Following the Energy Ministers’ meeting on 8 December 2022 and the National Cabinet meeting on 9 December 2022, the Australian Commonwealth government announced that a new Capacity Investment Scheme (CIS) will be established, alongside other measures in the Energy Price Relief Plan.1
The CIS is aimed at unlocking approximately AUD 10 billion in private and public sector investment in new clean dispatchable storage and generation to ensure reliability and security in Australia’s energy market, as well as affordable electricity supply and reduce Australia’s exposure to high coal and gas prices over the medium and long term.
Further details on the CIS will be released in the coming months, with the first auction expected to occur in 2023.
The CIS looks to drive and support investment in renewables and energy storage, as the clean energy transition in Australia gains momentum. Whether any adjustments to the current market design framework will be required will be an important development to monitor. Market participants should be considering the potential impact of the CIS in respect of both existing and new offtake and hedging contracting arrangements for generation projects.
Baker McKenzie in collaboration with Cornwall Insight will provide market, policy and regulatory insights on the development of the CIS as part of our Energy Masterclass series in 2023.
What we know so far
At the Energy Ministers meeting on 8 December 2022, the Commonwealth Government received endorsement from state and territory Energy Ministers to establish the CIS. The CIS is a new Commonwealth revenue underwriting mechanism aimed at unlocking approximately AUD 10 billion in private and public sector investment in new clean dispatchable storage and generation to ensure reliability and security in Australia’s energy market, as well as affordable electricity supply and reduce Australia’s exposure to high coal and gas prices over the medium and long term.
The full details about the CIS have not yet been released. Further details are expected to be released in the coming months. Consultation with states and territories and industry will be required to determine details of the scheme itself.
The first auction is expected in 2023. There is a view to have the scheme operational by the second half of 2023.
Here are some of the other details known so far:
- The CIS will be available to all jurisdictions nationally.
- It will be limited to zero emissions dispatchable generation and storge technologies. It is different to the previous Energy Security Board capacity mechanism proposal which considered fossil fuel technology.
- Where other state schemes already exist, the CIS is to be integrated with these to avoid duplication and ensure confidence in the market. For example, the CIS is to be consistent with existing schemes including the NSW Electricity Infrastructure Roadmap. CIS funding will be available to support the existing NSW Electricity Infrastructure Roadmap framework and not alter competitive tenders underway or scheduled for 2023. The Commonwealth will work with Western Australia and the Northern Territory to explore how CIS or other mechanisms may support their electricity grids and large industrial energy users in remote areas. It will also operate alongside the National Energy Transformation Partnership and Rewiring the Nation plan.
- Eligible projects will include those eligible under existing state-based schemes as well as on-grid, public and private utility scale projects that achieve financial close from 8 December 2022 onwards.
- Open tenders will determine which projects gain CIS support. The optimal mix of generation and storage for reliability will be determined through the tender process, and all configurations will be considered (co-located and standalone). CIS support is aimed at decreasing risk for investors and spurring more investment.
- An agreed revenue “floor” will assist coverage of project operating costs and debt repayments. The Government will pay the difference when revenues fall short, and a share of profits is to be returned if revenues exceed agreed “ceiling”.
- The CIS will create construction and operations jobs in clean energy projects, especially in the regions.
1 Energy Ministers’ Meeting Communique, 8 December 2022 <https://www.energy.gov.au/sites/default/files/2022-12/Energy%20Ministers%20Meeting%20Communique%20-%208%20December%202022.docx>; The Hon Chris Bowen MP (Minister for Climate Change and Energy), ‘Capacity Investment Scheme to power Australian energy market transformation’ (Media Release, 8 December 2022) <https://minister.dcceew.gov.au/bowen/media-releases/capacity-investment-scheme-power-australian-energy-market-transformation>; Prime Minister Anthony Albanese, The Hon Dr Jim Chalmers MP (Treasurer) and The Hon Chris Bowen MP (Minister for Climate Change and Energy), ‘Energy Price Relief Plan’ (Media Release, 9 December 2022) <https://www.pm.gov.au/media/energy-price-relief-plan>