Deputy Secretary Simon Duggan delivered a keynote address on the Capacity Investment Scheme to panel of experts in the renewable energy industry today.
The Australian Clean Energy Summit is held every year and is the peak gathering of leaders driving Australia's energy transformation. The summit brings together leading policy-makers, investors, developers, energy users, and utility companies from across the country to discuss the latest clean energy solutions and technologies.
Keynote speech - Accelerating the Transition: Ensuring the Capacity Investment Scheme Delivers
CAPACITY INVESTMENT SCHEME - PROGRESS SO FAR
We meet here today on the lands of the Gadigal people of the Eora Nation.
I acknowledge their continuing connection to this land and pay my respects to their Elders past, present and emerging.
My name is Simon Duggan and I lead the Energy Group in the Commonwealth Department of Climate Change, Energy the Environment and Water.
I'm thankful to Kane, Christiaan and the Clean Energy Council (CEC) more broadly for the invitation to speak to you about the Capacity Investment Scheme (CIS) to set the scene for the impressive panel of industry experts that will follow.
The CEC has been a great source of input and advice on the CIS and is an influential voice more broadly on what is required for Australia to make a successful clean energy transition.
This is a sophisticated audience and most of you will be familiar with the CIS.
Therefore, while I will spend a few minutes orienting the discussion by describing what the CIS is and what it aims to achieve, most of my remarks will focus on addressing the most common questions raised with us by investors, industry analysts and others that already have a sophisticated understanding of the CIS.
Before doing so though, a couple of housekeeping points.
Firstly, I am conscious that there are investors here today associated with bids into one or more of the 3 CIS tenders that have been launched to date. For probity reasons, I won't be going into the specifics of those tenders and instead will be focusing my remarks at the program and instrument design level.
We're also diligent when we brief investors on the CIS about communicating to the whole market concurrently. Therefore, the speaking notes that I'll be drawing on today will be put onto the CIS web site at the conclusion of my remarks.
With those preliminaries out of the way, I'll now launch in.
The role of the CIS is to provide renewable energy investors with greater certainty through a revenue underwriting agreement that shares the risk of low wholesale electricity prices.
From the point of view of taxpayers and electricity consumers, it provides a natural hedge revenue support is only provided if and when consumers are benefitting from low wholesale electricity prices.
And from the point of view of clean energy investors, the CIS shares the revenue risks associated with factors like the uncertain timing of thermal generation closures and unforeseen declines in renewable energy technology costs.
The objective is supporting clean energy projects to reach financial close to drive the acceleration in investment needed to achieve the government's target of 82% renewable energy generation in our electricity grids by 2030…
…which of course is fundamental to achieving the government's legislated 43% emissions reduction goal.
It is also fundamental to ensuring replacement capacity is in place to manage the impact of closing coal generation.
The scheme was launched early last year with the announcement of 2 pilot auctions for clean dispatchable generation and storage - one in NSW as part of their roadmap and a second standalone tender in South Australia and Victoria.
The CIS was then expanded in November, with the announcement of regular 6-monthly generation and storage tenders in the National Electricity Market and annual tenders in the Western Australian Wholesale Electricity Market (WEM) through to 2027.
Through the expansion of the CIS, the Australian Government has committed to underwriting a total of 32GW of clean energy generation and storage - 9GW of dispatchable capacity and 23GW of variable renewable energy.
This is the amount that we calculate is needed over and above existing state and territory renewable energy commitments to achieve 82% renewables by 2030, supporting in the order of $74 billion of new clean energy investment in Australia over the next 3 to 6 years.
Significant progress has been made in the implementation of the CIS and the response from clean energy investors has been very encouraging.
The joint CIS/NSW Roadmap pilot tender has now concluded. When the tender was announced, the government's plan was to contract 380MW of dispatchable capacity.
But after receiving 3.3GW in bids, the size of the tender was increased to 1.1GW, supporting 6 battery and virtual power plant projects in NSW.
