Australian Government joins the States in major underwriting of Clean Energy Investment

1. Overview and insights

The CIS can positively influence all three aspects of the energy trilemma (security, cost and sustainability).

The financial guarantees to be provided under the CIS can cut borrowing costs and deliver projects that the market would otherwise be unable to support and speed the development of clean energy projects.

However, the actual costs will not be known to the Government in advance. This is because the design of the CIS incorporates blind auctions and variable government contribution based on project revenue. Moreover, it does not directly address other Australian energy transition complexities such as planning approvals, supply chain, and transmission and connection.

2. Pilot Capacity Investment Scheme

Earlier this year, the New South Wales Government, under its Electricity Infrastructure Roadmap, and the Commonwealth Government, under its pilot Capacity Investment Scheme, held the first auction (CIS Auction 1). Six energy storage projects were successful in CIS Auction 1 – a combination of large-scale battery energy storage systems and some smaller virtual power plants engaging in demand response activities.²

As a key driver for the pilot CIS was to answer a potential supply gap from the planned closure of the country’s biggest coal fired power generator, the 2.88 GW Eraring facility, currently scheduled for August 2025, the successful projects are targeting commercial operations by December 2025. Their proponents have committed to delivering at least half their capacity when needed to respond to any LOR3 events that are declared by the Australian Energy Market Operator after that time. LOR3 events occur when the available electricity supply is equal to or less than the operational demand and no reserve supplies are available which can necessitate controlled load shedding.³

The Commonwealth Government has now opened registrations for the first capacity investment scheme tender round for South Australia and Victoria (CIS Auction 2)⁴. Bids for CIS Auction 2 will close on 21 February 2024 and will seek 600MW of four-hour equivalent or 2400MWh of dispatchable renewable generation and storage.

3. Expanded Capacity Investment Scheme

As noted above, just one day after announcing the successful projects for CIS Auction 1, the Minister for Climate Change and Energy announced the expansion of the Capacity Investment Scheme. Whilst the finer details are yet to be publicised, the key features have been announced, many of which mirror what was already in place.

31. Scope

The CIS has increased the target to 32 gigawatts, with 23 gigawatts of initiatives to become available for 'variable' generation assets (wind and solar) and the remaining 9 gigawatts to become available for 'dispatchable' energy and storage (batteries and pumped hydro). The design features for the variable generation assets are more opaque at this stage, as generation projects have not been included in the pilot rounds, CIS Auction 1 and CIS Auction 2.

3.2 Revenue floor and ceiling

Under the CIS, successful projects will be offered long-term revenue agreements whereby the Commonwealth Government effectively underwrites a project against an agreed revenue 'floor' and 'ceiling'. If the revenue earned by a project exceeds the net revenue ceiling, the owner pays the Commonwealth an agreed percentage of revenue. If revenue falls below a set amount, the Commonwealth will pay the proponent a certain amount.

This model has been effectively implemented in the ACT to shield consumers from recent price hikes. However, unlike the ACT scheme, the expected costs of CIS contracts are not-for-publication. The justification from Government for this is that it will ensure that reverse auctions achieve the best outcome for taxpayers. Successful tenders will be assessed against a range of criteria – and not solely the ‘lowest’ cost. We would expect the criteria would put significant weighting on the ‘conversion’ of the project into operation and the proponents demonstrating this pathway.

3.3 State coordination

In an attempt to smooth the rollout of the CIS, the Commonwealth Government will negotiate new bilateral Renewable Energy Transformation Agreements (RETAs) with state and territory governments under the National Energy Transformation Partnership.

Through the revised RETAs, the state and territory governments will work with the Commonwealth Government to ensure delivery of new renewable energy projects. The following commitments have been flagged as possible inclusions within the revised RETAs:

• improve reliability by maintaining agreed reliability benchmarks;
• manage an orderly transition; and
• invest in strategic electricity reserves.

18GW of the 32GW on offer under the CIS will be subject to RETAs. State and territory Governments will be heavily incentivised to agree to the Commonwealth Government’s terms, as they have indicated that capacity may be re-allocated from any state or territory that does not make the necessary commitments, to those that do. We summarise those existing schemes in section 5 below.

3.4 Other details

The Commonwealth Government has indicated that the CIS:

• will feature regular six-monthly tenders from the second quarter of the 2024–25 financial year through to 2027;
• will contain incentives for states and territories who streamline approval processes by offering a greater share of bi-annual capacity auctions; and
• may address other barriers to renewable investment such as workforce and supply chain constraints.

4. Retirement of the Renewable Energy Target

The announcement of the expanded CIS represents a move away from the long-standing Renewable Energy Target (RET), which is due to expire at the end of 2030.

The RET allows renewable generators to create certificates for every megawatt hour of electricity they generate and obligates liable entities to purchase these certificates. The RET created a financial benefit for renewable energy systems in addition to the sale of the electricity generated.

The departure from the RET represents a significant policy shift as Australia seeks to accelerate the energy transition. The move has been welcomed by peak energy bodies, consumer groups and climate advocates.⁵ It is seen as providing more direct revenue support and potentially reduces the end-user cost burden of the RET, which was seen to pass through to consumers in higher electricity prices. Of course, amounts paid under the CIS support mechanism will still be tax-payer funded, albeit in taxes rather than electricity tariffs.

5. Alignment with State-based Initiatives

As noted above, where state-based clean energy investment initiatives exist, it is intended that tenders under the expanded CIS will be integrated.

5.1 NSW

Until the recent announcement, , it had been expected that the Capacity Investment Scheme would not be offered directly in NSW because NSW already has a government-led underwriting scheme through the offering of Long-Term Energy Service Agreements (LTESAs) . However, the Commonwealth Government has indicated that it will provide funding from the Capacity Investment Scheme budget to commit additional capacity to the LTESA tenders as it did with CIS Auction 1.

5.2 Victoria

The Victorian Government has previously held two contract-for-difference style auctions known as Victorian Renewable Energy Target (VRET) auctions. Further VRET auctions are yet to be announced but have been flagged as a crucial element to achieving the State’s offshore wind targets (2 GW by 2032, 4 GW by 2035 and 9 GW by 2040). It is possible the CIS will be integrated into future VRET auctions. However the Commonwealth Government may be hesitant to integrate with an offshore wind VRET given these projects will likely not contribute towards the 2030 renewable energy target due to their longer development timelines.

Victoria’s recently relaunched government-owned renewable electricity enterprise, the State Electricity Commission (SEC) may also look to capitalise on the CIS. The SEC’s 12-year Strategic Plan 2023-2035 foreshadows an initial $1 billion investment towards building 4.5GW of new power through renewable energy and storage projects.⁶

5.3 Queensland

The Queensland Energy and Jobs Plan and related legislation embeds State ownership of generation and storage assets. However, it is expected that the Government owned electricity entities will be eligible to participate in auctions for revenue support under the CIS.

The key question in Queensland is how the CIS will be implemented, as there is no recent experience of underwriting auctions in the State. The most recent public tender process, the RE400 – a 400MW storage and generation tender – was essentially an offtake tender. The RE400 commenced in 2017 and a single contract for 400MW of offtake was awarded in 2020. This tender was managed by CleanCo (then newly formed).

5.4 Western Australia

In April 2020, the Western Australian Government introduced the Clean Energy Future Fund. Two rounds of funding were held in July 2020 and April 2021 with a third round expected in the near future. Additionally, the Western Australia Government has committed to introducing climate change legislation with targeted consultation currently underway.