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Capacity Investment Scheme - The South Australia-Victoria CIS Tender open

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    The CIS Tender Guidelines and full form project documents have been released

    Summary

    • On 15 December 2023, the Commonwealth opened bids for the inaugural Capacity Investment Scheme (CIS) South Australia-Victoria tender (CIS SA-Vic Tender).
    • The Department of Climate Change, Energy, the Environment and Water (Cth) have released CIS SA-Vic Tender Guidelines which provide important details on the tender process, eligibility criteria, merit criteria, key dates and other relevant information to assist proponents in preparing their bids.
    • Proponents can review drafts of the CIS agreement (CISA) (in word and pdf) and tripartite deed (in word and pdf) and familiarise themselves with the key commercial terms.
    • In this article, we discuss the key updates to the CIS SA-Vic Tender process and key commercial changes from the CISA term sheet to the draft full form CISA.

    What is the Capacity Investment Scheme?

    The CIS is a national framework supporting 32 GW of new capacity nationally, including 23 GW of renewable capacity and 9 GW of clean dispatchable capacity.

    The CIS is comprised of:

    1. Support of 1.1 GW of dispatchable capacity already committed under Stage 1 of the CIS, which includes 480 MW that the Commonwealth supported as part NSW's second LTESA tender (Tender Round 2 – Firming Infrastructure) and 600 MW as part of the current CIS SA-Vic Tender.
    2. A national tender held approximately every six months from April/May 2024 until 2027 to support 12.94 GW of capacity. This includes 4.9 GW of dispatchable capacity and 8 GW of renewable capacity.
    3. Renewable Energy Transformation Agreements between the Commonwealth and State/ Territory governments to support 18 GW of capacity. These G2G agreements will seek to increase renewable energy generation, maintain energy system reliability and address non-market barriers to investment, such as planning and environmental approval bottlenecks.

    What is the CIS SA-Vic Tender?

    On 15 December 2023, the Commonwealth opened bids for the inaugural CIS SA-Vic Tender. This tender is a competitive process supporting dispatchable capacity in South Australia and Victoria and seeking an indicative volume of 2,400 MWh of dispatchable capacity that will be operational before the end of 2027.

    This tender intends to allocate:

    • 800 MWh to each of South Australia and Victoria; and
    • 800 MWh to either South Australia or Victoria based on projects' merit criteria.

    Successful tenderers for a project will be awarded a CISA. This is a "contract for difference" between a proponent and the Commonwealth that provides for:

    • partial revenue support from the Commonwealth where a project’s net revenue falls below an agreed ‘floor’; and
    • an obligation that proponents pay a percentage of net revenues to the Commonwealth where net revenue exceed an agreed ‘ceiling’ across a year,

    each subject to an annual cap. 

    Further details on the CISA, and how the draft full form contract differs from the term sheet previously shared by the Commonwealth, is set out below.

    CISA diagram

    Some further detail on the CISA, and how the draft full form contract differs from the term sheet previously shared by the Commonwealth, is set out below.

    CIS SA-Vic Tender tender process

    Proponents must submit their bids in two stages: Stage A – Project Bid and, where invited, Stage B – Financial Value Bid.

    At each stage of the tender, proponents' projects will be assessed against merit criteria (as set out in the tables below). The CIS SA-Vic Tender Guidelines provide more detail regarding how each of these merit criteria will be assessed by AEMO.

    Stage A - Project Bid

    No

    Merit Criteria

    Weighting

    MC 1

    Contribution to system reliability

    40%

    MC 2

    Project deliverability

    20%

    MC 3

    Organisation capability to deliver

    20%

    MC 4 

    Community and First Nations Engagement

    20%


    Stage B - Financial Value Bid

    No

    Merit Criteria

    Weighting

    MC 5 

    Financial value

    70%

    MC 6

    Commercial departures

    10%

    MC 7

    Social Licence comitments

    20%


    Key Dates of the CIS SA-Vic Tender

    The CIS SA-Vic Tender will progress in accordance with the key dates set out below.