The second pilot tender, aimed at clean dispatchable projects in South Australia and Victoria, has also received a very strong response.
For the Stage A assessment, we received over 100 bids totalling of 59GWh of dispatchable capacity. This is more than 24 times the indicative tender size of 2.4GWh.
Meritorious Stage A projects have been invited to submit for Stage B assessment, with the successful projects to be announced in the next few months.
Building upon the success of these 2 pilots, in May we opened the largest single tender ever for renewable energy in Australia with our first NEM-wide generation auction.
There has been strong interest in the tender so far.
We received 40GW of projects at the registration stage, and over 80 project bids at Stage A with a combined capacity in excess of 25GW - more than 4 times our target of 6GW.
Bids are now being merit assessed in accordance with the Tender Guidelines, with meritorious projects progressing to Stage B and successful projects being announced at the end of the year.
As I mentioned earlier, CIS tenders will continue to be rolled out every 6 months in the NEM, and annually in Western Australian Wholesale Electricity Market, out to 2027.
This will provide proponents with the opportunity to submit bids at the point where they're ready in their project development cycle.
The core design features of the CIS will remain consistent between tenders to provide certainty to investors.
But we'll also take opportunity to make improvements over time, including in response to feedback from investors and market participants such as yourselves.
Most of what I've just described will be familiar to many of you in the room.
So as I promised, I'm going to dive a bit deeper now by focusing on 5 of the most common questions raised with us about the CIS by clean energy investors and stakeholders more broadly.
The first is incentives for owners of clean energy generation assets who are successful in securing a CIS agreement to engage in contract and hedging markets.
The way the question is often framed is whether - by underwriting downside revenue risk - are we inadvertently dulling incentives for renewable energy generators to participate in power purchase agreements and other forms of contracting to the detriment of those on the other side of the market seeking certainty of electricity supply.
There are 3 design features of the CIS that mitigate this.
Firstly, the CIS meets 90% of the revenue shortfall below the strike price identified in the CIS contract, not 100%. Second, project proponents bid an annual cap of revenue support, beyond which they bear 100% of the revenue risk.
And third, only positive wholesale electricity prices contribute to the calculation of a generation project's net revenue position; dispatch at negative prices are deemed at $0/MWh.
In other words, renewable energy projects with a CIS agreement deliberately retain some level of downside revenue risk that they have the incentive to manage through contract and hedging markets.
A second issue raised with us is whether the CIS will support so-called zombie projects.
That is, could projects that succeed at a CIS tender that run into difficulties which prevent them from generating by 2030 undermine the delivery of the investment needed and the government's 82% renewables target.
We think this concern is misplaced because of 2 key protections built into our approach.
Firstly, the CIS eligibility and merit criteria provide the basis for a rigorous assessment of project deliverability, as well as organisational capability.
Key factors taken into account include:
- the proponent's track record delivering similar projects in Australia or overseas
- how progressed they are in securing environmental and planning approvals, financial support, land access and grid connection
- whether they can demonstrate strong engagement, benefit sharing and support from the relevant First Nations groups and local communities.
In other words, more advanced projects with a lower delivery risk will have an advantage under the CIS merit criteria.
Secondly, the CIS tender sizes have been frontloaded to provide maximum time for projects to reach completion and allow adjustments to be made over time.
Almost half - or around 13GW out of the total 32GW of capacity for the CIS will be tendered this year and we are currently preferencing projects that can generate by 2028.
The tender guidelines also state that if projects are not meeting the milestones specified in their CIS agreement and remedial steps are not taken to get them back on track, they risk losing CIS support.
This would provide us with the additional headroom to increase the size of the next scheduled CIS tender to compensate for the loss of projected generating capacity.
Since CIS support payments only begin once a project has begun commercial operations, the government will have no financial exposure to projects that are not generating in the timeframe specified in their CIS agreement.
A third and related issue that is sometimes raised is the potential for non-market factors to prevent new generation and storage projects from being operational by 2030.
