Australia's Capacity Investment Scheme – Consultation opens on the design for Western Australia

What you need to know

• The Department of Climate Change, Energy, the Environment and Water (Cth) (DCCEEW) has published a Consultation Paper outlining the design of the Capacity Investment Scheme (CIS) in WA.
• The first CIS tender for the Wholesale Electricity Market (WEM) is planned for June 2024, with an indicative target of 500 MW of four-hour equivalent (2 GWh) clean dispatchable capacity.
• The design for implementation of the CIS in WA is intended to closely mirror the CIS processes in the National Electricity Market (NEM) that have already been announced.
• The WA CIS will be designed to co-exist with the WEM Reserve Capacity Mechanism (RCM). Participation in the RCM will be required to enter into and maintain a CIS Agreement (CISA).

What you need to do

• Consider whether you wish to submit feedback on the WA Consultation Paper – feedback is due by 09:59am AWST Monday, 6 May 2024.
• Consider the anticipated eligibility and merit criteria for the first tender and whether you wish to participate.
• Register for the stakeholder forum being held on Thursday 18 April, to find out more.

The Capacity Investment Scheme in WA

DCCEEW published a consultation paper outlining the design of the CIS in WA on 12 April 2024 (WA Consultation Paper). It is available at: Capacity Investment Scheme - Western Australia Design Paper - Climate (dcceew.gov.au).

The WA Consultation Paper follows:

• the Commonwealth Government's announcement in November 2023 of an expansion of the CIS to support the development of 9 GW of dispatchable capacity and 23 GW of renewable capacity across Australia; and
• CIS tenders in New South Wales, South Australia and Victoria.

The CIS involves the Commonwealth Government seeking competitive tenders for renewable and clean dispatchable capacity, with successful projects offered long-term CISAs for an agreed revenue floor and ceiling.

If the annual net revenue earned by the project exceeds the net revenue ceiling, the project owner pays the Government an agreed percentage of revenue above the ceiling. If the project's annual net revenue is below the net revenue floor, the Government pays the project owner an agreed percentage of the shortfall below the revenue floor.

Source: Capacity Investment Scheme – Western Australia Design Paper (April 2024), Australian Government Department of Climate Change, Energy, the Environment and Water.

Distinct features of the Wholesale Electricity Market

A Wholesale Electricity Market exists in relation to the South-West Interconnected System in WA, WA's largest electricity network. Importantly, the WEM is not part of the NEM and has certain distinct features. This includes a Reserve Capacity Mechanism under which electricity generators, storage and other eligible providers can apply to be certified to receive Capacity Credits for capacity made available to the WEM. These Capacity Credits can be sold to other market participants such as large consumers (who have individual reserve capacity requirements that they must meet) or the market operator, AEMO, separately from any energy actually generated by the provider in a particular trading interval. Contracting in the WEM is also predominately by way of bilateral transactions between market participants, with market settlement taking account of those bilateral transactions.

In its earlier design papers for the NEM, DCCEEW noted a different CIS design would be required for the WEM as a result of these distinct features.

Core elements of the CIS design for the WEM

The WA Consultation Paper outlines a different CIS design to the NEM, whilst also noting that the design for implementation of the CIS in WA is intended to closely mirror the processes in the NEM that have already been announced and implemented.

Important features of the CIS design for the WEM include:

• projects that participate in the CIS in WA must also participate in the RCM and be eligible to receive Capacity Credits to receive payments;
• CISAs can have a term of up to 15 years, and so provide longer term certainty to investors when compared to the RCM, which requires annual certification with no guarantee that certification one year will result in certification the following year;
• projects that fail to meet their Reserve Capacity Obligations under the RCM will not be subject to additional liquidated damages under a CISA;
• different bid parameters for the revenue floor and ceiling will apply for CISAs for dispatchable capacity (bidded on the basis of a total facility revenue per unit of capacity in $/MW) and CISAs for renewable generation capacity (bidded on a combination of fixed ($/MW) and variable ($/MWh) metrics for the floor and ceiling); and
• projects that are already, or will be, in receipt of revenue support from either the Australian or WA Governments will not be eligible to tender. Importantly, this includes projects that have entered into a contract with AEMO under its Non-Co-Optimised Essential System Services framework (notwithstanding that those contracts have typically been of significantly shorter duration than the anticipated duration of a CISA, e.g. 2 years). It is not expected that projects receiving large-scale generation certificates, investment from the Clean Energy Finance Corporation or grants from the Australian Renewable Energy Agency will be excluded on this basis.

It appears that, in WA, the CIS will only apply to the WEM. The WA Consultation Paper does not indicate that it will be available to projects that will connect to networks outside of the WEM in WA, such as the North-West Interconnected System in the Pilbara region of WA.

 Complexities with implementing the CIS in WA

The implementation of the CIS in WA comes at a time of significant reform in the WEM, including 'New WEM Commencement' in October 2023.

Whilst we expect there to be significant interest in the CIS in WA, its introduction does introduce further complexity to participation in the market at a time of significant change. It will be important for market participants to understand the details of the implementation of the framework in the WEM when they become available, including:

• what happens if a project that has entered into a CISA is subsequently no longer eligible for Capacity Credits after entry into a CISA, or if its Capacity Credits are cancelled or reduced in subsequent years? It appears that the CISA may be terminated by the Government where the project no longer participates in the RCM or does not meet its Reserve Capacity Obligations;
• whether other forms of funding or support will exclude a project from participating in the WA CIS;
• the eligibility and merit criteria used in the CIS tender process; and
• the specific terms of the CISA.

Want to know more? 

• Australia's CIS – new support for clean dispatchable projects (Part 1)
• Australia's CIS – new support for clean dispatchable projects (Part 2)
• Australia's CIS - Victorian and South Australian CIS tenders now open for registration (Part 3)
• Capacity Investment Scheme - The South Australia-Victoria CIS Tender open

Author: Caroline Lindsey, Partner; and Thea Walton, Lawyer.