Capacity Investment Scheme open for business for the WA energy market

The capacity investment scheme (CIS) is now open for the first time in Western Australia for large scale clean energy projects seeking to operate in the WEM. 

The CIS is a revenue sharing mechanism with the Australian government. We anticipate the introduction of the CIS will play a positive role in reducing the financial uncertainties associated with new projects. However, it is but one piece of the puzzle in Western Australia’s pathway to net zero and the government’s goal to becoming a renewable energy powerhouse. 

Snapshot

• The CIS is available to renewable energy projects located in WA and connected to the SWIS with a capacity of at least 30MW.
• The CIS will operate in tandem with the Reserve Capacity Mechanism. A project’s bid will be assessed on its ability to receive capacity credits and operate within that scheme.
• Registration for tender 2 closes on 12 August 2024 and project bids will be accepted until Monday 19 August 2024. Future tender rounds will occur every 12 months until 2027.
• The success of the CIS in WA will be heavily dependent on there being a credible development pipeline of eligible projects. It remains to be seen whether the CIS, in connection with the WA government’s related initiatives and policies, will provide the necessary backing needed to achieve the levels of investment required for WA’s climate and energy transition goals.

What is the CIS?

The CIS is a national government scheme which seeks to incentivise the development of dispatchable renewable energy sources. It is designed to support the retirement of coal fired power stations and to deliver on the Australian government’s target of 82% renewable electricity by 2030, equating to an additional 32GW of capacity.

Under the scheme, the national government underwrites the revenue of successful projects, with an agreed revenue floor and ceiling.

To deliver on the government’s targets, it is intended that tenders will be held every 12 months in the WEM and every 6 months in the NEM until 2027.

Application of the CIS to the WEM and tender round 2

The CIS was initially introduced to target projects in the NEM. An expansion of the CIS to the WEM was announced in November 2023, followed by the opening of tender round 2 for bids on 22 July 2024. Tender 2 seeks to deliver a target of 2,000 MWh across the WEM.

Registration for tender 2 closes on Monday 12 August 2024 and project bids will be accepted until Monday 19 August 2024.

The indicative date for announcement of the successful projects is March 2025.

The detailed tender guidelines can be found here. 

Eligibility to participate in the WEM scheme

The following criteria must be met to be eligible for the scheme:[1]

Location	Located in WA and connected to the South-West Interconnected System (SWIS) Will be a registered facility under the WEM rules
Minimum requirements	Nameplate capacity of at least 30 MW Nameplate capacity dispatchable for at least 2 hrs
Technology type / fuel source	Eligible renewable source[2] and eligible to create LGCs Charge from the SWIS A combination of the above
Grid connection	Connection enquiry has been submitted to Western Power

Revenue sharing model

A successful bid will see the project enter a Dispatchable Capacity Investment Scheme Agreement (Dispatchable CISA) with the Australian government.

The Dispatchable CISA will provide for:

• partial revenue support (90%) from the Australian government if revenue falls below the agreed floor; and
• revenue sharing (50%) to the Australian government if revenue exceeds the agreed ceiling,

in each case, subject to an annual payment cap and for a term not exceeding 15 years.

A project proponent’s bid must include bid variables for the floor and ceiling values, an end date to the revenue sharing support and the annual payment cap.

Interaction with the Reserve Capacity Mechanism

The WEM operates with a unique Reserve Capacity Mechanism (RCM). The RCM seeks to ensure that there is sufficient generation capacity in the SWIS by:

• setting a reserve capacity requirement two years in advance, as published in the WEM Statement of Opportunities;
• allocating reserve capacity and capacity credits based on a project’s technical capability; and
• assigning individual reserve capacity requirements to each market customer, based on contributions to the peak system, to allocate the cost of capacity credits fairly.

Supplementary capacity is procured prior to the commencement of a capacity year if it is determined that there is insufficient capacity to satisfy demand.

In April 2024, feedback was sought on the design and rollout of the CIS to the WEM, to ensure that the scheme design would operate effectively within the RCM. Feedback from the consultation process was used to inform the design of the CIS to the WEM, including the tender guidelines and draft term sheets.

Successful CIS projects will be required to participate in the RCM as follows:

• bids will be assessed on the project’s ability to receive capacity credits; and
• payments under the CIS will be based on the capacity credits obtained by the project.

It follows that projects with a high ability to contribute to reducing WEM prices and volatility will receive favourable assessment in the financial merit criteria.

Limited application to renewable energy sources

As noted in paragraph 3 above, the CIS will not apply to gas fired generation. Since the release of the Australian government’s Future Gas Strategy[3], which supports the continued role of gas fired generation in the energy mix, criticism has been directed towards the decision to limit the availability of CIS incentives in the NEM to renewables. The view being that the future reliability of the energy system as a whole should be supported, including gas fired assets. This limitation will also apply to the WEM CIS scheme, notwithstanding that the WEM currently has a higher dependence on gas in the system than the NEM.

Can the scheme deliver on the hype?  

It is estimated that at least 50GW of new generation and storage will be required in the SWIS by 2042 and 4000km of new transmission lines.[4]

Despite the need for substantial investment in the sector, the development of new large scale renewable energy projects in WA (outside of batteries) has plateaued in recent years. This slowdown in growth has been attributed to several factors, including:

• uncertainty and delays in achieving grid connection;
• planning and environmental approval bottlenecks; and
• the need for large-scale improvements and upgrades to transmission.

Whilst the CIS is a positive step to support WA’s pathway to net zero and will contribute to overcoming some of the financial barriers to investment, the overall success of the rollout of the CIS will depend on there being a credible pipeline of eligible projects to secure funding. It can be expected that this will require, in conjunction with the CIS:

• A coordinated and streamlined approach being taken by government to the development of renewable energy projects, including the success of initiatives such as Powering WA[5] and the WA Green Energy Approvals Initiative.[6]

As an example, tender 2 seeks projects with a commercial operations date of no later than 1 October 2027. Projects that submit a commercial operations date after this time are unlikely to be assessed further.[7] As future tender rounds can be expected to have a commencement window of equivalent length, a project’s ability to compete in a tender will depend on it being able to demonstrate that it has a strong and credible path to project completion, including material progress towards securing land tenure, planning and regulatory approvals, grid connection and satisfaction of Traditional Owner and First Nations requirements. We are seeing delays in securing the above across renewables projects in Australia generally, which may delay the rollout of CIS projects in the WEM.

• The successful implementation of the transmission upgrades announced by the WA government in late-2023, it being widely acknowledged that there is no energy transition without better transmission. This includes detailed transmission planning to provide project proponents with certainty over the pipeline of future works.  
• Improvement of the processes and timelines for projects to achieve grid connection.