Capacity investment in Australian renewable energy projects – applications now open and first set of tender guidelines released for Government revenue underwriting scheme

The expanded Capacity Investment Scheme (CIS) is finally underway, with the Capacity Investment Scheme – National Electricity Market – Generation Tender 1 (Generation Tender 1) having commenced Friday 31 May 2024. Registration for Generation Tender 1 will remain open until 5pm AEST on 19 June 2023, and Project Bids will close at 5pm AEST on 1 July 2024.

The CIS reflects the Commonwealth Government's ambitious policy of creating an additional 32 GW of capacity by 2030, filling reliability gaps as ageing coal power stations exit, and delivering on the Commonwealth Government's target of 82% renewable energy by 2030.

The CIS will support the commerciality of investments and impact pricing and the availability and type of contracting in the electricity market, so it is important for current and future proponents of renewable, storage and hybrid projects to understand how it works.

The Capacity Investment Scheme: background

The first stage of the CIS was launched in 2023 with two pilot tenders:

• NSW firming tender (1.1GW dispatchable capacity), which concluded in November 2023 with six successful projects announced; and
• South Australia-Victoria Tender (2.4GW dispatchable capacity), which is in its closing stages.

On 23 November 2023, the Commonwealth Government announced an expansion of the CIS and its plans to underwrite an additional 32GW of projects nationally to facilitate the nation's clean energy transition.

The additional 32GW of capacity nationally will be made up of:

• 23 GW of renewable capacity; and
• 9 GW of clean dispatchable capacity.

18 GW of capacity will be allocated through Renewable Energy Transformation Agreements (RETAs) with State and Territory Governments. The remainder will be allocated across the NEM through tenders and based on merit.

The expanded CIS will be administered by AEMO and delivered through competitive auctions held every 6 months from 2024 to 2027, commencing with Generation Tender 1 and with the next tender scheduled for November 2024. The tender process itself is expected to take longer than 6 months, so there will be some overlap between tenders.

The Generation Tender 1 Tender Guidelines (Tender Guidelines) and supporting documents were released on 31 May 2024, and provide necessary detail into how the CIS will operate in practice. However, we expect that there may be revisions in subsequent tenders based on industry feedback and lessons learned in Generation Tender 1.

Generation Tender 1: process and timelines

Generation Tender 1 seeks market bids for renewable electricity generation in the National Electricity Market (NEM) with a target of 6GW renewable capacity. Successful projects will be awarded long-term (up to 15 year) revenue underwriting agreements. Allocations will be divided between NEM jurisdictions as follows:

Adopting a similar approach as the South Australian-Victorian pilot tender, Generation Tender 1 will follow a three-stage process:

• Stage A – Project Bid: Project Bids are submitted by proponents and assessed against defined Eligibility Criteria and Merit Criteria 1-4 (as discussed below).
• Stage B – Financial Value Bid: projects are shortlisted at the end of Stage A and invited to submit a Financial Value Bid, together with Project Documents in the form of an offer for acceptance by the Commonwealth Government. Proponents may submit an Alternative Financial Value Bid at the same time, with different Bid Variables. Once Financial Value Bids are received, projects are assessed against Merit Criteria 5-7 (see below).
• Stage C – Due Diligence and Recommendations: AEMO may perform due diligence on the projects and proponents. AEMO will provide a recommended list of bids to the Commonwealth Government. The Commonwealth Minister for Climate Change and Energy to select successful projects.

Key dates for Generation Tender 1 are^[1] :

• 16 May – 19 June 2024 – registration window.
• 31 May – 1 July 2024 – Project Bids to be submitted (Stage A). Projects are assessed to develop a Project Shortlist.
• August/ September 2024 – Projects on the Project Shortlist to be invited to submit Financial Value Bids (Stage B).
• September/ October 2024 – Due diligence and assessment of Financial Value Bids.
• December 2024 – announcement of successful bids.

Capacity Investment Scheme Agreements (CISAs)

Successful CIS tender projects will be awarded long-term (up to 15 years) revenue underwriting contracts with the Commonwealth Government known as CISAs. There are two types of CISAs:

• Clean Dispatchable CISAs: to support projects with dispatchable generation of two hours or more; and
• Generation CISAs: to support renewable generation projects.

A key aspect of the CISA design is to preserve incentives for projects to participate in wholesale contracting markets due to exposure to market prices between a floor and a ceiling which will be bid as part of the tender process. If revenue for the project is below the floor, the CISA will provide partial revenue support (90% of the amount below the floor). If revenue for the project is above the ceiling, the project will be required to pay 50% of the revenue above the ceiling to the Commonwealth Government. Annual caps will apply to the revenue payments.

CISA projects will retain negative price risk with prices below zero deemed to be zero for net revenue calculations. This is intended to mitigate the risk of uneconomic dispatch of generation and retain incentives for the project to enter contracts that manage negative price risk.

Unlike the NSW LTESAs, there is no periodic option to be exercised for revenue support to apply. The floor and ceiling will always apply during the contract period; however, the generator may opt out of the CISA revenue support for up to three five-year periods.

Eligibility Criteria for Generation Tender 1

Proponents and projects seeking to participate in the CIS must demonstrate compliance with Proponent Eligibility Criteria and Project Eligibility Criteria before they can be competitively assessed against the Merit Criteria.

