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Level 2, 356-360 Oxford Street
Bondi Junction NSW 2022
atco.com.au
31 August 2023
The Department of Climate Change, Energy, Environment and Water (DCCEEW)
CapacityInvestmentScheme@dcceew.gov.au via Consultation Hub
To the policy team,
Re: Capacity Investment Scheme consultation
ATCO welcomes the opportunity to provide input into the design of the Capacity Investment Scheme
(CIS) and to respond to the consultation paper.
Delivered successfully, the CIS has the potential to encourage new investment in capacity to help resolve reliability risks in the energy market. ATCO is a diversified energy infrastructure owner, operator and renewable energy asset developer. We are looking to expand our footprint in the
National Electricity Market (NEM) and are encouraged by the focus of the CIS to provide long-term revenue certainty to investors and complement existing state schemes.
ATCO observe the policy preference by DCCEEW for the adoption of a ‘cap-and-floor’ type model in implementing the Program. ATCO are supportive of this model, namely the way it competitively ascribes revenue certainty to projects and establishes consumer and taxpayer protections by incorporating a profit-share mechanism. We note this model has proliferated as a preferred model amongst policy makers in the energy sector in recent times. As DCCEEW progress the Program it may be useful for learnings observed from parallel processes, such the NSW LTESA program, to be incorporated into the design and assessment process for the CIS to bring projects to market promptly and affordably.
The CIS can support both short and long duration storage technologies such as Pumped Hydro Energy
Storage (PHES) and Battery Energy Storage Systems (BESS). Our comments in this submission are limited to where we consider refinements to proposed design features that will provide revenue certainty to projects that enable them to manage risks, secure financial investment backing and better serve the long-term interests of consumers.
ATCO Australia Pty Ltd | ACN 74 091 033 546 | Registered Office: Level 12, 2 Mill St Perth 6000
The key points this submission conveys are:
1. Embedding a long-term outlook into the program and redefining the goal to meet reliability
needs from FY26 till post-2030 and beyond 2050.
2. Ensuring that public and private projects are assessed on a level playing field in all jurisdictions
will lead to the most efficient projects being brought to market.
3. The CIS would be able to better accommodate PHES projects if timelines are flexible and there
are capabilities in the program to:
• Recognise and value greater contribution to reliability over a significant, long-term
horizon; and
• risk-sharing, to allow risks to be allocated flexibly after bid date.
4. Allowing proponents to set the cap and floor percentages and the term period would result in
optimal bids, without compromising on bid assess-ability.
Embedding a long-term outlook into the program and redefining the goal to meet reliability needs from FY26 till post-2030 and beyond 2050.
ATCO notes that CIS tenders are expected to be rolled out till 2027 to meet reliability needs between
FY26 and FY2030. While it is expected that reliability will be needed between these years, it is important to consider that there are likely to be reliability needs post-2030, assuming coal closures do not occur on time or other unforeseen events occur in the energy market. Broadening the focus of the
Scheme to solve capacity concerns post-2030 and shore up electricity supply reliability for the decades to come would allow more projects to participate in the CIS tender process and achieve the revenue certainty they otherwise may not be able to attain if the program solely focused on reliability needs till FY2030.
Capping the program till 2030 in line with budgetary constraints is a reasonable approach, however it is important to be aware that doing so could risk ruling out valuable capacity that can help meet reliability needs until and after 2030. Embedding a long-term outlook into the program would help in future-proofing the Scheme, allowing it to be flexible to changes in circumstances.
Understanding that the key focus of the program is to meet reliability needs from FY26-2030, this could be regarded as the short-term objective of the program. To meet the short-term objective, the program could include additional screening or weighting to assess projects i.e., projects that can be delivered before 2030, can be prioritised in the initial tenders. Whereas projects past 2030 can be relegated to later tenders rather than being rejected. This way, the program would be able to assess projects that can meet reliability needs both before and after 2030.
Ensuring that public and private projects are assessed on a level playing field in all jurisdictions will lead to the most efficient projects being brought to market.
