Capacity Investment Scheme now open for business: will it solve the capacity conundrum?

By Lisa Zhou, Skye Kirby, Lana Yang, Julia Arrighi, Jun Chong
Energy Renewable Energy

Pilot tender round and draft full form CISA launched 9 min read

The first standalone Capacity Investment Scheme (CIS) tender round is now well underway, with Stage A 'Project bids' submitted in February. Only clean dispatchable capacity projects in Victoria and South Australia (with a minimum storage duration of two hours and a minimum size of 30 MW) are eligible for this tender round. Virtual power plants, demand response and flexible loads are specifically excluded.

A shortlist of projects will be invited to submit Stage B 'financial value' bids in April, and successful projects are expected to be announced in mid-2024.

For the purposes of this tender round, a draft full form CIS agreement (CISA) was published in December 2023, and Stage A bidders were invited to provide feedback on the draft (for information, not evaluation) as part of their bid. A final form CISA will be published for the purposes of Stage B.

While we wait to see the final form clean dispatchable CISA and to hear the results of the tender round, we consider the current state of play.

Key takeaways

  • The Federal Government is rolling out the expanded CIS regime at pace.
    • The first pilot round was a combined LTESA/CIS round in NSW and saw contracts awarded in November 2023 to six projects, totalling 1,075 MW of reliable capacity.
    • The second pilot round (and first 'standalone' CIS round) for clean dispatchable projects in Victoria and South Australia is well underway.
  • CIS design and implementation continues to evolve. In March 2024, the Government conducted a further consultation, specifically on the CIS implementation design and CISA products.
  • Our comparison of the draft full form clean dispatchable CISA  against the September draft term sheet indicates that the Government has sought to more closely align the terms of the CIS underwrite with the firming LTESA.
  • For a deeper dive into the draft clean dispatchable CISA, please see our companion Insight

Quick recap: what is the CIS and why is it important?

The CIS is a national scheme designed to boost investment in the energy transition. It was developed by the state and Federal Governments following the wide rejection of proposed reforms to introduce a capacity market. Although initially targeting 6 GW of dispatchable capacity, in November 2023 the Government announced an expansion of the CIS to:

  • deliver an additional 32 GW of new capacity by 2030, equivalent to around half of the current National Electricity Market (NEM) (expected to comprise 23 GW of renewable capacity representing $52 billion in investment, and 9 GW of clean dispatchable capacity representing $15 billion in investment);
  • support electricity generation growth and reliability in Australia's rapidly changing electricity markets as ageing thermal power stations exit; and
  • support the delivery of the Government's 82% renewable electricity by 2030 target.

The CIS is being implemented through two key instruments:

  • long-term government support agreements (ie CISAs) awarded to successful projects, whereby the Government effectively underwrites a project against an agreed revenue 'floor' and 'ceiling'. As with other forms of government support, the contracts aim to provide long-term revenue certainty to mitigate financial risk for debt and equity, and encourage investment in renewables; and
  • Renewable Energy Transformation Agreements (RETAs), negotiated between the Government and each of the state and territory governments to incentivise the jurisdictions to provide a favourable environment for renewables investment in return for their allocation of federal CIS funding.

The Government has indicated that of the target 32 GW for the CIS, 14 GW will be rolled out through CIS tender rounds, and the remaining 18 GW delivered through RETAs.

For a more detailed overview of the CIS regime, refer to our previous Insight.

How has the CISA evolved since September?

Following the September draft of the CISA term sheet, a draft full form CISA was issued for the current Victoria and South Australia clean dispatchable tender round.

The Government has indicated that, going forward, there will be two types of CISA products available: a generation CISA and a clean dispatchable CISA (see further below). We can expect that the terms of these agreements will continue to evolve following the pilot tender round in Victoria and South Australia, and to reflect feedback received through the March consultation.

