The Department of Climate Change, Energy, the Environment and Water (DCCEEW) has shed more light on how the Capacity Investment Scheme (CIS) will operate in Western Australia’s Wholesale Electricity Market (WEM), with the release of a Western Australia Design Paper (Design Paper) on 12 April 2024.
By way of a very high level recap, the CIS will underwrite the development of renewables and storage through Capacity Investment Scheme Agreements (CISAs) with successful tenderers, under which the Commonwealth will pay proponents a percentage of revenue shortfall below an agreed floor, and proponents will share a percentage of project revenue above an agreed ceiling.
Key takeaways
- Consultation on the Design Paper is now open, and closes on Monday 6 May 2024.
- DCCEEW has announced that for WA, the CIS will target 2.3 GW of variable renewable energy (generation) and 1.1 GW of four-hour equivalent (4.4 GWh) of storage (“clean dispatchable capacity”) in the WEM over the period to 2030.
- The first CIS tender is expected to commence in WA in June 2024, targeting 500 MW of four-hour equivalent (2 GWh) clean dispatchable capacity.
- Timing of the CIS tenders will be yearly and precede the Reserve Capacity Mechanism (RCM) cycle, so that proponents can lock in a CISA before applying for Capacity Credits under the Reserve Capacity Mechanism.
- In order to be eligible, projects must participate in the RCM, and capacity payments under CISAs will be based on Capacity Credits held by projects. Projects connecting in constrained areas, where limited Network Access Quantities (and therefore Capacity Credits) are available, should be aware of this.
- Entry into a contract with AEMO for the provision of Non-Co-optimised Essential System Services (such as peak demand or minimum demand services) will result in a project not being eligible under the CIS.
- Bilateral contracting revenues will be taken into account in a project’s net revenue, and CISAs will include obligations on project proponents to share details of revenue earned under bilateral contracts. Project proponents intending to participate in the CIS will need to ensure that any power purchase agreements they enter into include appropriate confidentiality carveouts to allow for the disclosure of such information.
Background
While the expanded CIS (which will apply nationwide) was previously announced and consulted on (see the Implementation Design Paper dated 29 February 2024), it was always recognised that due to the different nature of the WEM as compared to the National Electricity Market (NEM), the design of the CIS would need to be adapted to operate properly in the WEM.
In particular, there are two key features of the WEM that necessitate changes to the CIS:
- The Reserve Capacity Mechanism, which allocates “Capacity Credits” to market participants in return for participants making capacity available in the market. Holders of Capacity Credits are paid for the Capacity Credits they hold, either by AEMO at a predetermined price, or by trading Capacity Credits bilaterally with market participants who consume energy (who have an obligation to acquire Capacity Credits relative to the size of their load at peak times). The RCM operates on a four year cycle, with Capacity Credits being allocated two years ahead of the relevant Capacity Year in which capacity must be made available. Each Capacity Year runs from 1 October in one year to 30 September in the next.
- Bilateral contracting, which allows for energy and Capacity Credits to be traded bilaterally, with participants declaring their bilateral trades to AEMO and settling payment for those trades directly, without AEMO’s involvement (and without AEMO knowing the contract prices). Trading in the Short-Term Energy Market (a day ahead market) and Real Time Market (the spot market) allows participants to trade around their bilateral contract position.
The key aspects of the CIS’s design in WA are set out below.
Size
For WA, DCCEEW has announced that it is expected that the CIS will target 2.3 GW of variable renewable energy (generation) and 1.1 GW of four-hour equivalent (4.4 GWh) of storage (“clean dispatchable capacity”) in the WEM over the period to 2030.
The first CIS tender is expected to commence in WA in June 2024, targeting 500 MW of four-hour equivalent (2 GWh) clean dispatchable capacity. The first generation tender is then expected in mid-2025 (together with a second clean dispatchable capacity tender).
Timeline
The timeline for CIS tenders in the WEM will precede the annual RCM cycle, so that project proponents can enter into a CISA, and progress to committed status, prior to applications for Certified Reserve Capacity under the RCM being made. For example, the 2024 CIS tender will run until approximately February 2025, ahead of applications for Certified Reserve Capacity in the 2025 RCM cycle, which are scheduled to close on 25 June 2025. The intent of this alignment is to allow successful tenders to lock in a CISA to increase the bankability of their projects and help projects meet the level of financial commitment required to be eligible for Capacity Credits in the RCM.