ATCO supports that the CIS will complement state schemes. Where effective state schemes exist, it is important that CIS tenders are integrated in them. While it is clear that in NSW, CIS funding will be funnelled through the Roadmap and the LTESA tenders, it is less clear for other states. We understand that DCCEEW may be in the process of working out the details on the allocation of CIS funding between states. ATCO recommends that once these details are confirmed, it should be shared with industry, including the method used to determine the percentage of funding each state will receive.
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Another consideration is how states would leverage and implement this funding in their respective jurisdictions. There is a lack of clarity on the discretion states have in terms of implementing the CIS in their jurisdictions. This issue is further compounded when the eligibility criteria is open to both publicly and privately-owned projects.
Currently, it is unclear how a federal scheme which will work differently in jurisdictions where states may have significant discretion about its implementation, can provide private developers the assurance that they will be treated fairly compared to state-owned projects or projects that have a minority or majority equity share from governments. Assessing public and private projects on a level playing field is crucial for this policy to work fairly and effectively. This will ensure the most efficient projects are bought to market and consumers receive the best value.
Assuming that states are able to implement the CIS at their discretion, it may be worth establishing controls to ensure that CIS funding does not inadvertently favour government-owned entities or projects. For transparency and equity in the project selection process, there may be benefit in prioritising and subsequently implementing measures that help ensure fair representation and opportunity for participation in the CIS between government-owned entities and private sector funding.
The CIS would be able to better accommodate PHES projects if timelines are flexible and there are capabilities in the program to:
• Recognise and value greater contribution to reliability over a significant, long-term horizon;
and
• risk-sharing, to allow risks to be allocated flexibly after bid date.
ATCO is encouraged that the consultation paper takes into consideration the longer development and construction lead times of PHES compared to shorter duration technologies. However, it is unclear how these longer lead times will be factored into the tender process given the tight timeframes outlined in the paper. Currently, the focus of the CIS is to boost new project delivery until 2030 – it is important to highlight that such timelines may prevent longer lead time technologies from participating in the Scheme, thereby impeding the longer-term effectiveness of the CIS in encouraging energy supply reliability out to 2050 and beyond.
In keeping with the positions taken above, should DCCEEW take a long-term outlook and extend the
2030 timeline, this would enable longer lead time technologies to participate in the CIS. This is particularly advantageous as these technologies have the capability to delivery long term system strength and other benefits to electricity consumers. The timing issue is further compounded if we consider the length of time between a reliability need being identified, tender commencement, and the current required date of delivery of a CIS project.
To provide the system with a range of options to meet capacity requirements, pre-determined capacity allocations could be incorporated in the CIS design for specific technologies to account for their risk profiles, lead times and costs. This will ensure that no one technology dominates in the CIS and a range of options are available in the energy system to meet the capacity need. Another option is to enable capability in the program to recognise and value the greater contribution to reliability provided by long duration energy technologies through reliability modelling assessments and/or duration metrics.
As considered during the NSW LTESA tender program, the CIS may be able to help deliver PHES projects promptly if risk allocations are flexible. For major civil energy infrastructure assets such as PHES, the uncertainty created by disruptive, persistent, and industry-wide trends in the contractor market make it difficult for proponents to take on development, construction and operational risks without the
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opportunity to mitigate the risk with an underwriting facility. PHES projects are likely to need secured
CIS funding as a stage-gate to rationalise the final stages of project development, resulting in challenges for proponents to price certain risks at bid date.
Without means to adjust input costs fairly and transparently after bid date for a limited and agreed set of risks, contractors or owners may be required to price conservative levels of contingency into bid variables to manage unlikely but highly impactful tail risks, which may include scope changes encountered later in development, escalation risks for key capital inputs, or high-impact, low- probability events encountered over the course of construction. Put simply, the CIS risks funding contingency for low-probability events that may not materialise. This could be avoided by allowing flexibility in the CIS to be re-priced after bid date as projects move down the development pathway and costs are less likely to fluctuate.
