Capacity Investment Scheme kicks off: what you need to know

By Kate Axup, Skye Kirby, Julia Arrighi, Jun Chong
Energy Renewable Energy

Better project support vs easier eligibility requirements 6 min read

Registrations for the first Capacity Investment Scheme (CIS) tender round in South Australia and Victoria are now open.

Under the CIS regime, successful projects will be offered long-term revenue agreements whereby the Federal Government effectively underwrites a project against an agreed revenue 'floor' and 'ceiling'. In this sense, the CIS agreements (CISAs) are broadly similar to the long-term energy service agreements (LTESAs) tendered by the NSW Government as part of their Energy Infrastructure Investment Roadmap. (In fact CISAs will not be available in NSW given the existence of LTESAs—see further below).

This Insight identifies some of the key differences between CISAs and LTESAs, and provides some thoughts as to which agreement provides better project support.

Key takeaways

  • The first CIS tender round for South Australia and Victoria will open for bids in mid-December 2023 and will seek 600MW of four-hour equivalent or 2400MWh of dispatchable renewable generation and storage.
  • The CIS will accelerate the investment required in generation and storage and will enforce performance obligations to support system reliability.
  • Projects already receiving revenue support from the government will not be eligible for CIS tenders.
  • Our initial analysis of the draft CIS terms against LTESAs suggests that—from a project perspective—LTESAs provide better revenue support overall, but eligibility requirements may be easier to meet for a CISA.

The CIS at a glance

Various government support mechanisms have been introduced at the state or federal level to underwrite investment in the energy transition.

The latest of these is the CIS, a national scheme which has evolved from the earlier unsuccessful proposal to introduce a capacity market and which the Federal Government says will 'unlock' at least $10 billion of new investment and 6GW of dispatchable power.

Our detailed review of the draft term sheet for a CISA, which the Department of Climate Change, Energy, the Environment and Water (DCCEEW) published for consultation from 12 September to 10 October 2023 (CISA Draft Terms Sheet), reveals there are important differences between CISAs and LTESAs for project proponents, investors and lenders to consider.

For example, unlike LTESAs which are effectively only 'switched on' when the project proponent exercises an option to access revenue support, a CISA provides revenue support—and, in turn, imposes performance and revenue sharing obligations—throughout the term of the agreement. This may be due to the policy driver behind the original capacity market proposal, ie ensuring that new dispatchable power underwritten by the Government is always available when it is actually needed, and in particular at times of system stress.

CISA vs LTESA: is one better than the other?

Noting the CISA terms are subject to further development following consultation, our initial view is that on balance, the LTESA wins out from a project perspective for the following reasons:

Less gainshare risk

The LTESAs are structured as short-term options, which provide a proponent with flexibility to call on those options only at times when (a) revenue is forecast to fall below the agreed floor and (b) the proponent is happy to accept the risk required to make payments to the state at a future time if revenue rises above the agreed ceiling. By contrast, the CIS is effectively an 'automatic' contract for difference, meaning a proponent whose project is profitable will always be required to share that upside with the state.

Less performance risk

LTESA projects are only required to perform to their bid capacity during times when an option is exercised, whereas CISA generation projects must meet their availability guarantee throughout the term—again, this affords LTESA proponents more flexibility in that, in deciding whether or not to exercise an option for revenue support, they can take into account their ability to meet the corresponding performance requirements at the relevant time. In addition, CISA projects (like firming LTESA projects, and consistent with the purpose of a capacity market) are required to specifically respond to a 'Lack of Reserve' load shedding event (known as a 'LOR3 event'), whereas generation and long duration storage LTESA projects do not have specific performance obligations at times of system stress.

More relaxed technology requirements

Generation LTESA projects need only involve a renewable energy source, whereas CISA projects must comprise only zero emissions technology. Likewise for storage LTESAs, no restrictions apply, but CISA storage projects must be capable of charging from the grid only—presumably this means it will be easier for 'co-located' generation and storage to obtain an LTESA than a CISA.

More relaxed registration requirements

CISA applicants must already be registered with AEMO, but LTESA applicants need only be intending to register.

However, it is worth noting that for some projects, it may be easier to meet the eligibility requirements for a CISA than for an LTESA. For example:

Connection status

CISA applicants need only have 'engaged' with an NSP, whereas LTESA applicants (other than Demand Response projects) must have a connection agreement, or an NSP response to a connection enquiry.

Planning approvals

CISA applicants need only demonstrate an 'understanding' of the planning and approvals processes, whereas LTESA applicants must have received a Secretary’s Environmental Assessment Requirements (SEARs) or lodged a development approval application, as applicable (though we note CISA applicants must also demonstrate secure land access).

Given the timeframes involved in the connection and approvals processes, this difference is significant.

How will the CIS sit with existing government support regimes?

The CIS is a national framework to increase dispatchable technology and has been designed to complement, not displace, other existing schemes in states and territories.

Where there are existing schemes, it is intended that the CIS tenders will be integrated—eg in NSW, CISAs will not be available given the existence of LTESAs, but the Federal Government will provide CIS funding to commit an additional 550MW of firming capacity for the LTESA tender round 2. This will more than double the initial 380MW capacity committed by the NSW Government for that tender round, increasing the capacity to 930MW.

The Tender Guidelines for Firming LTESAs indicate that the provision of CIS funding is expected to come with conditions to ensure alignment with the objectives of the Capacity Investment Scheme. It is not clear how this principle will be applied in practice, and whether it means, for example, that there will be a subset of LTESAs awarded according to different eligibility requirements in order to satisfy the criteria for CIS funding.

It is important for proponents to note that projects already receiving revenue support from the government (ie periodic or ongoing payments that are of a similar nature to payments under the CIS) will not be eligible for the CIS tenders. This is to ensure that projects do not access duplicate sources of government funding.

We understand that grants or investments from a federal or state government body (eg CEFC or ARENA), or certificates created under a federal or complementary state jurisdictional scheme (eg LGCs or the WA Reserve Capacity Mechanism capacity credits) will not be considered revenue support and projects in receipt of those will still be eligible for the CIS.

Will the CIS achieve its purpose?

Chair of the AEMC, Anna Collyer, has likened solving the energy transition to tackling a jigsaw puzzle with many moving pieces.

While government support mechanisms such as the CISA and LTESA are important tools in accelerating the enormous amount of investment required in generation and storage—perhaps even a 'corner piece' of the jigsaw—there are a multitude of other hurdles faced by new projects, such as social licence issues, connection delays, transmission access, network congestion, and materials and labour shortages.

Taxpayer funds will go much further to securing an orderly energy transition at least cost if government support mechanisms such as the CIS are accompanied by innovative regulatory reform to address some of these challenges facing new projects, particularly with respect to the connections process, transmission access and congestion relief.

If you would like to understand in more detail the similarities and differences between NSW LTESA terms and the CISA Draft Terms Sheet, please contact us and we would be happy to discuss.

What's next

Registrations for the South Australia and Victoria CIS are now open. The DCCEEW previously stated that a failure to register would not disqualify proponents from subsequently lodging a bid. However, the DCCEEW now states that registration is the first step in the South Australia and Victoria CIS tender process, suggesting that a failure to register may disqualify proponents from subsequently lodging a bid.