Bidding into the Capacity Investment Scheme? Plug into our deep dive into the clean dispatchable 'CISA'

By Lisa Zhou, Skye Kirby, Lana Yang, Julia Arrighi, Jun Chong
Banking & Finance Energy Energy regulation Renewable Energy

Pilot tender round and draft CISA launched 8 min read

The first standalone Capacity Investment Scheme (CIS) tender round, open to clean dispatchable capacity projects in Victoria and South Australia, is now well underway.

Stage A 'Project bids' were submitted in February for evaluation. A draft full form clean dispatchable CIS agreement (CISA) was published for the tender. Stage B of the tender round is scheduled for April 2024. Successful bids are expected to be announced in mid-2024.

Our analysis of the draft full form CISA against the term sheet published in September indicates that the Federal Government is seeking to more closely align the terms of the clean dispatchable CISA with the terms of firming LTESA. Given the success of the November LTESA tender round last year, the Government is no doubt hoping this strategy will see the current CIS tender round attract competitive bidding, ensuring value for money for taxpayers.

The results of the current round will be announced in mid-2024 — possibly after the next round of the CIS (expected in Q2 2024) has commenced.

Developers, investors and lenders must stay across these rapid developments to ensure they can accurately assess the CIS opportunity presented by each tender round.

For the bigger picture of the CIS as a whole, see our companion Insight. For a closer look at the draft clean dispatchable CISA, read on.

Key takeaways

  • CIS design and implementation continues to evolve. A combined LTESA/CISA tender round was successfully conducted for NSW in November last year. A 'standalone' CISA tender round is underway for clean dispatchable capacity projects in Victoria and South Australia.
  • Despite closer alignment with the firming LTESA, the draft full form clean dispatchable CISA presents a number of key issues for project stakeholders to consider. The key considerations cover a wide spectrum of project, development and bankability issues such as:
    • performance risk, especially with respect to onerous LOR3 system stress obligations for project owners;
    • termination risk resulting from a one-sided termination regime favouring the Government;
    • delay risk, including limited extension of time relief;
    • a narrow change in law regime; and
    • as a result of the above, the extent to which cashflows are bankable, especially given the potential clawback of revenue support payments and associated rebates regime.
  • Developers, sponsors and financiers of renewable generation and storage projects need to stay across these issues to accurately assess the opportunity presented at each tender round.

Project delivery issues

Despite closer alignment with the firming LTESA, there are several provisions in the draft clean dispatchable CISA that developers should carefully consider:

Onerous system stress obligations
  • Reliability outcomes are a key policy driver for the CISA, as reflected in onerous obligations for the project company in relation to system stress events (known as 'LOR3' events). A rebate applies such that failing to adequately respond to one or two LOR3 events in a support year may significantly or completely erode the support payment for that year.
  • LOR3 events do not always come with advance warning—the major power outage in Victoria in February provides a timely reminder that a LOR3 response may be required at very short notice.
  • This begs the question as to whether a CISA project is required to reserve capacity to ensure it can respond to a LOR3 event. This has potential ramifications for project profitability (as that capacity cannot be used for other purposes, such as arbitrage or providing network services) and for supplier warranties. It could also reduce the benefit to consumers of increased competition between merchant storage providers in the NEM.
One-sided termination regime favours the Government
  • The Government has broad termination rights that go wider than the government termination rights under the LTESA.
  • The project company has no termination rights, even in the case of government default.
  • Termination is automatic where the project company fails to achieve all of the conditions precedent by the CP sunset date.
Limited relief for delay and force majeure
  • Extension of time relief is only available in limited circumstances (caused by force majeure, which is narrowly drafted) and for certain dates.
  • Both Project Force Majeure Events and Connection Force Majeure Events are only declared in very limited circumstances, with the scope of these events being narrower than under the firming LTESA.
Narrow change in law regime
  • The definition of 'change in law' is narrow and, to some extent, out of step with the LTESA and other government contracts we have seen.
  • Changes in law relating to the description, categorisation and thresholds for LOR3 events are expressly excluded.
  • Additionally, the change in law regime only applies to change in law events that occur after the date of commercial operations.

Bankability issues

Being new, the clean dispatchable CISA has not been 'banked'. The most comparable Australian market precedent is the LTESA awarded to a number of BESS projects. To our knowledge, none of these projects have been project financed, though this may be due to the LTESA regime being relatively new itself, and that relatively few BESS projects have been project financed in Australia generally (and, where there has been project finance, a number of those projects have had other key sources of contracted revenues such as an offtake or tolling arrangement).

This is about to change. Momentum for new investment in firming and storage projects is rapidly building, and we anticipate growth in project financing in this space. As a result, it will be important for developers and financiers to consider the following bankability issues in assessing the relevant CIS opportunity:

  • Broadly speaking, where net revenue is below the agreed 'floor', the Government pays the project 90% of the shortfall, and where net revenue is above the agreed 'ceiling', the project pays the Government 50% of the revenue above the 'ceiling'.

    Proponents are required to bid their floor and ceiling, and they cannot be changed for the term of the CISA. Proponents must therefore ensure their bid variables will result in sufficient cashflows to meet future debt service, construction and operating costs.

    This will be difficult to model where, at the time of the bid, a project may not yet have project finance terms, construction and operation contracts, or certainty over other project costs (including those related to land and approvals).

    For proponents bidding for longer tenors under their CISA, it will also be difficult to forecast whether there are sufficient cashflows to cover potential increases to debt pricing on a refinancing.
  • Fixed support payments from the Government are made quarterly under the CISA, but the reconciliation process at the end of each support year may result in a 'claw back' payment to the Government. We expect lenders will, at a minimum, want comfort that cash reserving or another form of funding mechanic is in place to cover these 'clawback' payments.
Performance risk
  • A failure to adequately respond to a LOR3 event could result in complete erosion of the support payment for the relevant support year. Financiers will be focused on the project's strategies for rapidly responding to LOR3 events, including whether these align with operating procedures under supplier warranties.
  • In considering any strategy to manage LOR3 event performance requirements, proponents should also consider the implications for their offtake arrangements. The level of contracted revenues supported by an offtake remains key to the bankability analysis (despite the pressure for financiers to take on greater merchant exposure).
Delay risk
  • The CISA prescribes narrow grounds for extension of time relief, and automatic termination where conditions precedent are not met by the CP Sunset Date (refer above). Lenders will require comfort that adequate buffers have been built into the delivery timetable and key dates under the EPC and other material project documents.
Performance security
  • Within a short period after signing a CISA, proponents must provide performance security to the Government to guarantee the project's financial obligations. If project financing is not yet in place (and this is likely to be the case for many projects), proponents will need to provide this through existing bank guarantee credit lines within their corporate group or raise new bank guarantee credit lines.
CISA financier tripartite deed
  • The draft tripartite deed (a schedule to the CISA) is largely on usual terms, but we expect financiers to be focused on the usual negotiated provisions such as cure periods and enforcing party obligations during financier step-in periods. In order to minimise their departures, proponents may decide not to bid amendments to the tripartite, but there is no guarantee the Government will accept any financier requested changes down the track.

What's next for the CIS?

The CIS is being rolled out at pace, and CIS design and implementation continues to evolve.

Developers, sponsors and financiers of renewable generation and storage projects need to stay across rapid developments to accurately assess the opportunity presented at each tender round.

This includes monitoring the results of both the current tender round and the consultation.