ATCO acknowledge that considering this capability may require an augmenting of the awarding authority’s remit, but also note that there is precedent in the market which may help DCCEEW consider this option. Many of the risk-sharing approaches prescribed in the NSW Government’s commercial principles on escalation risk for infrastructure projects may be applicable to the CIS, while fairly and transparently managing the risks associated with cost exposure to the awarding authority.
Allowing proponents to set the cap and floor percentages and the term period would result in optimal bids, without compromising on bid assess-ability.
ATCO observe the similarity between the revenue underwriting design instrument and cap-and-floor products increasingly deployed by policy makers in the energy sector. While ATCO support such schemes, we realise this Scheme differs slightly from others such as the NSW LTESA program as there is a cap and floor ceiling percentage. For proponents to understand the commercial value they can achieve from bidding into a CIS tender, they would need to know the proposed top-up percentage.
Typically, in other processes, there is a quantifiable sum which is payable, providing proponents with revenue certainty – a percentage may not be able to achieve this outcome.
Fundamentally, we would like to understand the value of the Federal Government setting the percentages, as opposed to allowing proponents to do so and then evaluating bids accordingly. It is important to be wary of the risk that is introduced should the Commonwealth elect a floor sharing percentage that is not appropriate for financing covenants and specifically, minimum debt serviceability thresholds, thereby impacting the efficiency of project financing achieved by proponents.
It also appears to limit opportunities for proponents to minimise fiscal impacts to the Scheme, thus achieving a more favourable Financial Value score.
If DCCEEW see value in setting the floor and ceiling price percentages instead of allowing proponents the flexibility to set their own, it is crucial for industry to know how these percentages will be set. These percentages are key inputs into proponents bid so it is imperative that they are communicated to industry as early in the tender process as possible, enabling proponents to make sound investment decisions.
Regarding the term of support period, ATCO notes that the consultation paper says that it “will be as determined for each tender process.” Currently, it is unclear if each tender will have a different or bespoke term or if the term period will be the same across tenders in all jurisdictions. Knowing this key detail is crucial for proponents to appropriately model and consider the impact of the CIS in their investment planning. We also note the additionality for the term period to be an adjustable bid variable
– allowing proponents to put forward an alternative term period “where improved value for money can be demonstrated.”
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ATCO’s perspective is that the term period should at least extend beyond the offtake horizons currently available in the market, and be informed by input from financiers, and the tenor of revenue certainty they require to provide efficient cost of debt. This consideration will differ for different projects as
PHES would require a longer tenor. Financing efficiency for PHES would not be possible with a revenue underwrite that is less than 30 years. If DCCEEW were to determine the term of the support period, it could potentially be insufficient for PHES. Instead, ATCO’s preference is for proponents to bid the term as well as the starting year for the support period. This would allow PHES projects to be appropriately accommodated in the Scheme and would enable projects that do not require support in certain years to be evaluated favourably.
We thank DCCEEW again for the opportunity to make a submission. If you have any questions or would like to discuss any of the comments made in this submission, please contact myself or Ollie Tridgell,
General Manger – Market Strategy & Policy at oliver.tridgell@atco.com or 0413 924 993.
Yours sincerely,
Chris Judd
Executive General Manager, Energy Infrastructure chris.judd@atco.com
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ATCO RESPONSE TO SELECTED CONSULTATION QUESTIONS
The Department is seeking feedback on WA implementation of the CIS, including interaction with the existing Reserve Capacity Mechanism. This will be further canvassed in a WA-specific consultation paper.
ATCO supports the approach to consider implementation of the CIS in WA separately from other jurisdictions. It is important that the CIS complements the existing Reserve Capacity Mechanism in the
South-West Interconnected System and provides new capacity support for the North West
Interconnected System in the short and long term.
How can the CIS design be future-proofed for an evolving/changing technology mix?
