What REZ projects can expect from the New South Wales access right arrangements and LTESAs 11 min read
Since publishing our previous Insights examining the key Renewable Energy Zone (REZ) initiatives being pursued around the NEM, the New South Wales Government has forged ahead with implementing its Electricity Infrastructure Roadmap, having:
- formally declared two of the five proposed REZs, and published a draft declaration for a third REZ;
- commenced a tender process to appoint a network operator for the Central West Orana REZ (CWO REZ);
- published draft REZ access standards for consultation1; and
- on 11 April 2022, commenced an expression of interest process to appoint 'Candidate Foundation Generators' for the CWO REZ.
Ahead of the:
- publication of further details regarding the streamlined connection process proposed for REZ projects later this month;
- market briefing expected to occur later this quarter regarding the competitive tender process to be conducted by AEMO Services Limited at regular intervals to award Long Term Energy Service Agreements (LTESAs) and access rights2; and
- the initial auction of access rights for the Central West Orana REZ and LTESAs, expected (in Q4) later this year,
this Insight examines the concept of Candidate Foundation Generators and what REZ projects can expect from the New South Wales access right arrangements and LTESAs.
On 11 April 2022, EnergyCo (as the Infrastructure Planner under the Electricity Infrastructure Investment Act 2020 (NSW)) commenced an expression of interest process to appoint 'Candidate Foundation Generators' (CFGs) for the CWO REZ.
This EOI process is separate from the access rights and LTESA tenders to be conducted by AEMO Services Limited; and being awarded CFG status does not guarantee a project will be awarded an LTESA or CWO access right. Rather, CFGs will have the opportunity to participate in an engagement process with EnergyCo and, potentially the shortlisted proponents for the CWO network operator role, that will inform the design of the network infrastructure for the CWO REZ.
This will be achieved by coordinating the CFG engagement process with the network operator procurement process to enable:
- the design of the REZ network infrastructure to be informed by additional market data regarding likely REZ projects and locations;
- an integrated program for delivery of the REZ network infrastructure and REZ projects to be developed (including integrated testing and commissioning phase for energisation from 2026); and
- coordination and design of centralised services such as system strength, environmental planning, community engagement and social licence initiatives.
Expressions of Interest for CFGs are due by 9 May 2022 and will be assessed against the following elements:
- Size and location – projects must be at least 250MW and able to connect to one of the three CWO 'Stage 1' energy hubs3 from 2026.
- Project development status – the current project status, including how advanced the project design is, whether a planning approval process has commenced and whether land tenure (or options) has been obtained.
- Quality of developer – EnergyCo will also consider the project developer's track record and prior experience in developing comparable projects.
- Financing – the strategy for financing project development expenses and current status thereof.
The REZ access scheme will be based on a physical connection model and, similar to current NEM network connections, provide REZ projects with a 'non-firm' access right. In contrast to the current NEM network access arrangements, the REZ access scheme aims to provide REZ projects with greater certainty about network curtailment risk through a target transmission curtailment level set by reference to optimised and efficient utilisation of the REZ transmission network4.
Access rights will be allocated to REZ projects in three allocations, according to the following hierarchy:
Access rights will be allocated up to an initial Aggregate Maximum Capacity Cap, intended to be based on modelling of an 'efficient level of over-subscription' to the REZ network. Successful projects will be allocated a maximum capacity for each of the four periods during the day – dawn, day, dusk, and night.
If, once the Allocation 1 rights have been exhausted, EnergyCo identifies that the target transmission curtailment level of the REZ Scheme Network is not forecast to be met, then it can revise the Aggregate Maximum Capacity Cap and allocate additional access rights in respect of the identified 'headroom capacity'.
Given the timetable for the competitive access right and LTESA auctions proposed by AEMO Services Limited in its Infrastructure Investment Objectives Report, and the flexibility that AEMO Services has regarding the size of each auction and whether or not to award access rights/ LTESAs up to that volume in each tender, it is possible that the Allocation 1 and 2 access rights may not be fully allocated in a single tender round but rather awarded progressively over time.
This third allocation of access rights is intended to provide a mechanism for the market to fund REZ network augmentations to allow the creation of additional access rights without harming Allocation 1 or 2 access right holders. This would occur on an ad hoc basis.
Subordinate access rights
EnergyCo would also have the power to introduce a framework for subordinate access rights provided that such framework is designed on the premise of subordinate access right holders 'doing no harm' to existing access right holders – it's envisaged this might be needed where, for example, the actual technology mix in the REZ is materially different to the forecasted mix and subordinate access rights are required to improve utilisation of the REZ infrastructure.
The REZ access rights scheme design distinguishes between:
- REZ network infrastructure – being that infrastructure included in a REZ declaration, and which may include existing infrastructure that is within, or outside of, the geographical boundary of the new REZ; and
- REZ scheme network – a subset of REZ network infrastructure that supports the REZ intended network capacity and to which access rights will be granted.
It's a function of the NEM's interconnected transmission system that projects holding an access right to the REZ scheme network can still have their ability to export/import from the NEM curtailed and their Marginal Loss Factor impacted by the capacity and system strength of the broader transmission system.
To the extent that projects seeking to connect to existing REZ network infrastructure that is not part of the REZ scheme network could impact REZ projects, the NSW Government is considering the following options to preserve commercial incentives for REZ access rights holders:
Regardless of which option is adopted, projects that have development approval, or have submitted an application to connect within six months after publication of the relevant access scheme declaration, would not be subject to this access control mechanism.
Another key component of the REZ initiative are LTESAs. LTESAs are contracts containing a series of options for:
- short term swaps, in the case of generation LTESAs; or
- annuity top-up contracts, in the case of long-duration storage LTESAs.
