Since Herbert Smith Freehills’ last update on the Capacity Investment Scheme (CIS) in August, the Commonwealth Government has announced a major expansion to the CIS.

Our previous articles detailed the Commonwealth Government’s Public Consultation Paper for the proposed approach and design of the CIS, and the partnership between the NSW and Commonwealth Government to increase the firmed capacity in Round 2 of the NSW Firming and Infrastructure Tender. If you would like to read these articles, they can be accessed here and here, respectively. The results of the Round 2 tender as published by AEMO Services can be accessed here.

This latest announcement provides details of the expansion of the CIS, including its scale, technical operation and interaction with state and territory governments and schemes.

The Announcement

On 23 November, the Commonwealth Government announced the expansion of the CIS and its plan to underwrite projects to deliver 32GW of renewable energy and ‘clean dispatchable capacity’ by 2030. A further 23GW of variable (solar and wind) and 3GW of dispatchable (battery and pumped hydro) capacity will be underwritten, growing the 6GW of dispatchable capacity previously committed.

The Commonwealth says that the CIS expansion is designed to assist Australia to achieve the Government’s 82% renewable energy target by 2030 whilst minimising fluctuations in energy prices, reducing emissions, and increasing the reliability of the Australian energy system as coal-fired generators approach the end of their operational life.

The expansion of the CIS marks the replacement of the Renewable Energy Target (RET) established under the Renewable Energy (Electricity) Act. The RET scheme will cease at the end of 2030, meaning that new registrations with the Clean Energy Regulator will no longer be possible and, for entities already registered, there will no longer be any entitlement to create LGCs. Obligations of liable entities to surrender LGCs will also cease. Until 2030, the RET will continue to operate alongside the CIS.

The Expanded CIS Design

The CIS will be progressively rolled out from 2023 to 2027 by way of a series of competitive tenders in which clean renewable generator and storage proponents will be selected to fill reliability gaps. The Commonwealth Government has announced that tenders will be held every six months. It is not yet clear the order of jurisdictions that tenders will be conducted in, nor when they will commence. Reviews will be conducted from 2027 onwards as to the need for further tenders.

Successful proponents will enter into Capacity Investment Scheme Agreements (CISAs). CISAs will have a term of 10-15 years. Importantly, successful projects with CISAs will still be able to sign offtake agreements with commercial counterparties in order to gain revenue from the sale of renewable generation or the provision of storage capacity and network support services.

CISAs will be contracts for difference with both ‘floor’ and ‘ceiling’ net revenue values. Payment flows at the end of each payment period will be determined by project revenues, including any revenue under commercial offtake agreements. The Commonwealth Government will provide revenue support to the owner when net revenue is below the floor value, and the owner will share revenue with the Commonwealth Government when net revenue is above the ceiling value. The value of these payment flows will be determined as a percentage of the revenue above the ceiling or below the floor. This cap and collar scheme will therefore assure revenue within a set range, with the gap between agreed revenue values being the project’s market exposure.

Our previous article detailed the merit considerations and eligibility requirements for Commonwealth tenders.

CIS Implementation in States and Territories

Eighteen of the 32GW of Commonwealth CIS funding will only be available to states and territories who sign Renewable Energy Transformation Agreements (RETAs) as part of the National Energy Transformation Partnership (NETP). Additionally, where state or territory parties do not satisfy RETA obligations or sign a RETA capacity funding by the Commonwealth may be reallocated to those states or territories that do.

RETAs will be bilateral agreements between the Commonwealth and state and territory governments to ‘ensure the delivery of projects’.[1] They aim to address common development issues of renewable projects and facilitate the removal of coal-fired power stations nearing the end of their operational lives. Further details about the specific content of the RETAs are still to be provided as well as details about when the Commonwealth will negotiate the RETAs.

The Commonwealth explains that RETAs are intended to “ensure alignment between state and territory schemes and CIS objectives” and “RETAs aim to reflect the unique needs of each state and territory and may include commitments to:

  • improve reliability by maintaining agreed reliability benchmarks;
  • manage an orderly transition; and
  • invest in strategic electricity reserves.”

The Commonwealth states that CIS tenders will integrate with and not displace existing state and territory schemes.

South Australia-Victoria Tender

In mid-December this year, the South Australia-Victoria CIS conducted by AEMO is seeking tenders for an indicative volume of 2.4GWh of dispatchable capacity that will be operational before the end of 2027. There will be a minimum of 800MWh allocated in each of Victoria and South Australia, with the remaining 800MWh to be allocated to either state according to project merits.

In order to be eligible, proponents must meet twelve requirements. Notably, the project must:

  • have a nameplate capacity of no less than 30MW and be able to dispatch this capacity continuously for a minimum of 2 hours;
  • have a fuel source that is either an eligible renewable energy source, charged from the NEM, or a combination of both;
  • not be a committed or existing project, unless it is an expansion project which includes adding new generation or storage units; and
  • not be subject to a revenue underwritten agreement by a Commonwealth, state or territory contracting 50% or more of the project’s nameplate capacity.

Stage A merit criteria will consist of contributions to system reliability, project deliverability and timetable, organisational capability to deliver the project and community and First Nations engagement. Stage B merit criteria will consist of financial value, contract departures and social licence commitments.

Bidding for the South Australia-Victoria CIS Tender is expected to close May 2024 with outcomes to be announced mid-2024. Dispatchable capacity under the tender is likely to be contracted on substantially similar terms to the draft term sheet which can be accessed here.

A full form of the capacity CISA and CISA for renewable generation are yet to be released.

Further details of merit considerations and eligibility requirements for the South Australia-Victoria tender can be found in the Market Brief.

How Herbert Smith Freehills can help

HSF has a market leading full service renewable energy team. We have helped our clients win bids in each LTESA round to date and understand the form and bankability of the LTESA and CISA documentation. We can advise on the implications of the CIS for your project and on all legal aspects of your renewable energy or energy storage project.

 

[1] Major expansion of Australia’s energy grid capacity announced – DCCEEW

 

Gerard Pike
Gerard Pike
Partner, Melbourne
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Neena Aynsley
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Nick Baker
Nick Baker
Partner and Global Co-Head of Energy, Melbourne
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Peter Davis
Peter Davis
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Alison Dodd
Alison Dodd
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David Ryan
David Ryan
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Daniel Zador
Daniel Zador
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