risky to finance compared with large hydro projects that can take a decade to return value.
Speed is another decisive factor. Battery energy storage systems can move from planning to operation in a matter of months. For a grid under pressure to replace coal generation and stabilise renewable output quickly, this responsiveness is critical. Developers can roll out multiple projects across different states, adjusting capacity to suit local demand and network needs in a way hydro cannot replicate.
Flexibility extends beyond deployment. Batteries can be scaled up modularly, added in stages, or linked to solar and wind farms to firm renewable generation directly. Once connected, they can tap into multiple revenue streams, providing not just energy shifting but also frequency control, grid stability, and emergency backup. These services have become increasingly valuable in the National Electricity Market, giving batteries an economic edge that hydro projects struggle to match.
This combination of cost efficiency, rapid delivery, and operational flexibility has positioned batteries as the default choice for a new storage investment across Australia. Hydro still offers unique benefits, but in the day-to-day competition for capacity and revenue, batteries are setting the pace.
What hydro still offers that batteries don’t
Despite the setbacks, hydro retains qualities that batteries have not yet been able to replicate.
- Long-duration storage: Pumped hydro can provide energy over entire days. This makes it vital during extended periods of low wind and solar generation, when batteries alone cannot carry the load.
- Longevity: Once built, a hydro facility can operate for 40-80 years with relatively low ongoing costs. Batteries, by contrast, require replacement or augmentation within 10-20 years, giving hydro a durability advantage over time.
- Scale and stability: Hydro projects can move vast amounts of energy across the grid and deliver a level of stability comparable to baseload generation. They help anchor the system during stress events in a way batteries are not yet equipped to do.
- Strategic resilience: Hydro offers insurance against extreme events. It is less about daily arbitrage and more about ensuring the grid can withstand prolonged renewable droughts, a role that current market settings undervalue.
Policy and market tensions
Policy is not the decisive factor in whether hydro continues to play a role in Australia’s energy mix. The market on its own has shifted towards fast, modular solutions because that is where the immediate returns are. Batteries fit that profile perfectly, while hydro requires a much longer horizon that doesn’t align with current revenue structures. Without targeted incentives or government support, few investors are prepared to accept the risk of tying up capital for a decade before seeing reliable payback.
At the same time, governments are under pressure to deliver quick results as coal exits the system. That urgency has encouraged policy settings that reward speed, flexibility, and short-term storage, reinforcing the dominance of batteries. Yet the need for deep storage has not gone away. As the share of wind and solar increases, so does the risk of extended periods where renewables underperform. In those conditions, the grid requires assets that can run for days.
The tension lies in balancing the short-term need to stabilise the grid with the long-term need to safeguard against rare but severe gaps in generation. Market rules and incentive structures are not yet designed to value that resilience, leaving hydro projects stranded despite their strategic importance. Unless this gap is addressed, Australia could find itself with an abundance of short-duration storage but vulnerable when faced with the every events that hydro is best placed to manage.
The road ahead
The next phase of Australia’s storage strategy is likely to be more diverse than the current contest between hydro and batteries suggests. Batteries will continue to dominate because of their falling costs and quick deployment, and they will be the backbone of day-to-day firming for wind and solar. But the gaps they cannot yet fill are opening opportunities for other technologies to emerge. Hydrogen, iron-air batteries, and thermal storage are all being explored as options for very long-duration supply, with several pilot projects underway across the states.
Hydro is unlikely to disappear, but its role may narrow. Instead of competing directly with batteries for medium-duration storage, it may be positioned as a specialised safeguard against extreme events. Projects that can deliver 12 to 24 hours of energy will remain valuable, particularly as the country aims to retire coal while keeping reliability intact. Whether those projects move ahead will depend on governments recognising that markets alone will not fund infrastructure designed for rare but critical scenarios.
What is clear is that storage is no longer a single-technology race. Australia’s grid will need a layered mix: fast, modular batteries for daily balancing, complemented by fewer but deeper assets capable of carrying the system through prolonged renewable droughts. In that context, hydro is not dead, but waiting for the conditions where its strengths become indispensable again.
Hydro’s retreat from the frontline does not mean it has no future in Australia. Batteries are winning the present, but the long-term test of the grid will be how it performs when renewables falter for days at a time. In that moment, the value of hydro will be clear, and whether today’s pause becomes tomorrow’s revival will depend on how policy and investment choices evolve.
Energy Matters has been in the solar industry since 2005 and has helped over 40,000 Australian households in their journey to energy independence.
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