     Stage

     Key Date

     Stage A – Project Bid opens

     15 December 2023

     Stage A – Q&A Process opens

     10 January 2024

     Registration to submit a Project Bid closes

     16 February 2024 at 5:00pm AEDT

     Stage A – Project Bid closes

     23 February 2024 at 5:00pm AEDT

     Invite to submit Stage B – Financial Value Bid

     April 2024

     Stage B – Q&A Process opens

     May 2024

     Announce successful bids

     Mid 2024

    Key changes in the CISA commercial terms

    To assist proponents, we have set out below the key commercial changes from the draft CISA term sheet to the draft full-form CISA. We also set out some high level comments based on NSW's tender for firming LTESA (Tender Round 2 – Firming Infrastructure), which some proponents may be familiar with. In that Tender Round 2, successful proponents were awarded a firming LTESA, subject to entry into and compliance with a Project Development Agreement (i.e. governing the construction and operation of the project) (PDA). The firming LTESA is a contract between a proponent and the Scheme Financial Vehicle (SFV) which:

    • provides revenue support for up to 10 years through a series of one-year options to access an annuity payment, subject to an annuity cap; and
    • contains a repayment mechanism that allows the SFV to recoup prior payments when a proponent earns net revenue above a threshold, subject to a cap of 100% of historical net payments from the SFV to the proponent.

    In general, the full-form CISA is more similar to the NSW LTESA than the CISA term sheet stage, but some key differences remain. There may also be differences in the merit criteria for each scheme, which is not the focus of the table below.

     Item

     Draft CISA (term sheet)

     Draft CISA (full form)

     Ashurst Comments

    Term

    Fixed 15 year term.

    Maximum 15 year term.

    Making the term of the CISA a bid variable provides proponents with greater flexibility.

    Under the firming LTESA, the term is also for a maximum of 10 years (noting shorter contract terms were considered more financially competitive by AEMO Services).

    Payment structure

    The Commonwealth pays 75% of net revenue above the floor.

    The proponent shares 75% of the of the net revenue above the ceiling.

    The Commonwealth pays 90% of net revenue below the floor, subject to an annual payment cap.

    The proponent shares 50% of the net revenue above the ceiling, subject to an annual payment cap.

    The proponent has 90%, but not full, protection where net revenue drops below the floor under the CISA.

    The payment structure is firm – ie the Commonwealth support must always be taken, rather than an option for a proponent to exercise.

    Under the firming LTESA, a proponent could access a flexible payment structure through a series of one-year options to receive an annuity payment. Similar to the CISA, proponents share 50% of net revenues above a threshold, subject to an annuity cap (noting lower annuity caps were considered more financially competitive by AEMO Services). However, repayments to the SFV were capped at 100% of historical net payments from the SFV to the proponent (the CISA has a flat annual cap).

    Payment calculation and timing

    Commonwealth pays the proponent any positive net quarterly payment and positive annual reconciliation payment.

    Proponent pays the Commonwealth the absolute value of any negative net quarterly payment and annual reconciliation payment.

    Commonwealth pays the proponent each quarterly payment and any positive annual reconciliation payment.

    Proponent pays the Commonwealth the absolute value of any negative annual reconciliation payment.

    Under the CISA, the Commonwealth pays quarterly payments upfront with reconciliations made annually. The proponent pays the Commonwealth annually if there is a negative reconciliation payment.

    The firming LTESA has a similar model to the full-form CISA.

    Annual Revenue Floor and Annual Revenue Ceiling

    Annual Revenue Floor and Annual Revenue Ceiling were previously expressed as single bid variables, subject to CPI.

    The Annual Revenue Floor and Annual Revenue Ceiling may vary for each year throughout the term.

    Permitting the floor and ceiling to vary throughout the term of the CISA provides proponents with greater flexibility throughout the term.

    This is similiar to the firming LTESA model (noting that low net revenue thresholds bid in were considered more financially competitive by AEMO Services).

    Annual Payment Cap

    No payment cap mentioned in the CISA term sheet.

    The annual payment cap limits the amount paid by the Commonwealth as a support payment and the amount paid by the proponent as a share of net revenue.

    The annual payment cap amounts are to be provided by the proponent in a schedule and the amounts may vary for each year.

    The annual payment cap will depend on the commercial objectives of the proponent and their requirements for achieving a financial investment decision (for example, any level of support required from lenders).

    Under the firming LTESA, annuity payments were also capped at an annuity cap. However, repayments to the SFV are also capped at 100% of the historical net payments made by the SFV to the proponent.

