Update: Commonwealth Electricity Capacity Investment Scheme

Since Herbert Smith Freehills' last update on the Capacity Investment Scheme (CIS) in July, the Commonwealth Government has released a Public Consultation Paper (Consultation Paper) for the proposed approach and design of the CIS.

Our previous article noted several potential eligibility criteria, as well as detailed the recently announced partnership between the NSW Government and Federal Government to increase the firmed capacity in Round 2 of the NSW Firming Infrastructure Tender. If you would like to read this article, it can be accessed here.

This latest Consultation Paper provides further details of the CIS tender process including eligibility requirements and merit assessment as well as information on the upcoming Victorian and South Australian tender auctions.

Background to CIS

The CIS is designed to support the reliability of the Australian electricity market through the provision of clean dispatchable capacity. The CIS will also help prevent fluctuations in energy prices as Australia transitions from thermal generation plants to clean energy technologies.

The CIS will only be available to projects that operate in established Australian electricity markets and will not be open to projects operating in off-grid electricity systems or small stand-alone electricity networks that do not have established and competitive wholesale electricity markets.

The Commonwealth Government expects the CIS as a whole to unlock around $10 billion of investment and add 6GW to support electricity grid reliability and security. The CIS is open to projects that achieved/achieve financial close from 8 December 2022 onwards and available for both publicly and privately owned projects. However, projects already receiving revenue support from Commonwealth or state and territory governments will not be eligible for CIS tenders (subject to the list of exclusions provided in the Consultation Paper).

The CIS will be progressively rolled out over from 2023 to 2027 and processed through a series of competitive tenders in which clean renewable generation and storage proponents will be selected to fill reliability gaps. Successful bidders will enter into long term Commonwealth underwriting agreements for an agreed revenue ‘floor’ and ‘ceiling’. The Commonwealth Government is expected to conduct a review from 2027 onwards as to the need for further CIS tenders.

CIS design

The allocation of the 6GW to individual states or territories under the CIS will be guided by a set of principles provided for in the Consultation Process. The principles focus on selecting target locations in a fair and objective manner that address the reliability needs of states through clean technologies and in a financially efficient manner.

Reliability targets will be determined from modelling the total dispatchable and non-dispatchable capacity required in each year to maintain reliability needs, in total and for each jurisdiction, and converted to capacity (MW) in medium storage equivalent. This will assist the Commonwealth Government in selecting which projects will meet the required needs.

In addition to allocating a capacity per tender, the Commonwealth Government will be allocating a MW Capacity and financial budget per tender. The MW budget will be publicised as a broad range and specific details of the capacity budget and the financial budget will be kept confidential to not undermine outcomes of the competitive tender process.

Eligibility requirements

Detailed eligibility requirements related to emissions for each tender round have not yet been provided by the Commonwealth, however, it is expected that bidding projects must:

• have a fuel source (e.g. hydrogen) or storage fuel source (e.g. BESS) that contributes to zero scope 1 emissions; or
• for storage projects only, be capable of charging only from the grid.

Dispatchable generator projects utilising renewable energy sources like wind, solar, hydrogen sourced from renewables, biomass and concentrated solar thermal will all be eligible. Coal and gas projects will not be eligible.

Variable renewable energy projects that do not generate electricity that is dispatchable and/or comprise a storage component that would enable the electricity to be dispatchable will not be eligible for support under the CIS due to their limited contribution to system reliability.

Storage projects that are stand-alone or physically co-located with generation will be eligible for the CIS tenders. This may include expansion projects to existing storage or generation assets, or the addition of new storage or generation assets to existing shared infrastructure.

Demand response projects may be eligible based on whether they contribute to the objectives of the CIS. For example, eligible projects may include participants in the NEM wholesale demand response market who can reduce demand for four hours or more. Whereas projects that do not substantially add to system reliability such as electricity retailers using virtual power plants to manage short-term price volatility within a trading portfolio will not be considered eligible.

The Commonwealth Government is currently seeking feedback from interested parties on its requirement that eligible projects have a minimum capacity requirement of greater than 30MW.

State specific tender requirements are also anticipated to form part of the tender process with prospective tender projects expected to demonstrate they hold the required land access, understand the required planning pathway and approvals and understanding of the grid connection process.

Merit Assessment

Successful projects will be selected based on demonstrating the highest level of merit as against the merit criteria. This involves a two stage process:

• Stage 1 – projects are assessed against technical, commercial and social license criteria with strongest performers shortlisted and invited to submit bids for round 2.
• State 2 – projects are assessed against their contribution to the policy objectives of the CIS, i.e. improving system reliability, cost-effective and lowering prices for consumers.

Further detail on the two stages can be found in the Public Consultation Paper.

CIS Implementation in States and Territories

The CIS will complement and work alongside existing state and territory schemes to help deliver the national energy transformation. To minimise duplication and disruption, CIS tenders will be integrated with existing state and territory schemes.

New South Wales

As highlighted in our July article, the CIS will be implemented in collaboration with the NSW Electricity Infrastructure Roadmap. This includes the announced firming tender to add an additional 550MW to firming capacity in NSW. The CIS combined with the NSW Government’s own scheme will deliver almost 1 GW of dispatchable capacity to eliminate the forecast shortfall in 2028/29 flagged by the AEMO.

Western Australia

The Consultation Paper highlights the needed for targeted consultation on how the CIS will be implemented into Western Australia’s electricity market. Unlike the eastern states, which operate through the National Electricity Market (NEM), Western Australia’s main electricity market is the Wholesale Electricity Market (WEM). Any implementation of the CIS into Western Australian markets will need to reflect the differences between the WEM and the NEM.

In western Australia, AEMO assesses applications for the provision of reserve capacity into the WEM via the Reserve Capacity Mechanism two years in advance. It is expected that CIS contracts issued in WA will be adapted to complement the existing Reserve Capacity Mechanism, for example, by supporting the entry of new, zero emissions plant which can participate in the Reserve Capacity Mechanism.

South Australia and Victoria

The next CIS tender is expected to be in late 2023 and open to projects in South Australia and Victoria. The Commonwealth Government has opted for a joint tender in Victoria and South Australia due to emerging reliability requirements and the highly interconnected nature between the two states.

The tender process is expected to include an eligibility requirement for projects to dispatch at a minimum duration of output at full capacity. As the duration requirement is set at a minimum threshold, longer duration storage projects could compete in the tender and the evaluation process will attribute greater value to longer duration projects. This approach is similar to the NSW Firming and Long Duration Storage (LDS) Long-Term Energy Service Agreement (LTESA) tenders, which prescribe minimum durations of 2 hours and 8 hours respectively, with longer durations being attributed greater financial value.

Further details are to be provided as to whether there will be minimum quotas per state jurisdiction. For example, whether the tender guidelines could specify that one-third of allocated capacity must be allocated to South Australia, one-third must be allocated to Victoria, and one-third could be allocated to either.

Consultation process

The Commonwealth Government is seeking feedback in response to its published eligibility and CIS tender process requirements. Proponents interested in providing feedback on the CIS may do so before Thursday 31 August at the Department of Climate Change, Energy, the Environment and Water’s website here.

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