Capacity Investment Scheme update and the release of the Dispatchable CISA

Since our last update on the Capacity Investment Scheme (CIS) in December 2024, AEMO has sought and received tenders for an indicative volume of 2.4GWh of dispatchable capacity via the South-Australia-Victoria CIS tender process. AEMO has shortlisted a number of proponents and those proponents are required to submit their Stage B – Financial Value Bids by 31 May 2024.

The Dispatchable CISA

As part of this process, an updated proforma of the Dispatchable Capacity Investment Scheme Agreement (Dispatchable CISA) was released to the market, together with a payment mechanism calculator tool which can be used to demonstrate how payments are calculated under the Dispatchable CISA.

We have summarised below some of the key changes in the proforma Dispatchable CISA and how these changes may impact proponents.

LOR3 events

One of the most notable changes in the proforma CISA from the previous draft was the removal of the provisions relating to Lack of Reserve 3 (LOR3) events declared by AEMO.

A LOR3 event may occur where there is a severe shortage of available energy reserves compared to energy demand, such as during a period of very high demand or unexpected generator outage. A LOR3 event is the most extreme event and will only occur where there is an actual deficit in the supply/demand balance. The occurrence of a LOR3 event may require controlled load shedding to protect the system security of the electricity network and avoid damage to infrastructure. In recent years, actual LOR3 events have occurred in:

• February 2017 in South Australia due to extreme temperatures resulting in high demand for energy;
• February 2017 in New South Wales due to extreme temperatures resulting in high demand for energy at the same time as some key gas generators being unavailable and other thermal generators reducing output;
• January 2019 in Victoria due to extreme temperatures resulting in high demand for energy at the same time as there was reduced generation capacity;
• February 2024 in Victoria due to the impact of a catastrophic storm event that damaged powerlines and caused subsequent generator outages.

Treatment of LOR3 events in the original draft Dispatchable CISA

The original Dispatchable CISA required that proponents bid at least 50% of its contracted capacity during an actual LOR3 event and to use reasonable endeavours to bid all of its contracted capacity for each trading interval during that event. If a proponent failed to bid at least 50% of its contractual capacity during an actual LOR3 event, this would have resulted in a reduction in the support payments payable to the proponent under the CISA.

Industry feedback on the LOR3 regime

One of the consistent themes in energy industry feedback to the original Dispatchable CISA was that the LOR3 regime in the CISA could adversely impact the Commonwealth’s aims for the Capacity Investment Scheme for the following reasons:

• storage facilities would need time to charge to be able to meet the requirement to bid at least 50% of their contracted capacity during a LOR3 event;
• if proponents believed a LOR3 event was imminent, the LOR3 provisions may have meant that proponents elected to charge their facilities to be able to meet their contractual obligations under the CISA, which could worsen market conditions by increasing load and thereby increasing the likelihood that a LOR2 event leads to an actual LOR3 event;
• the LOR3 regime could mean that proponents were incentivised to reserve capacity at all times to ensure that they can respond to a LOR3 event. Reserving capacity in this way could impact project revenues (and therefore bankability) and reduce capacity that would otherwise be available to respond to Lack of Reserve events earlier or to provide other network services.

Proponents and industry bodies also argued that the market signals around Lack of Reserve events (i.e. higher pricing) would already be sufficient to drive the bidding behaviours that the Commonwealth was seeking to enshrine in the Dispatchable CISA.

The removal of the LOR3 regime in the proforma Dispatchable CISA suggests that the Commonwealth has accepted concerns from the market in relation to the potential negative impacts of the LOR3 regime under the draft Dispatchable CISA.

Other notable changes in the proforma Dispatchable CISA

In addition to the removal of the LOR3 regime, other notable changes in the proforma Dispatchable CISA are as follows:

• Termination: The termination regime has been expanded to allow for a proponent to terminate the CISA for a default by the Commonwealth;
• Assignment and novation: The Commonwealth’s assignment and novation rights have been clarified to permit assignments and novation without a proponent’s consent where the assignment or novation is to a government agency which has been guaranteed by the Commonwealth;
• Change in Law: The Change in Law regime has been clarified but remains very narrow (e.g. changes in law must apply expressly or exclusively to the relevant project, facility, its assets, the project area or the relevant proponent), which means that a proponent’s main protection for Change in Law risk is via the support payments that could apply under the CISA if the revenue floor is hit; and
• Key Subcontractors: The Commonwealth’s consent right for the engagement of Key Subcontractors has been clarified so that a deemed consent will apply if the Commonwealth has not responded with a specified period of time. However, no material changes have been made in respect of the Commonwealth’s rights in respect of Key Subcontractors, including the extensive access, records and reporting obligations, which may be difficult for proponents to pass through to their subcontractors.

These changes show that the Commonwealth is taking into account market feedback in designing the contractual arrangements for the Capacity Investment Scheme. However, proponents will still need to carefully consider whether the support offered by the Dispatchable CISA is sufficient enough to justify the additional obligations imposed on proponents.

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.