Capacity Investment Scheme – Public Consultation paper

August 31, 2023

Response to, Commonwealth Department of Climate Change, Energy, the Environment and Water

Capacity Investment Scheme
Public Consulta.on Paper 2023
From the Australian Solar Thermal Industry Associa@on (AUSTELA)
ACN: 149 005 210
PO Box 6127
O'Connor
ACT 2602, Australia, h-p://www.austela.net.au

Dear Capacity Investment Scheme team,

Thank you for this opportunity to respond to the Public Consulta@on Paper on the proposed Capacity
Investment Scheme (CIS), prepared by the Department of Climate Change, Energy, the Environment and Water in August 2023.

AUSTELA is an industry associa@on of companies that are involved in solar thermal power genera@on. It includes Australian companies and Australian subsidiaries of interna@onal companies in the field.

AUSTELA welcomes the Capacity Investment Scheme and considers that it has great poten@al to address the current electricity market shortcomings, if it is implemented well.

AUSTELA appreciates the specific acknowledgement of concentra@ng solar thermal and strongly endorses the technology-neutral, renewable-only approach of the CIS Discussion Paper.

However, AUSTELA believe it is a mistake to use a 4-hour storage metric to define the CIS, since 4 hours is much smaller than the long-dura@on required for maximum reliability benefits in the future electricity system.

In the following pages we respond to the discussion paper in three parts:

1. Overview of the main issues arising from the proposed CIS;
2. Specific responses to ‘Consulta@on Ques@ons’; and
3. Recommenda@ons.

Yours sincerely;
Keith Lovegrove
Craig Wood
Victor Marin
Directors, AUSTELA contact: Keith Lovegrove klovegrove@itpau.com.au

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Introduc*on
Solar thermal technologies take their energy from the sun, but unlike solar PV, solar thermal technologies store the sun’s energy as heat rather than conver@ng it to electrons immediately.
Concentra@ng Solar thermal Power (CSP) genera@on systems operate with an array of mirrors that concentrate the sun’s heat and stores it in a medium (typically molten nitrate/potassium salts). The heat – to around 600˚Celsius – can be stored for many days and used to drive a steam turbine which produces electricity via a synchronous generator whenever needed, day or night. Typical systems have tanks with enough salt to run the power block in the absence of sun for 15 hours or more.
Concentra@ng solar systems can also provide clean industrial process heat which typically displaces gas-powered heat in manufacturing.

While the renewable energy sector has been dominated by wind and PV, the impera@ve for reliable dispatchable renewable genera@on – to balance variable genera@on – makes CSP an ideal technology op@on to include in electricity grids. While rela@vely small in uptake to date, CSP has a 30-year track record and currently around 6.5GWe of installed capacity in more than 100 u@lity scale plants around the world. Spain is the past leader in u@lity-scale CSP and China is currently building 28 CSP projects.
A recent key example is the Noor Energy project in Dubai, a 700MW CSP project hybridised with
250MW of solar PV, now nearing comple@on.

AUSTELA regularly comments on the mix of future renewable energy technologies, energy system design and market rules and incen@ves. We brief ministers, senior departmental officeholders and regulators. Our most recent public contribu@on was to the Western Australian call for submissions on changes to the SWIS Reserve Capacity Mechanism (RCM).

It is clear to us that all jurisdic@ons need energy market redesign to ensure the construc@on of reliable, dispatchable zero-emissions electricity genera@on systems.

Overview Comments
In addi@on to responding to the Consulta@on Ques@ons, we have some overview comments on the
CIS design and details:

1. We welcome the Commonwealth’s acknowledgement that investment incen@ves are needed
in the na@on’s main electricity grids to encourage the building and provision of renewable
dispatchable capacity;
2. We support the Discussion Paper’s language that places an emphasis on “clean dispatchable
capacity” rather than explicitly sta@ng ‘storage’ or ‘genera@on’. This allows technology-
agnos@c solu@ons, rather than quotas for technology;
3. AUSTELA considers the ‘reliable capacity value’ metric of a 4-hour dura@on storage system to
be inappropriate because it encourages storage dura@on that is too low. We argue this
benchmark should be at least 15 hours;
4. AUSTELA cau@ons that other details adopted in the final CIS need to carefully considered to
avoid perverse outcomes that do not achieve the stated goals, including:
a) Implicitly or explicitly suppor@ng storage-only systems in preference to technologies
such as CSP that combine energy collec@on and storage together in one investment;
b) Sejng short @melines between tenders and commissioning that can only be met by
bakeries;

