Capacity Investment Scheme Tender 3 Update

Since our last update on the Capacity Investment Scheme (CIS) in May 2024, the Australian Government has released a Market Brief on the upcoming CIS Tender 3 which is scheduled to open for registrations and bid submissions on 13 November 2024.

In this article we summarise the market briefing and some key changes to the bid process from previous tenders.

Tender 3 overview

The market brief gives potential Proponents an overview of Tender 3 and an update on the policy positions for the tender. Tender 3 is a competitive bid process to secure clean dispatchable capacity in the National Electricity Market (NEM) under the CIS. The indicative target is for 4 gigawatts of four-hour equivalent dispatchable capacity, or 16 gigawatt hours.

Proponents bid for a contract with the Australian Government which will provide partial revenue support for nominated periods where the net revenue of the Project falls below an agreed floor, and requiring payment for a percentage of net revenue to the Australian Government when the net revenue exceeds an agreed ceiling.

Process

Timeline

The Tender 3 timeline is as follows:

• Process commencement date 13 November 2024 – Tender Guidelines are released, registration and bid submissions open
• Registration closing date - 9 December 2024
• Stage A – Project Bid closing date - 16 December 2024
• Invitation to submit Stage B – Financial Value Bid - March 2025
• Stage B – Financial Value Bid closing date - May 2025
• Announcement of successful bid - September 2025

All dates are indicative with final dates communicated throughout the tender process.

Proposed Merit Criteria and policy positions

To be considered for the Tender, bids must meet Eligibility Criteria to be published at the commencement of the Tender 3 process. Compliant bids will then be assessed against nine proposed Merit Criteria split across two Stages, notably:

• the Project’s impact on the electricity system, focusing on ability and reliability to provide essential system services and contribute to system strength.
• the Project’s feasibility to reach commercial operation date (COD), whilst articulating strategies for mitigating delivery risks. The Target COD is 31 December 2029, but in general earlier project CODs with contractually enforceable milestones will be viewed more favourably. Further, the track record of the Proponent will be examined to ensure the Project can be delivered in alignment with the Project Bid.
• the Proponent’s approach to engagement strategies and understanding of First Nations communities, with focus on culturally aware engagement and the potential for shared economic and social benefits. Separately, the Proponent’s attention to local support will be evaluated, including the project’s engagement strategies, and their understanding of stakeholders and local communities.
• the financial value and system benefits of the Project. This includes an evaluation of the Project’s cost-effectiveness and its contribution to system reliability, as well as its ability to support the government’s 82% renewable energy target by 2030. Any commercial departures from the proforma project documents, particularly the Dispatchable Capacity Investment Scheme Agreement (CISA), will be examined and the resulting risk transfer assessed.

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

Notable changes

Several key changes distinguish Tender 3 from previous tenders.

• Hybrids: Hybrid projects can participate in either Tender 3 or Tender 4, but not both. A separate market brief for Tender 4 will be published in mid-November.
  
  Hybrid projects can now only bid as Non-Assessed Dispatchable Assets, meaning the Associated Project (the Generation Asset) will not be included in the assessment of the Proponents’ bid. Further, there will be no obligation for the Proponent to deliver the Generation Asset under the terms of the CISA.
  
  In previous dispatchable tenders, the cost of charging for hybrid projects was not considered. Tender 3 Hybrid Projects will standardise the cost of charging the Storage Asset from either the Generation Asset or the grid to ensure these costs are identical, with exceptions to prevent the Australian Government from underwriting price risks not significantly impacting the Hybrid Facility. Depending on the specific scenario, the wholesale cost of charging under the Hybrid Dispatchable CISA will vary.
   
• First Nations:
  
  Eligibility Criteria: A new First Nations eligibility criterion requires proponents to demonstrate intent and commitment to comply with First Nations legal protections. This includes a warrant that Proponents have not previously breached First Nations protection laws, including the Racial Discrimination Act 1975 (Cth), Aboriginal and Torres Strait Islander Heritage Protection Act 1984 (Cth), Environment Protection and Biodiversity Conservation Act 1999 (Cth), and Protection of Movable Cultural Heritage Act 1986 (Cth).
  
  Merit Criteria: The new merit criteria for First Nations will be separated from the merit criterion for community outcomes to allow distinct assessments. Higher merit will be attributed to projects demonstrating strong First Nations and community engagement, local content, and employment targets.
  
  Projects will receive higher merit scores under the First Nations merit criteria if they fund programs to help First Nations people enter the workforce and remove known blockages (e.g., trade skills and licensing requirements, small business readiness programs). They will also be viewed more favourably if they meet the Australian Government’s Indigenous Procurement Policy targets (2.5% to 3% from 2025 to 2027 for Commonwealth non-corporate entities).
   
• Local content and employment
  
  In contrast to Tender 1, Tender 3 Projects are guaranteed to be of higher merit if they can meet local content and employment targets. Local content targets are based on those established by the NSW Renewable Energy Sector Board Plan, including the stretch goal of steel products and components being composed of 95 per cent locally milled steel. Local employment targets are based on the Australian Skills Guarantee (ASG), which set target percentages for work hours on the project to be undertaken by trainee/apprentices and female employees.

Eligibility of wholesale contracts

Eligible Wholesale Contracts are agreements that Proponents may enter which allow participation in the contracts market. They do not affect the CISA but revenue received under them will be considered project revenue for the purposes of determining a Project’s net revenue in a period under the CISA.

• Automatically eligible contracts: Fixed-fee physical and virtual tolling arrangements with non-related parties may qualify as Eligible Wholesale Contracts. These arrangements must be bona fide commercial agreements entered into on an arm’s length basis.
• Related party contracts: Wholesale contracts between related parties will not be considered Eligible Wholesale Contracts for Tender 3. A Wholesale Contract with a related party is any generation transaction with a related body corporate as defined in the Corporations Act 2001 (Cth).
• Provisionally eligible contracts: Where a contract is not automatically eligible per the first dot point above, the Australian Government may use its discretion to deem a contract eligible (including for related party contracts) if it demonstrates:
  
  - A direct relationship with the dispatch capabilities and operational constraints of the CISA asset.
  - Market liquidity and price transparency, allowing for benchmarking of prices and terms.
  - Transparent risk allocation, with risks equitably assigned to the parties best able to price and manage them.

How Herbert Smith Freehills can help

HSF has a market leading full service energy team who are experts in storage and hybrid projects. We have helped our clients on bids in each previous round of the CIS and can advise you on the operation, risks and bankability of the CISA documents.