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31 August 2023
Mr Salim Masouz
Branch Head
Capacity Investment Scheme
Commonwealth Department of Climate Change, Energy,
the Environment and Water
Submitted online at: Consultation hub | Provide a submission - Capacity Investment Scheme – Public Consultation paper - Climate Change (dcceew.gov.au)
Dear Mr Masouz
Submission: Response to Public Consultation Paper on the Capacity Investment Scheme
CS Energy welcomes the opportunity to provide a submission in response to the Capacity Investment Scheme (CIS) Public Consultation Paper (Paper) released by the Commonwealth Department of Climate Change, Energy, the Environment and Water (DCCEEW).
About CS Energy
CS Energy is a proudly Queensland-owned and based energy company that provides power to some of our state’s biggest industries and employers. We employ almost 500 people who live and work in the Queensland communities where we operate. CS Energy owns and operates the Kogan Creek and Callide B coal-fired power stations and has a 50% share in the Callide C station (which it also operates). CS Energy sells electricity into the National Electricity Market (NEM) from these power stations, as well as electricity generated by Gladstone Power Station for which CS Energy holds the trading rights.
CS Energy also provides retail electricity services to large commercial and industrial customers throughout Queensland and has a retail joint venture with Alinta Energy to support household and small business customers in South-East Queensland.
CS Energy is creating a more diverse portfolio of energy sources as we transition to a new energy future and is committed to supporting regional Queensland through the development of clean energy hubs at our existing power system sites as part of the Queensland Energy and Jobs Plan (QEJP).
Key issues
As the energy market transforms to a lower carbon energy mix, it is critical that the market incentivises the required capacity to ensure a reliable and secure transition. Although the Commonwealth Government will apply the CIS first to South Australia and Victoria for projects commissioning in 2027, it is essential that the CIS be designed to enable its ready application to other States and Territories over longer time-frames consistent with the energy transformation. That context underpins this submission.
The CIS is a partial solution to delivering the enormous buildout needed by 2030 to meet emissions reduction ambitions. A general observation is that great benefit will be obtained by clarity of the overall approach to achieving renewable energy targets and how individual schemes will dovetail to provide support across asset types. For its part, the CIS tender process is more likely to elicit the broadest possible range of proposals if the tender documents specify the CIS’s objectives and minimise prescription of the means to satisfy them.
In particular, the specification of auction targets now will improve developer and investor certainty for planning projects for the CIS. For Queensland, these could be aligned to the forecasts developed as part of the QEJP, which suggest that the State has different needs to South Australia and Victoria (see section 5 below). These can be changed if there is a material change in risks, rather than have a complex process that attempts to tailor auctions to specific reliability needs.
The tender documents therefore will need to provide detailed evaluation criteria linked to the CIS’ objectives. The discussion below elaborates where relevant on the benefits of minimising prescription of project attributes.
CS Energy’s observations and recommendations cover five elements of the CIS:
Payment design;
Service performance – availability and duration of the service;
Eligible sources of the service;
Social licence; and
Jurisdictional coverage (including tender and contract governance, and project lead times).
Payment Design
The Paper proposes that CIS contracts set a revenue cap and a revenue floor with potential for sharing upside and downside revenue outcomes. The Commonwealth will “top up” a percentage of any shortfall in revenue and the capacity provider will pay the Commonwealth a portion of any revenue above the cap. CS Energy supports the proposal that the values of the caps, floors and revenue sharing arrangements are to be proposed by project proponents and will be considered by the Commonwealth. There should not be any upfront limits on the values of the cap and the floor or of the range of the collar.
Although a standard floor price arrangement would simplify project and contract design, CS Energy recognises the Commonwealth’s interest in avoiding real or perceived windfall gains to capacity providers.
CS Energy is concerned that the Paper does not expressly recognise that many capacity providers operate portfolios of assets. The output of a project receiving CIS funding is likely to be traded according to a portfolio-based strategy. This has the potential to complicate the allocation of revenue to the CIS project. This question is covered further in item 2 below.
Service Performance
The Paper states that CIS projects must offer a minimum of 50% of their CIS capacity to the market for the duration of a declared LOR3 condition. CS Energy understands from briefing by DCCEEW officials and AEMO Services staff that CIS projects must have an availability factor of 97%. These requirements might unduly restrict the nature of the offers a CIS tender will receive.