    Credit Support

    Initial security of an amount reflecting the Commonwealth's re-tendering costs to be provided 5 business days after signing, until the conditions precedent have been satisfied or waived.

    Performance security of an amount to be specified in the CISA to be provided during the support phase.


    Performance security to be provided to the Commonwealth within 20 business days after signing and remain valid until the earlier of:

    • 20 business days after Commercial Operations Date; and
    • if the CISA is terminated prior to COD, 40 business days after the date on which all amounts payable in connection with that termination have been paid.

    The security amount is to be calculated using the following formula: $20,000 per MW multiplied by the maximum capacity, up to a maximum amount of $4,000,000.

    Credit support is no longer required during the operational period.

    The security amount required from signing to CODis similar to the firming LTESA.

    Availability Guarantee

    An availability rebate is payable by the proponent if the equivalent availability threshold of 97% is not achieved.

    Availability relief for reduced capacity due to AEMO direction or instruction in relation to the transmission network.

    An availability rebate is payable by the proponent if the equivalent availability threshold of 90% is not achieved.

    Availability relief for reduced capacity due to AEMO direction or instruction in relation to the transmission network and any project force majeure event (PFME) subsisting.

    The availability regime is more favourable under the CISA than the term sheet with a lower equivalent availability threshold and additional relief events for force majeure.

    Under the firming LTESA, the equivalent availability threshold was also 90% but there was no relief for project force majeure events (only AEMO direction or instruction in relation to the transmission network).

    Performance Guarantees

    The performance guarantees require conformance with the project characteristics and a performance event rebate is payable if there is underperformance with respect to an LOR3 event (i.e. when AEMO has declared that ‘LOR Load Shedding’ is occurring as a result of a shortfall of available capacity reserves).

    The performance guarantees require that a storage capacity rebate is payable for a failure to achieve the storage capacity and a performance event rebate is payable if there is underperformance with respect to an LOR3 event.

    By requiring a storage capacity guarantee, the performance guarantee regime under the CISA is broadly aligned with the firming LTESA.

    Liability Caps

    The Commonwealth and proponent's liability caps were left to be specified in the CISA.

    The Commonwealth's liability is limited to:

    • $1 million in respect of any single event; and

    • $2 million in aggregate in respect of all events occurring within any financial year.

    The proponent's liability is limited to:

    • $5 million in respect of any single event; and

    • $10 million in aggregate in respect of all events occurring within any financial year.

    Liability caps for both parties have been broadly aligned with the firming LTESA.

    Proponent Termination

    It was suggested in the term sheet that the proponent may be entitled to terminate for Commonwealth default with an amount to be specified in the CISA.

    The proponent has no right to terminate the CISA.

    The CISA notes that termination rights are not available for the proponent because it has rights to seek damages and a termination right is contrary to the policy objectives of the CIS.

    Under the firming LTESA, the proponent could terminate due to SFV's default, material breach or misrepresentation, insolvency and the proponent experiencing a prolonged force majeure event.

    Automatic termination payment

    If the proponent fails to satisfy all conditions precedent by the sunset date, the agreement automatically terminates and the proponent must pay an amount calculated by reference to the aggregate of:

    • a dollar amount per MW bid by the proponent multiplied by the maximum capacity; and
    • the greater of 90% of the net historical payments which the proponent received and zero.

    If the proponent fails to satisfy all conditions precedent by the sunset date or fails to achieve commercial operation on or before the sunset date, the agreement automatically terminates and the proponent must pay $4 million.

    By providing for a larger fixed termination payment if a proponent fails to satisfy all conditions precedent and commercial operations by the sunset date, smaller developers may be less willing to bid for a CISA given the risk of automatically being required to pay out a relatively large termination payment.

    Under the firming LTESA, the SFV may (but is not required to) terminate the LTESA and PDA if a proponent failed to achieve commercial operations by the sunset date. The consequences for such a termination was sized to the project, being a payment of an amount equal to the sum of:

    • 20,000 per MW multiplied by the contracted percentage of the maximum capacity, up to a maximum amount of $4,000,000; and
    • the greater of 90% of historical net payments and zero.


    Authors: 
    Bree Michael, Partner; Cassandra Wee, Partner; Robert Gough, Senior Associate; Joshua Hetzel, Associate; Nancy Mao, Graduate

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