This alignment with the RCM application process (together with the smaller size of the WEM and associated capacity targets) means that in the WEM, CIS tenders will be run on a yearly basis. This is in contrast to the NEM, where CIS tenders are expected to be run every 6 months.
Obligations under CISAs entered into for the WEM will commence on 1 October, to align with Capacity Years in the RCM.
Eligibility and assessment
Most of the eligibility requirements for projects in the WEM will be the same as in the NEM – for example, projects must have a capacity of at least 30MW, be an eligible technology (although for clean dispatchable CISAs, projects are eligible if they charge from the WEM, rather than the NEM), and have made progress towards obtaining connection approval, and project proponents must be an SPV. As in the NEM, only projects that are yet to achieve financial close, or that achieved financial close after 23 November 2023 (for generation CISAs) or 8 December 2022 (for clean dispatchable CISAs) are eligible.
However, there are some notable features and differences for the WEM:
- Projects must participate in the RCM, and will only be eligible for payments for capacity under a CISA to the extent they have been assigned Capacity Credits. This is particularly important to note for projects that may be connecting in a constrained part of the network – since 2022, Capacity Credits that are assigned to a facility are capped at the facility’s assigned “Network Access Quantity” or “NAQ”. NAQ is a notional quantity representing available capacity in the relevant part of the network, and is assigned (broadly) on a first come first served basis. This means that facilities connecting in constrained areas may receive a NAQ and Capacity Credits that are below their Certified Reserve Capacity (or no NAQ and Capacity Credits at all), which will, in turn, affect their eligibility for payments under a CISA.
- As in the NEM, participation in certain other revenue support schemes will mean a project is ineligible for the CIS. Importantly, DCCEEW has confirmed that in the WEM, projects that enter into a contract with AEMO for the provision of Non-Co-optimised Essential System Services (NCESS) will be ineligible. NCESS can include services such as peak demand services (increasing injection, or reducing load, during peak intervals) and minimum demand services (increasing withdrawal during low demand intervals).
- Unlike the NEM CIS, the merit assessment of tender responses will include a more limited assessment of a project’s contribution to system reliability. This is because the RCM process includes a more detailed reliability assessment. Given CIS projects will be required to participate in the RCM (and payments under CISAs will be dependent on Capacity Credits actually being allocated to the projects), it is therefore unnecessary for the CIS tender assessment to effectively duplicate this process.
Payment structures
To reflect the existence of Capacity Credit revenues, the payment mechanisms under CISAs in the WEM will be as follows:
- Generation CISAs: there will be two components to the floor and ceiling – an energy component, bid as $/MWh of generation, and a capacity component, bid as $/MW of Capacity Credits held (unlike NEM CISAs, which only contemplate a $/MWh floor and ceiling)
- Clean dispatchable CISAs: the floor and ceiling will be bid as $/MW of Capacity Credits held (unlike NEM CISAs, which contemplate a floor and ceiling based on annual total project net revenue in dollars)
In the NEM, it is proposed that the Commonwealth will pay 90% of the shortfall below the agreed revenue floor, and will receive 50% of the revenues above the agreed revenue ceiling. DCCEEW has flagged that it will not necessarily adopt these 90%/50% splits in the WEM.
As with the NEM, a project’s net revenue (used to determine whether the floor or ceiling under the CISA is activated) will include revenues from eligible wholesale contracts. This will include bilateral contracts, and there will be requirements on project proponents to share details of payments made under such contracts (even though such information is not shared with AEMO under the bilateral contracting mechanism in the WEM). Project proponents intending to participate in the CIS will need to ensure that any power purchase agreements they enter into include appropriate confidentiality carveouts to allow for the disclosure of such information.
Reserve capacity refunds payable by projects under the RCM (due to failure to provide capacity when needed) will not be deductible from net revenue under the CISA. However, in recognition of the fact that such refunds are already payable (and not deductible from net revenues), there will not be additional liquidated damages under the CISA for failure to perform.
Next steps
Consultation is open on the Design Paper until Monday 6 May 2024 (extended from Friday 26 April 2024). It is important to note that DCCEEW has flagged that the above principles for the CIS in the WEM are subject to change as a result of consultation, so watch this space.
The first clean dispatchable CIS tender, targeting 500 MW of four-hour equivalent (2 GWh) capacity, is expected to commence in June 2024.
Interested in our insights and experience on the future of energy including energy generation & storage, decarbonisation, energy generation and critical minerals?
