VRET 2: Further auction to assist Victoria to meet its renewable energy target

The Victorian Government’s second Victorian Renewable Energy Target (VRET) renewable power and LGC offtake reverse auction is expected to deliver at least 600 MW of large scale renewable energy projects, marking a significant contribution toward reaching Victoria’s renewable energy target of 50% by 2030.

Snapshot

• Deadline for bid submission is 8 November 2021.
• Proponent and proposed project must satisfy the 13 eligibility criteria and notably must:
  • generate renewable energy from wind, solar, hydro or an eligible renewable source declared by the Minister under the Renewable Energy (Jobs and Investments) Act 2017;
  • have a capacity greater than 10MW; and
  • have submitted a planning permit application by 30 September and has, or will have, obtained a planning permit by no later than 31 March 2021.
• Assessment based on weighted review of 6 evaluation criteria.

Winners expected to be announced mid-2022.

Features and requirements

Payment Mechanism

Successful bidders (Proponents) under the VRET 2 auction will be awarded a 10-year Support Agreement for their renewable energy project with the Victorian Government.

Support Agreements uses a contract-for-difference (CfD) payment mechanism with funds paid on a monthly basis over 10 years. Being a two-way CfD, the amount payable is calculated by multiplying the amount of eligible electricity sent out during each trading interval in MWh, by the difference between each of the ‘Contract Price’ and the ‘Pool Price’. The Contract Price is the AUD $ per MWh of renewable generation in Victoria as bid by the Proponent into the VRET 2 auction process. The Pool Price is the greater of the spot price in the wholesale electricity market for a trading interval and $0.

A payment cap also exists, being an amount applied to the total of all 'Net Amounts' over the term of the Support Agreement. Once the payment cap is reached, neither party will pay a settled monthly CfD payment until the total of all Net Amounts returns below the Payment Cap.

As part of their response, Proponents must submit bids for both the Contract Price and Payment Cap over the life of the Support Agreement. Note that unlike under the support agreements for VRET 1, there is no Base Amount payable and there will be no annual escalation of the Contract Price.

Other features of the Support Agreement include:

• Commercial Operation must be achieved no later than 30 December 2024, with liquidated damages regime in event of delays;
• Project is obliged to transfer LGCs or equivalent Green Products to the State;
• Victorian Government reserves the right to exercise a ‘sleeving’ arrangement for the Support Agreement with an electrical retailer at any time (although this is not expected to impact on the winning Proponents’ rights under their respective Support Agreements).

Network Requirements

VRET 2 features strengthened network requirements to mitigate grid connection risks and ensure that Projects can be connected quickly.

In submitting their bid, Proponents must demonstrate that sufficient information has been provided to Australian Energy Market Operator (AEMO) or the relevant Network Service Provider (NSP) to enable assessment of the feasibility of the proposed connection.

Further, Projects will be assessed on:

• overall technical feasibility (i.e. assessment of technology, capability, delivery plan at each stage of the Project, progress towards achieving a compliant grid connection agreements and obtaining requirement permits); and
• impact of the Project on existing electrical network infrastructure (i.e. constraint and system strength impacts, ability to provide network support solutions and alignment with system reliability and security objectives).

Renewable Energy Zones (REZs)

REZs are areas containing abundant renewable energy resources. VRET 2 continues to push development of Victoria’s six REZs, which were a focus of the 2020/21 Victorian State Budget.

While VRET 2 does not mandate Projects to be located within a REZ, Projects located in areas where the grid has the ability to withstand disturbances and has network capacity are preferred. In this sense, network strength and stability of the location are key factors in determining the success of a bid.

Note that VRET 2 and the REZ Stage 1 procurement process are being undertaken concurrently and bidders with Projects located in close proximity to Stage 1 REZ projects are likely to benefit, particularly in the Murray River, Western Victoria, South West and Central North REZs.

Planning & Environment

Planning and environmental requirements have the potential to cause significant delay. To mitigate this risk of delay on the overall VRET 2 program, for VRET 2 a bidder’s project must have:

• a live planning permit; or
• submitted a planning permit application by 30 September 2021.

Note that submitting a VRET 2 bid for a project at permit application stage will not trigger any preferential treatment or fast-tracking through the planning approvals system. Even if a permit application has been submitted, the planning permit must be obtained by 31 March 2021 to maintain eligibility.

Proponents are also required to identify potential social and environmental impacts associated with their project and explain how such impacts will be mitigated.

Local Requirements

VRET 2 places a strong emphasis on local content and local jobs to ensure that more of the work generated by Projects supported by the auction is delivered in Victoria, with obligations on Proponents to share the benefits of their Project with the local community.

In addition to adhering to policies under the Local Jobs First Act 2003 (Vic), Proponents should be aware that:

• overarching minimum local content requirements have been set under VRET 2 (which vary depending on the proposed project);
• Proponents must consult with Apprenticeships Victoria as part of the Major Project Skills Guarantee to identify opportunities for local apprentices and trainees; and
• a compliant Local Industry Development Plan must be provided and an acknowledgement letter from the Industry Capability Network must be submitted as part of the bid.

Termination for convenience

The State’s ‘termination for convenience right’ under the Support Agreement has been retained from VRET 1 with a slight amendment that the State’s notice requirement to trigger the termination of the Support Agreement has been extended from 10 days to 6 months. While compensation is payable by the State to the seller if the clause is triggered, it is limited to the outstanding debt and associated costs of terminating the Seller’s funding agreements at the date of termination. This is the same position as in VRET 1.

How HSF can help

HSF has a market leading full service renewable energy project and project finance team in Australia and Victoria. Having advised on three of the six successful first round VRET projects, we are perfectly positioned to assist with prospective bidders with their participation in VRET 2.