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c) Sejng the dura@on of support contracts at a term of 10 – 14 years that aligns with
the economic life of bakeries rather than the 25 – 30 year economic life of long-
dura@on storage, such as CSP and PHES.
5. We agree with the Public Consulta@on Paper’s posi@on that the CIS should avoid
incen@vising fossil fueled energy sources such as gas and coal, since the goal of the CIS is to
assist moving Australia’s energy systems to 82% renewables by 2030 and by implica@on
100% by 2050;
6. We note that the Paper commits to the 2030 Commonwealth emissions goal, but not
explicitly the ul@mate goal of ‘net-zero’. We submit that explicitly considering the net-zero
goal would help to frame the capacity investment issue with long-dura@on renewable energy
storage in mind;
7. Under ‘Objec@ves’, men@on is made of, “Costs being borne by the Commonwealth, and
which are therefore not passed on to electricity consumers, including households and
industry.” Arguably, if the floor and ceiling prices are op@mal, it should be revenue neutral
for the commonwealth. If not, taxpayers would just be subsidising ar@ficially lower prices to
consumers;
8. Under the heading ‘Context of the CIS’, the Paper notes: “This aim is to accelerate the
development of new capacity to replace capacity that is forecast to exit the market in
coming years, and meet growing demand.” The capacity forecast to exit the market is coal-
fired capacity – ie. fully firm, reliable and dispatchable capacity within outage limits. If the
CIS is skewed towards 4-hour dura@on storage coming into the system, grids will s@ll lack the
8 – 24 hour dura@on capacity required. If this is the outcome, the genera@on companies and
grid operators will s@ll have a strong argument for gas, coal and diesel genera@on in 2050;
9. It is correctly noted on page 12 of the Public Consulta@on Paper: “Some technology types
will have a reduced contribu@on to reliability on a per MW basis when compared to
medium storage baCeries (e.g. short dura@on baCeries) and some technologies will have a
higher contribu@on (e.g. long dura@on storage).” From this explana@on we assume the
Department is considering giving 4-hour dura@on storage a firm capacity value of “1”, and
any dura@on less than this benchmark is de-rated, and any dura@on greater than 4 hours
being pro-rated, eg. 8 hours is “2” and 16 hours is “4” etc. This approach might work, but it is
very hard to see how a system that has ra@ng factors above and below 1 will be
transparently understandable and easy to administer. As previously noted we advocate
sejng the benchmark at 15 hours and calculate dera@ngs below that.

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Response to Consulta*on Ques*ons

Consulta@on ques@ons (1):
• The Department is seeking feedback on what other implica@ons the CIS might have on the energy market, and how the CIS can be designed to mi@gate risks while delivering on key policy objec@ves.

The overall impact of the CIS is likely to be a smoothing of wholesale prices, reducing the swing between average maximum and minimum spot prices. It is also likely to lower the value of tradeable ancillary services. These are expected and desirable outcomes. The greatest risk is that the CIS supports a technology mix that only deals with near-term issues. It should be designed so that it brings a mix of technologies and configura@ons that establish a trajectory to an op@mised result for a 100% zero emissions system in the long term.

• The Department is seeking feedback on WA implementa@on of the CIS, including interac@on with the exis@ng Reserve Capacity Mechanism. This will be further canvassed in a WA-specific consulta@on paper.

The RCM in WA is an essen@ally good mechanism but the details are very much @lted in favour of fossil fueled systems. The best approach to ensuring uptake of renewable dispatchable capacity in
WA would be to mandate a share of the RCM to 100% renewable solu@ons. This share should grow to 100% over @me. The CIS could be used to fund the cost gap as needed. We look forward to responding to the WA-specific paper.

We are also broadly in favour of integra@ng the CIS-funded projects into the New South Wales system via the long-term energy service agreements (LTESA) system.

Consulta@on ques@ons (2):

• What minimum storage dura@on should be required for tender eligibility, to achieve CIS policy objec@ves?

We believe that theore@cally a CIS project could have any storage dura@on so long as it was appropriately de-rated for its usefulness.

• What methodology for modelling and measuring dura@on requirements for various technology dura@ons would be appropriate?