The LTESAs have been designed to operate more like insurance than a typical offtake contract and are intended to provide minimum cash flows for projects in the event of low electricity prices (and associated revenues).
LTESAs will be awarded through the competitive auction process conducted by AEMO Services Limited and, while LTESAs are not restricted to REZ projects, it's a statutory requirement5 that projects not within a declared REZ must demonstrate 'outstanding merit' and have equivalent or better grid outcomes, community engagement and benefits and financial value.
Draft term sheets for the LTESAs and associated Project Development Agreements are available on AEMO Services' webpage and, while many of the provisions are similar to typical offtake contracts, some key points to note are:
Social licence commitments
One of the energy transition challenges is doing it sustainably, not just from an environmental impact perspective, but also from a community perspective. To this end, and reflecting the NSW Government's focus on ensuring there is broad public support for the REZ initiative, particularly in communities impacted by REZ infrastructure, the LTESAs impose binding social licence commitments on projects.
Social licence commitments will be familiar to sector participants who have previously participated in government procurements. During the competitive auction process, projects will have to bid their nominated commitments in the following areas, taking into account recommendations made in the NSW Renewable Energy Sector Board's associated plans:
- First Nations consultation, employment and content;
- local content employment quotas;
- community engagement obligations; and
- regional economic development initiatives.
A failure to fulfil the commitments results in a project losing the ability to exercise options under its LTESA and may also be required to pay a liquidated sum to enable commitment to be carried out by another entity.
The generation LTESA term sheet contemplates three contract structures (fixed shape/fixed volume; variable volume (generation-following); and green product only). AEMO Services has indicated a preference for fixed shape and fixed volume and, while the other structures were introduced following market feedback, a preference for fixed shape/fixed volume appears to remain, with the LTESA terms for the other structures leaving additional risks with the project (such as force majeure risk and network congestion/curtailment risk).
Fixed price vs repayment threshold price
If an option for a swap is exercised, the fixed price payable under the swap is intended to be set at a level that provides the project with the minimum revenue required to cover debt service repayments, meaning it will likely be lower than a typical offtake agreement fixed price.
Projects are also required to bid a repayment threshold price (which is expected to be set at a level that includes an equity return). Where the project's dispatch weighed average price exceeds the repayment threshold price in periods where no swap is operating, the project may be required to repay up to 75% of that portion of its dispatch weighed average price above the repayment threshold price.
This repayment obligation is capped at 100% of the historical cumulative net LTESA payments received by the project. To incentivise projects to enter into wholesale market contracts, and not to rely on LTESA payments, projects with an eligible wholesale market contract are also eligible for additional relief (and can also receive up to a full reduction of any applicable repayment obligation).
The default position for generation LTESAs is that the fixed price is a bundled price and that Scheme Financial Vehicle (as the project's counterparty under the LTESA) is entitled to all green products and black products associated with generation that is the subject of an LTESA swap.
'Black products' are defined to include any payment, credit, compensation or similar right or benefit attributable to the capacity or availability of the project. If the Scheme Financial Vehicle requests, projects will be obliged to monetise black products (and potentially green products not transferred) and account to the Scheme Financial Vehicle for the cash equivalent.
Long-duration Storage LTESAs
Once an option under a long-duration storage LTESA is exercised, it operates such that the LTESA annuity payment would top up the project's net operational revenues to the threshold net revenue amount bid by the project (such amount being the minimum revenue required to cover debt service repayments). Similar to the repayment mechanism for generation LTESAs, above the threshold net revenue amount, net operational revenues are shared between SFV and the project (up to 50% of the amount the project's dispatch weighted average price exceeds the threshold price).
The annuity payment is contingent upon the project meeting the availability threshold of at least 97% for the relevant period. If the project fails to achieve this, it is liable to pay the Scheme Financial Vehicle an availability rebate for availability shortfalls (capped at 20%).
Projects will have significant flexibility in how they operate, subject only to limited requirements that they register with AEMO, and participate in good faith, in all available markets.
The Long-duration Storage LTESA term sheet excludes a change in the transmission use of system charges that may be payable by the project from the change in law provisions. Instead, projects can claim a one-off annuity adjustment within two months after signing a connection agreement that requires the project to pay TUOS. It remains to be seen what approach the market will take to this restriction, which may adversely affect projects signing up to 'first generation' LTESAs (and whose connection agreements may permit TUOS passthrough) who would be time barred from claiming TUOS relief as compared to projects signing LTESAs at a later stage, when there may be a clearer indication of the likely TUOS impact of the review of network charges flagged by the AEMC in the Integrating Energy Storage Rule Change.
Projects looking to participate in the CFG engagement process, or make submissions on the access standard consultation papers, should note the following key dates:
- 27 April 2022 – submissions on the draft REZ access standards due
- 9 May 2022 - CFG expressions of interest due
As the processes to develop and implement these reforms continue, there will be opportunities for sector participants to be involved, both in consultation on the arrangements proposed for the CWO REZ and other NSW REZs and participating in the resulting projects.
We continue to track the development of these (and other) energy reforms – our analysis of which can be found on our Energy hub.
The consultation package can be found on the NSW Government’s Renewable Energy Zones webpage.
The market briefing replaces the pilot LTESA auction that AEMO Services Limited had initially proposed to conduct in Q2, 2022.
There are currently three 'Stage 1' Energy Hubs proposed for the CWO REZ – the Elong Elong, Merotherie, and Uarbry Energy Hubs, with a fourth under consideration (Burrendong Energy Hub).
Indicative modelling suggests that the target transmission curtailment level will be set at 0.3% of the annual volume of forecast generation availability for Allocation 1 projects.
Section 48(3) of the Electricity Infrastructure Investment Act 2020 (NSW).