LOR3 conditions are not readily forecast and can be declared at short notice. This may weaken the financial case of potential CIS projects by limiting the range of market services they can offer, with the resource allocated instead to managing the risk of not having 50% of its capacity ready for an LOR3 condition. This in turn would reduce any broader benefits the market could obtain from a project’s services. It therefore is essential the Commonwealth implement the Paper’s proposal that CIS project proponents be able to offer only a portion of an asset’s capacity to the CIS. The likely alternative is very high-priced offers in response to the CIS tender.
The Paper states that a CIS project must be able to dispatch energy at full capacity for a minimum duration to contribute to meeting the reliability standard. It also states that reliability requirements are to be determined by reference to AEMO’s Integrated System Plan (ISP) and Electricity Statement of Opportunities (ESOO) (taking account of legislated schemes/targets and modelled/announced coal closure dates), and the 0.002% USE and 0.0006% “interim” USE reliability standards. If the CIS design links these reliability expectations to a 97% availability factor, then the range of technologies able to participate will be very limited, and the value the projects could deliver via other services will not be captured by the market.
Another key point is that a need to specify performance requirements in CIS contracts has not been demonstrated. The operation of the wholesale energy market provides a very strong commercial incentive for energy sources to be available in tight supply-demand conditions, including circumstances that might give rise to LOR3 conditions. Complex administrative and compliance arrangements are not effective substitutes for a price mechanism where there is workable competition, as in the NEM.
Service Sources
Fundamental requirements of the CIS are that services must be dispatchable and release zero scope 1 emissions. The Paper states that the CIS will accept as zero scope 1 emissions the services from assets that are a) connected directly to the main transmission network or b) co-located behind the meter at grid connected wind or solar farms. Demand-side response projects will be eligible for CIS funding only if they are dedicated solely to supporting reliability. CS Energy agrees with these settings.
CS Energy is concerned that aspects of the service performance requirements set out to date, particularly the 97% availability factor, will prevent CIS participation by technologies such as pumped storage hydro-electric generators. Notwithstanding assessment of the reliability investment required for South Australian and Victoria by 2027, the CIS framework should enable participation of the widest range of technologies in tender processes. The importance of this to obtaining maximum value from CIS expenditure in a State such as Queensland is covered further in section 5.
Social Licence
CS Energy understands it has been suggested that CIS projects ought to locate in the Renewable Energy Zones (REZs) defined by each jurisdiction. This would not necessarily lead to an optimal outcome for the reliability of electricity supply or for Commonwealth expenditure on the CIS. It is quite likely that, in many instances, CIS projects will deliver more energy to consumers by locating elsewhere in a network than a REZ. Other network locations might be less congested and, or, closer to the regional reference node and so have lower marginal loss factors. If so, in either case more energy will be delivered at lower marginal cost and CIS projects will receive more revenue, substantially reducing the subsidy required through the CIS, and potentially upside gains to both parties.
Jurisdictional Coverage
CS Energy recognises that the relatively short time frame between the late 2023 CIS tender process and required project commissioning in 2027 reflects an assessment of reliability risks in Victoria and SA.
In later tenders, the Commonwealth would obtain more benefit by setting lead times for projects that will be delivered over longer time frames. In Queensland it would be prudent to match the CIS timeframes and objectives to the reliability outlook presented by the State Government’s own planning and modelling which is likely to differ from the ISP but may be the more likely path. Further, applying the Queensland Energy and Security Advisory Board’s biannual Blueprint updates on the progress of the QEJP and Queensland’s reliability outlook will streamline the governance for the CIS and reduce administrative overhead. These points rest on the policy and financial commitments the Queensland Government has and is making to its buildout.
This approach is likely to reveal significant benefits of incentivising the development of larger, more capital-intensive projects. This includes pumped hydro-electric storage generators and potentially 100% hydrogen capable peaking facilities, which will deliver reliability services of greater outputs over much more extended timeframes than technologies such as batteries.
CS Energy supports the Commonwealth’s approach of using AEMO Services to design and manage the CIS tender process. CS Energy understands that AEMO Services’ current purpose is set specifically to managing procurement in New South Wales. It would be appropriate to formally expand AEMO Services’ charter to managing the CIS for the Commonwealth across all Australian jurisdictions. This would promote confidence that the CIS will be managed to allocate CIS’ funds across jurisdictions in proportion to their reliability needs emerging consequent to the energy transformation.
If you would like to discuss this submission, please contact Don Woodrow, Market Policy Manager, at dwoodrow@csenergy.com.au or on 0407296047.
Yours sincerely
Dr Alison Demaria
Head of Policy and Regulation