The Proponent Eligibility Criteria for Generation Tender 1, which, unless otherwise indicated, apply to the Proponent, its consortium and their respective related bodies corporates, are as follows:

• EC1: the Proponent holds an ABN and is an Australian entity;
• EC2: it has not had a judicial decision relating to employee entitlements made against it in respect of which it has failed to pay any amounts required to be paid;
• EC3: it complies with its obligations (If any) under the Workplace Gender Equality Act 2012 (Cth);
• EC4: it has not within the last 10 years had findings made against it by the National Anti-Corruption Commission (or equivalent body);
• EC5: it is not named on the Consolidated List maintained by the Australian Sanctions Office within DFAT;
• EC6: it complies with its obligations (if applicable) under the Modern Slavery Act 2018 (Cth); and
• EC7: one bid entity must be a special purpose vehicle (SPV) which only carries on the project and conducts no other business and holds all assets and is entitled to all revenue of the project.

The Project Eligibility Criteria are as follows:

• EC8: the project is registered or intends to register with AEMO in the NEM;
• EC9: the project has a registered capacity of not less than 30MW;
• EC10: the project's fuel source is an eligible renewable energy source under section 17 of the Renewable Energy (Electricity) Act 2000 (Cth) (REE Act) and is eligible to create LGCs under the REE Act;
• EC11: for projects in Queensland, Victoria, South Australia and the ACT, the project was not committed or existing in AEMO Generation Information published 29 January 2024, unless it is an expansion; in NSW, the project is not identified as committed or existing on or before 14 November 2019;
• EC12: the project has not been rewarded a long-term (10 years) revenue underwriting agreement with the Commonwealth Government or a State or Territory under which 50% of the project's nameplate capacity is contracted and the Project receives revenue support;
• EC13: the project has received an NSP response to a connection enquiry, has executed a connection agreement or is in the process of seeking to amend an existing connection agreement (subject to exceptions for NSW REZs); and
• EC14: the project has received a project assessment decision from a relevant State or Territory planning authority or, if assessment is not required, lodged a planning development approval application under the relevant State or Territory legislation. The Tender Guidelines set out State-specific requirements for EC14.

NSW Developers should note that Generation Tender 1 will complement the NSW REZ access rights schemes. Developers seeking to participate in those schemes may also be eligible to participate in Generation Tender 1. NSW REZ access right holders may also be eligible to participate in future CIS tender processes. Eligibility Criteria and Merit Criteria have also been tailored for NSW projects to align with the Electricity Infrastructure Investment (EII) Act 2020 (NSW).

Hybrid projects (generation and storage) are eligible to bid in the Generation Tender 1, provided they have the same connection point and are owned by the same SPV. The CISA will aim to accommodate multiple types of hybrid configurations, including novel hybrid project configurations, The Tender Guidelines note that hybrid projects may provide additional market benefits compared to generation projects and consequently rank higher. If a hybrid project is awarded a CISA as a hybrid project, the proponent must deliver the whole hybrid project (ie. both the generation project and the co-located associated project).

Staged projects are also expected to be eligible, although the Tender Guidelines note that proponents "may need to consider how to participate in the Tender 1 Process" so it appears some uncertainty remains regarding the assessment of staged projects.

Merit Criteria for Generation Tender 1

Projects will be assessed at each stage against defined Merit Criteria, which are weighted as set out in the Tender Guidelines to receive an overall weighted score. The Merit Criteria address a range of matters beyond a simple assessment of financial value. Consequently, there will be a substantial degree of subjectivity involved when assessing proponents' bids. Further, AEMO may in its discretion consider whether to include a lower ranked Project Bid in the project shortlist over a higher ranked Project Bid in certain circumstances.

The Merit Criteria for Stage A and their associated weightings are:

While the weightings are as set out above, the Tender Guidelines note that projects may be ranked higher merit in Stage A if they can demonstrate:

• receipt of a section 5.3.4 letter from AEMO or formal engagement with EnergyCo where connecting to an access rights network, and development approval;
• if required, approval under the Environment Protection and Biodiversity Conservation Act 1999 (Cth);
• conditional financing (proponents should consider how best to position their financing to be competitive in the CIS tenders. Per the Tender Guidelines, AEMO is looking for evidence of a financing strategy or plan, including a detailed plan for raising capital and, where equity or debt financing is to be used, evidence of engagement with debt/equity financiers. We anticipate most development phase projects bidding into the CIS would have (at best) uncommitted letters of support based on high-level term sheets, whereas later stage projects may have committed financing in place especially where the project is already in construction);
• all necessary land tenure rights for the project and connection route;
• an executed contract or term sheet with an EPC contractor and/or OEM;
• engagement with local community and/or relevant First Nations communities; and
• a completed MC4 schedule.

The Merit Criteria for Stage B and their associated weightings are:

Projects assessed as having low merit against any individual Merit Criterion may not be further assessed or progressed to the Financial Value Shortlist.

Proponents considering a Project Bid should note that, per the Tender Guidelines, any commitments made under Merit Criterion 4 will be binding under the Project Bid. Any commitments made under Merit Criterion 7 will be binding under a Financial Value Bid.

Financial Value Bids in Stage B will also need to submit key commercial terms/Bid Variables, including:

• Support Period Start Date;
• Final Support Commencement Date;
• Final Expiry Date (maximum 14 years after the earlier of COD and the Final Support Commencement Date);
• Bid prices- floor and ceiling; and
• Annual Payment Caps.