The key methodology to be sekled is the assessment of dera@ng factors. We argue the benchmark of 100% should be set as being for systems with at least 15 hours of available stored energy. From there the calcula@on of de-ra@ng factors needs to be made sta@s@cally based on performance during con@ngency events from hour-by-hour models of future systems. Please note: the electricity systems modelled must be the 100% renewable future systems rather than the present system that is s@ll supported by fossil fuel genera@on.

Past work in this field by the US government Na@onal Renewable Energy Laboratory (NREL) in par@cular shows that there is a strong reduc@on in dera@ng factor going from 4 hours of storage to 8 hours and then a progressively levelling out to smaller improvement from 8 hours to 15 and beyond.

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• How could the CIS eligibility criteria and assessment methodology change and adapt over @me?

If the assessment of dera.ng factors is based on modelling in a future 100% renewable system, then the need to change over .me should be minimised. As systems are installed, models should be re-calibrated and updated based on historical performance of specific generators and general technology classes.
We do not agree with the Department’ inclusion of “Storage projects where the fuel source is the wholesale electricity market.” These projects should only be eligible if they are directly correla@ng in
@me their consump@on with the contracted output of a renewable generator.

Consulta@on ques@ons (3):

•What methodology for considering a project’s contribu@on to zero scope 1 emissions would be appropriate?

The CIS is intended for zero scope 1 emissions genera@on. We believe that eligible generators need to show that all the input energy used is renewably sourced directly at the @me that it is taken in.
Thus electricity storage systems should be directly connected to their source of ini@al genera@on.
Alterna@vely, contracted renewable genera@on for charging should only be eligible if the amounts consumed exactly correlate in @me with the amounts generated by the contracted source. Simply averaging via the purchase of LGC or annual volume contracts would undermine the key objec@ves of the CIS.

• How could this criteria and assessment methodology adapt as technology matures over @me?

If the principles above are adopted there should be likle need for adapta@on. The evolu@on of the wholesale market price signals, as coal plants re@re, should then be sufficient to move the most profitable configura@ons towards longer dura@on storage as @me goes on.

• What types of demand response would be consistent or inconsistent with the CIS objec@ves?

Demand response approaches should not be eligible. Wholesale market price signals should be sufficient for demand response. The whole point of the CIS is to support the ini@al investments in high-Capex, reliable renewable dispatchable genera@on. Demand response is not a high-Capex approach, it is the low hanging fruit.

• How can the CIS design be future-proofed for an evolving/changing technology mix?

We believe the scheme can be future-proofed with a strict approach to scope 1 emissions, @me- correla@on of renewable electricity supply to storage, a minimum project size of 30MW and a determina@on of dera@ng factors based on predicted contribu@ons to reliability in a future 100% renewable electricity system.

Consulta@on ques@ons (4):

• The Department is seeking feedback on the eligibility requirement of projects in the NEM for equal to or greater than 30MW registered capacity.

The 30MW limit is prac@cal and ensures that along with zero-emissions and dispatchability, the CIS projects are u@lity-scale, allowing CSP and PHES to be considered.

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Consulta@on ques@ons (5):
The Department is seeking feedback on each of the eligibility requirements including:
• the focus on a base level of development status of land tenure, planning and connec@on approvals.

We agree that “Successful projects will have the target final investment decision (FID) or financial close (FC) and COD key dates as contracted milestones”. The CIS projects should not require FID or
FC as a prerequisite.

Project owners need investment certainty in order to fund the necessary steps. We therefore suggest a milestone-based approach. This could be low-cost hurdles based on applicant track record and ability to achieve an alloca@on, but with development milestones to be met with a strict
@meline in order to maintain an alloca@on.

• the impact of par@cipa@on in other government schemes on CIS eligibility.

On par@cipa@on in other schemes, it is noted that “Projects that are already, or will be, in receipt of revenue support from Commonwealth or state and territory governments will not be eligible for the
CIS tenders.” We agree that this should not exclude LGCs, ARENA grants and CEFC facili@es.

• the eligibility of exis@ng projects to bid into the CIS, and ques@ons of CIS addi@onality that result from this approach.

Ideally the scheme should only be for projects not yet commissioned. Those at various stages of development should be eligible. Those already in opera.on should not be eligible.
It can be recognised however that some exis.ng storage systems may find their income base nega.vely impacted by the advent of new CIS supported systems on the exis.ng markets. Some recogni.on of this may be appropriate.

