Legal development

Australia's CIS (Part 3) - Victorian and South Australian CIS tenders now open for registration

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    What you need to know

    The Australian Government has opened registrations for the inaugural Capacity Investment Scheme (CIS) Agreement tender. This tender will commence in mid-December 2023 and will be open for projects physically located in South Australia or Victoria (CIS SA-Vic tender).

    Draft CIS SA-Vic Tender Guidelines are scheduled to be published later this month. Project proponents can register to be part of the program through the link here. Projects can then submit a bid with AEMO Services once the CIS SA-Vic tender is open.

    The Government announced that the CIS Program is open projects that can store energy for at least 2 hours. This is an expansion of the eligibility criteria for the scheme as the CIS Consultation Paper previously indicated that projects would be required to have a 4 hour equivalent duration to be eligible.

    Ahead of the CIS SA-Vic tender, the Government released the Draft Term Sheet which closed for public consultation on 10 October 2023. The Draft Term Sheet provides further detail to that set out in the CIS Consultation Paper, which we discussed in Parts 1 and 2 of our client updates, as well as providing an indication of the terms we can expect to see in the CIS SA-Vic tender.

    In this Part 3, we explore the commercial terms we expect to see in the upcoming CIS SA-Vic tender, based on the Draft Term Sheet, including key differences with the NSW LTESA.

    CIS Agreements compared to the NSW LTESA

    CIS Agreements are long-term Commonwealth underwriting agreements which aim to mitigate the risk of price volatility for financiers and investors and facilitate timely project development.

    The CIS sits alongside the Long Term Energy Service Agreements regime (NSW LTESA) which supports the delivery of the NSW Electricity Infrastructure Roadmap, similarly seeking to support the delivery of reliable capacity in other Australian States and Territories.

    The NSW LTESA and the CIS use different mechanisms based on specified net revenue thresholds to provide greater price certainty. The key differences between the two swap mechanics are:


    Payment Certainty

    Revenue Sharing

    CIS Agreement

    The Operator under a CIS Agreement will have the benefit of payments from the Commonwealth at a set percentage below the specified "floor" for net operational revenue throughout the term of the CIS Agreement.

    The Commonwealth will be entitled to payment at a set percentage above the specified "ceiling" for net operational revenue throughout the term of the CIS Agreement (not capped at repayment of amounts paid to the Operator).


    The Operator may exercise an option to enter fixed length derivative arrangements during the term of the NSW LTESA enlivening the specified net operational revenue threshold and have the benefit of payments below that threshold up to the annual cap.

    The Government will be entitled to repayment of any amounts paid to the Operator where the swap was exercised, provided that it will only be entitled to payment:

    1. when the net operational revenue exceeds the specified threshold;

    2. at 50% of the net revenue above the specified threshold; and

    3. until the earlier of repayment in full or the end of the term.


    These key differences between the CIS Agreement and the NSW LTESA mean that the CIS may appeal to different kinds of investors for whom stability of ROI is more critical than the upside of higher than expected returns. However the CIS is still likely to be a valuable tool for project developers who will model the impact of bid variables under any CIS tender, including maximum capacity, ceiling and floor for net operational revenue against targeted returns.

    Based on the Draft Term Sheet we have outlined the expected positions for the CIS SA-Vic tenders below. A copy of the Draft Term Sheet and a financial model worksheet are available here.

    Bid variables:

    In terms of what is within the tenderer's control, the Draft Term Sheet indicates key bid variables for Operators as follows:

    • Key dates such as the CP Target Date and COD (Target).

      The CP Sunset Date is stated to be the date 12 months after the CP Target Date.

      The COD (Sunset) and Final Support Commencement Date are stated to be the date 12 months after the COD (Target).
    • The Annual Revenue Floor and Annual Revenue Ceiling amounts against which the Commonwealth and Operator's financial support is tied.
    • Maximum Capacity and the Project Characteristics that the Facility must comply with in respect of the Maximum Capacity such as Import Capacity (MW), Storage Capacity (MWh), and Guaranteed Discharge Rate for Discharge Day.
    • The performance tests to demonstrate compliance with the Performance Guarantees.
    • Social licence commitments.
    • Conditions Precedents and Milestone Events (with examples given, including the date of CP Satisfaction and Commercial Operation Date).