To be generating by 2030, projects will need to not only secure financing - which is what CIS revenue underwriting is designed to support - but also a workforce, critical inputs from domestic and global supply chains, planning and environmental approvals, and the support of the First Nations groups and communities in which they are located.
The CIS merit criteria and tender guidelines make clear that project proponents that address each of these factors in their tender bids will score more highly in tender assessments.
But it's also the case that some of these issues require a whole of market or national approach beyond the capacity of an individual project proponent, requiring governments to lean in.
This is occurring at 2 levels.
Collectively as part of the National Energy Transformation Partnership and through the Energy and Climate Change Ministerial Council, with national strategies under development in each of the enabling areas that I mentioned.
And bilaterally through Renewable Energy Transformation Agreements currently being negotiated by the Commonwealth with each of the states and territories.
These agreements will ensure that the CIS is additional to state and territory efforts to meet their own renewable energy commitments.
They are also the vehicle through which jurisdictions that commit to actions that improve the enabling environment for renewable energy investment can maximise the allocation of CIS support and renewable energy investment in their state or territory, fast-tracking their renewable energy transition to the benefit of their economies.
A fourth issue raised with us is whether accepting the lowest cost bids could result in the CIS supporting a greater amount of utility-scale solar than is optimal from a system perspective.
It's important to be clear about which cost is assessed.
It is the forecast cost to the Commonwealth of underwriting the project with reference to its expected net revenue.
It is not the capital cost of construction and operation, where solar is cheaper than wind according to CSIRO's Gencost reports.
We expect a diversity of technologies to be competitive on this basis.
Those of you familiar with the CIS tender guidelines will also know that cost - or dollars per megawatt hour - are only one element of a much broader value for money assessment.
Explicit consideration is also given to the system services that the project will provide, as indicated by features such as the project's capacity factors, location on the grid and access to unconstrained transmission.
Over time, AEMO Services' advice to the government on which projects should receive CIS support will also be guided by the latest AEMO modelling of the optimal system build in 2030.
An obvious point of reference in this regard is the Integrated System Plan Step Change Scenario, which aligns with the government's 82% renewable energy target.
Having said that, we're also mindful of not being too definitive and getting locked into a central planner's mindset.
So, our intention is to remain flexible and keep the merit criteria broad enough so that we don't discourage project proponents from innovating.
It's the outcomes that we care about for consumer and taxpayer value, reliability and emissions reduction - not being restrictive about the clean energy technologies that will deliver it.
The fifth and final issue that I will touch on today that is often raised with us are questions about the electricity market that will exist after 2030.
Renewable energy projects are multi-decadal.
While CIS agreements will provide valuable revenue underwriting support for the first 10-15 years of a project's generation life, understandably project proponents are keen to understand where electricity markets in Australia may be heading over a longer timeframe.
With this in mind, Energy Ministers committed in March to launching a review in the middle of this year that will report publicly in the middle of 2025.
The Commonwealth will then work with the states and territories on a response and implementation plan for consideration by Energy Ministers by the end of 2025.
The intention is that any changes to legislation, rules, regulations or institutional arrangements arising from the review are in place by 2027 or 2028, broadly coinciding with the last CIS tender.
To conclude, establishing the CIS and launching the first 3 tenders has been a significant endeavour.
We have been encouraged by the market response to the 2 pilot auctions and the first NEM wide tender launched thus far.
These are positive, early signs that the CIS is reducing the market risks associated with large scale investment in firmed renewable energy.
But of course, we're only at the start of a 3-year program of tenders and there is more work to do.
This includes continuing to address the non-market enablers that will support the CIS in driving the acceleration of investment in clean energy needed to achieve the government's 82% renewables target.
We have benefitted enormously to date from extensive stakeholder engagement, including the Clean Energy Council's strong interest and expert advice in the development of the CIS.
We look forward to this continuing as rollout of this critical instrument continues.
Thank you.
Read more
Capacity Investment Scheme - DCCEEW