So far, the main trend in the evolution of the CISA is closer alignment with LTESA approach. Key changes are below:

Performance risk more aligned with LTESA approach
Then Now
As noted in our previous Insight, LTESA proponents may have more flexibility as their performance obligations only bite when they exercise their option, whereas CISA projects must meet their capacity and system stress event obligations throughout the term of the CISA. In its March consultation, the Government sought submissions as to whether the CISA should adopt the same option structure as LTESAs. The CISA performance regime more closely resembles the LTESA performance regime in other ways too: the performance obligations, including in relation to 'Lack of Reserve' load shedding events (known as 'LOR3 events'), are very similar, as are the rebates that apply if these performance obligations are not met.
Connection status criterion tightened
Then Now
In our previous Insight, we noted that, for CISA purposes, applicants were only required to have 'engaged' with an NSP, whereas LTESA applicants (other than Demand Response projects) were required to have either a connection agreement or an NSP response to a connection enquiry. Similar to LTESA applicants, CISA applicants are now required to have either received an NSP response, executed a connection agreement or be seeking to amend an existing connection agreement. We do note, however, that AEMO Services, which is administering the CIS on behalf of the Government, has the discretion to waive this criterion if it is satisfied that these requirements are highly likely to be fulfilled within a reasonable period of time and there are exceptional circumstances.
Technology requirements relaxed
Then Now
In our previous Insight, we noted that CISA storage projects had to be capable of charging from the grid only, whereas LTESA projects were not subject to any such restrictions, meaning it might be easier for 'co-located' storage projects to obtain an LTESA than a CISA. The fuel source for a CISA storage project may be either charging from the NEM or certain renewable energy sources. In the public webinar held by the Government on 8 March, it was explained that the CIS aims to be technology neutral and that all forms of renewable technology will be considered, so long as they satisfy the eligibility and merit criteria (including the requirement that the projects must be an eligible renewable energy source or charge from the NEM). Certain technology types (including VPPs) were excluded from the current pilot tender round but may be included in future tender rounds if the Government is satisfied as to their ability to contribute to reliability outcomes.

The implementation design paper published in March also proposes that, going forward, two CISA products will be on offer:

  • a Clean Dispatchable CISA for clean dispatchable generation projects capable of dispatching at a registered capacity of two hours or more, such as a battery; and
  • a Generation CISA to support clean renewable projects that will be registered as a generator for the purposes of central dispatch, such as a wind farm.

This is similar to the LTESA regime, which provides separate products for generation, firming capacity and long duration storage.

These CISA products will share several commercial characteristics, including milestone regimes and payment mechanisms. The performance requirements will differ in that Generation CISAs will need to achieve a minimum level of generation, while projects awarded with Clean Dispatchable CISAs must bid at least 50% of their contracted capacity during a LOR3 event, maintain a minimum level of storage capacity and have at least 90% availability during the support year.

What's next for the CIS?

As explained above, the CIS is being implemented through tender rounds and the RETAs.

Little public information is available on the status of the RETAs. In its post-meeting communique on 1 March 2024, the Energy and Climate Change Ministerial Council noted its commitment towards working to conclude RETAs prior to the launch of the CIS auctions in May (presumably a reference to the NEM-wide tender round for generation capacity scheduled for Q2 2024—see below).

Stage B of the current tender round in Victoria and South Australia (and publication of the final form clean dispatchable CISA) is scheduled for April 2024, with contract awards to be announced in mid-2024. The consultation paper indicates the following schedule for future tender rounds:

Q2 2024 NEM-wide tender round for 6 GW generation capacity.
Q4 2024 NEM-wide tender round for 4 GW renewable capacity and 3 GW dispatchable capacity.
From then on Six monthly tender rounds until 2027 (noting that any pre-existing tender round will not necessarily need to complete before the next tender round opens).

Project stakeholders who are considering bidding in these tender rounds will need to closely monitor the CIS regime as it continues to rapidly evolve, in particular the results of both the current tender round and the consultation.