• the technology risk appe@te of the CIS

The expressed wish to be technology neutral should be maintained. All technologies should be eligible. If performance hurdles are met, all technology risk should stay with the system owner.
No@ng the requirements for minimum system size and developer track record, it can safely be assumed that the bulk of uptake will be technologies commercially proven. For new technologies and technology varia@ons an approach for con@nuously upda@ng dera@ng factors will be needed.

The statement at 4.3.1, on merit assessment notes, “projects will be assessed against their technical, commercial and social licence merit.” We note that the social licence assessment is not detailed.

Consulta@on ques@on (6): The Department is seeking feedback on the evalua@on criteria, on the appropriate structure to assess a project’s contribu@on to system reliability and feedback on the poten@al development and applica@on of de-ra@ng factors.

The key methodology to be sekled is the assessment of dera@ng factors. We argue the benchmark of 100% should be set as being for systems with at least 15 hours of available stored energy. From there the calcula@on of de-ra@ng factors needs to be made sta@s@cally based on performance during con@ngency events from hour-by-hour models of future systems that are 100% renewable rather than within the present system that is s@ll supported by fossil fuel genera@on.

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As we note above, past work in this field by the US government Na@onal Renewable Energy
Laboratory (NREL) in par@cular shows that there is a strong reduc@on in dera@ng factor going from 4 hours of storage to 8 hours and then a progressively levelling out to smaller improvement from 8 hours to 15 and beyond.

Consulta@on ques@on (7): The Department is seeking feedback on the appropriate structure and sizing of performance requirements necessary to deliver on the policy objec@ves of the CIS without distor@ng storage market par@cipa@on.

We point to the Paper’s performance requirement sugges@ons: “A strict abatement regime will apply where a project is not available at the capacity (other than scheduled maintenance); respond to price signals in relevant markets; and bid a minimum of 50% of the project capacity in an LOR3 event (or equivalent event in the relevant market), that has been forecast by AEMO more than two hours ahead of the LOR3.” These are good in-principle requirements, however the issue is what is an equitable method for responding to a failure. The consequences should be not so onerous that a project cannot reasonably rec@fy itself over the longer term.

Consulta@on ques@on (8):

1. The Department is seeking feedback on all aspects of the high-level commercial model including:
- the floor price support mechanism

We leave it to others to comment on this issue.

- the use of a single net revenue floor for both VRE and scheduled generators (including storage)

The reference to both VRE and scheduled generators is confusing. We assume pure VRE generators
(PV and wind without storage) will not be eligible for the CIS.

- the term of the contract, including financing requirements around revenue tenor

We note that sec@on 4.4.2, CIS commercial structure, says: “Term of the support period (during commercial opera@on) will be as determined for each tender process.” Term of support is cri@cal. A shorter support period that aligns with bakery’s economic life (eg. 14 years) will disadvantage CSP and pumped hydro which have a 25 – 30-year economic life.

- the performance requirements, including the LOR3 performance requirements

Please see our response to (7).

- the milestone requirements, penalty provisions and termina@on provisions

We leave it to others to comment on this issue.

- A contract structure that divides development/construc@on and opera@ng periods into two contracts, similar to the NSW Project Development Agreement and LTESA division

We leave it to others to comment on this issue.

2. The Department is seeking feedback on the commercial model’s applicability to pumped hydro energy systems.

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We argue that the underlying technology-neutral basis of the proposed CIS should absolutely be maintained. It is important to test the proposed details for unintended perverse outcomes in rela.on to key technologies including PHES, CSP and bioenergy.

Recommenda*ons
1. Dura@on: We strongly recommend that the ‘4-hour medium storage’ benchmark/metric be
changed to 15-hours, lest the market takes 4-hours as the goal of the CIS. In prac@cal terms,
the grids also need capacity in the 8 – 24 hour range to cover for the exit of coal and gas;

2. Grid Charging: We recommend the Department s@pulates that grid-charged solu@ons in the
CIS must only use renewable electricity and must show a direct @me correla@on between
their charging and the supply of the renewable electricity they use;

3. Term: We recommend that CIS contracts have terms of at least 20 years and over, which
reflects the longer economic life of longer dura@on storage technologies such as CSP and
PHES;

4. Lead Times: We recommend that lead @mes between tender award and project opera@on be
tailored to the type of technology in ques@on so that projects with longer build-@mes (PHES
and CSP) are not disadvantaged.

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