    The percentage of financial support to be provided against amounts below the Annual Revenue Floor and percentage of revenue sharing to be paid to the Commonwealth above the Annual Revenue Ceiling are not stated to be bid variables. The Draft Term Sheet specifies a percentage amount of [75%] for each of the Revenue Ceiling Sharing Percentage and Revenue Floor Support Percentage. The bid variable to be considered is the revenue 'floor' and 'ceiling' at which the support and sharing percentages would be enlivened.

    Other key terms set out in the Draft Term Sheet include:

    Term: The Term of the Agreement will be divided into the Construction Period and Support Period. The Support Period will be 15 years from the Commercial Operation Date with a day for day reduction for each day of delay in achieving the Commercial Operation Date beyond the Final Support Commencement Date.

    The Support Period duration proposed by the Commonwealth is expected to support projects through periods of instability until processes mature and revenues stabilise to provide investors with reliable returns.

    Financial support: Support payments are made throughout the Support Period on a quarterly basis with an annual reconciliation payment (in lieu of the fourth quarter payment). These amounts are adjusted for LOR3 and Availability Rebates where the bid-back thresholds are not met.

    The Net Quarterly Payment between the parties is calculated as below:

    Net Quarterly Payment
    Quarterly Support Amount
    [0.75] x (Quarterly Revenue Floor - Net Quarterly Operational Revenue)

    Quarterly Revenue Sharing Amount
    [0.75] x (Net Quarterly Operational Revenue - Quarterly Revenue Ceiling)

    Availability Rebate

    LOR3 Rebate

    If the Net Quarterly Payment is positive, the Commonwealth pays this amount to the Operator. If the Net Quarterly Payment is negative the Operator pays this amount to the Commonwealth.

    Under the CIS Agreement, financial support and sharing mechanisms will always apply for the duration of the Term. The Operator must pay a specified percentage amount to the Commonwealth when their revenues are above the bid variable revenue 'ceiling', but they are also guaranteed financial support when their revenue is below the bid variable "floor".

    Conversely, in a NSW LTESA, the Operator can only access financial support if they exercise the option and they bear the risk of failing to exercise the option during a period of low revenue. However, the obligation to repay the government during periods of high revenue only arises if the Operator has exercised the option previously and there is a historical cumulative net payment.

    Performance guarantees: The Availability Guarantee will be measured quarterly and inform the Availability Rebate that is paid between the parties.
    Revalidation tests will be conducted annually to verify the performance of all other Performance Guarantees.

    Delay and Extensions: The Operator is entitled to an extension of certain target dates where the project is affected by a Force Majeure Event and is prevented from performing its obligations under the CIS Agreement. Any Milestone Dates that are affected by the relevant delay will also be adjusted. However, the Final Support Commencement Date is not subject to adjustment and the Commonwealth will further have no obligation to provide payment support under the CIS Agreement during a period of suspension due to Force Majeure.

    Termination rights: As discussed in part 2 of our analysis, termination rights under the Draft Term Sheet favour the Commonwealth.

    The Draft Term Sheet provides additional details around the termination rights of the Commonwealth which are enlivened where:

    • a Project Force Majeure Event impacts at least 50% of the Maximum Capacity and/or 50% of the storage capacity for a period of three consecutive Operating Years during the term;
    • the Force Majeure regime operates for a cumulative total of 18 months;
    • there is prolonged failure of the Operator to achieve the Performance Guarantees; and
    • failure to comply with approved cure plans.

    The Commonwealth is entitled to terminate for convenience but they must pay the Operator a pre-defined amount which is to be agreed by the parties.

    Where the CIS Agreement is terminated due to Operator default, the Operator owes to the Commonwealth an amount that references the aggregate dollar amount per MW bid by the Operator multiplied by the Maximum Capacity of the Facility and net historical payments received by the Operator.

    Security: Similar to other recent processes, the Operator is required to provide both Initial Security and Performance Security by way of a letter of credit or bank guarantee.

    Authors: Bree Miechel, Partner; Robert Gough, Senior Associate; and Nikki Doan, Graduate. 

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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