To accommodate an evolving technology mix, capability needs to be established in the program to be able to assess the risk profiles of different technologies. While some long duration storage technologies like PHES have long lead times and face unique construction risks, they have a longer operational life, provide deep storage, and have minimal exposure to input cost risk. The design of the
CIS should be able to recognise and evaluate these risk/reward trade-offs to allow different technologies to be compared against each other on a level playing field.
In addition, as discussed in our cover letter, embedding a long-term outlook into the program to consider reliability needs post-2030 as well as to provide longer lead time technologies an equal opportunity to participate in the CIS would also help in future-proofing the Scheme for an evolving technology mix.
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 connection
approvals.
• the impact of participation in other government schemes on CIS eligibility.
• the eligibility of existing projects to bid into the CIS, and questions of CIS additionality that
result from this approach.
• the technology risk appetite of the CIS.
Focusing on the development status of land tenure, planning and connection approvals is reasonable as credible projects would be able to have these considerations in place.
Regarding projects participating in other schemes, DCCEEW should consider whether forms of support
‘overlap’, or whether they are complementary. The merit of a project should be evaluated more closely where the awarding of additional support is doing the same ‘work’ as a support program already awarded.
The question of existing projects being able to bid into the CIS is one that needs careful consideration.
Given the objective is to encourage new investment and additional capacity associated with the needs of each jurisdiction, allowing existing projects into the CIS may compromise this objective.
Consideration needs to be given to whether market signals are adequate for existing facilities to provide capacity to the market. The use of the CIS for existing facilities will dilute available funding to support new projects and bring additional capacity to the market. The CIS might be better placed to assist new projects accelerate their development and come to market sooner – thereby providing more value towards the long-term interests of consumers.
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Considering the technology risk appetite, it may be ideal for the CIS to be technology-neutral – as long as the overall objective of the program is being met such as addressing reliability needs, no particular technology should be favoured over another. The program should also have the capability to assess the risk profile of different technologies. See our previous answer and cover letter for more detail.
The Department is seeking feedback on the appropriate structure and sizing of performance requirements necessary to deliver on the policy objectives of the CIS without distorting storage market participation.
The performance requirements are appropriate – they will help deliver on the policy objectives of the program by providing capacity in times of shortage, without distorting participation in the storage market. However, additional clarity is needed on whether the performance requirement applies every year or over the average term period. ATCO’s preference is for the latter as fulfilling performance requirements every year does not appropriately consider refurbishment or maintenance.
The Department is seeking feedback on all aspects of the high-level commercial model including:
• the floor price support mechanism
• the use of a single net revenue floor for both VRE and scheduled generators (including storage)
• the term of the contract, including financing requirements around revenue tenor
• the performance requirements, including the LOR3 performance requirements
• the milestone requirements, penalty provisions and termination provisions
• A contract structure that divides development/construction and operating periods into two
contracts, similar to the NSW Project Development Agreement and LTESA division
The floor price support mechanism is reasonable as it guarantees minimal revenue for debt serviceability, and de-risks project revenue profiles with the expecting impact of subduing target investor risk-weighted returns.
Regarding the use of a single net revenue floor for both VRE and scheduled generators, our understanding is that the net revenue floor will be selected by each proponent. We believe it is unlikely for VRE and scheduled generators to need the same revenue floor on a like-for-like basis.
The contract term is reasonable however DCCEEW should consider that investors need certainty of tenor for future tender rounds. Ideally, proponents should be able to choose the tenor appropriate for their project. Refer to our cover letter, particularly the fourth key point for more detail.
The performance requirements are reasonable and are required to achieve reliability targets.
However, we would like to understand the reasoning behind the minimum 50% bid of capacity in an
LOR3 event. ATCO recommends consideration be given to the relative portion of capacity availability appropriate across technology and chemistry types.
The milestone requirements also seem reasonable however if force majeure and other events push back longstop dates, DCCEEW should consider that most of the project delivery risk sits with the
EPC/OEM.
ATCO does not have a strong preference for a single or two-contract structure. Instead, we believe the focus should be on ensuring that the terms in the contract are flexible enough to have the capability to risk-share, allowing risks to be allocated flexibly after bid date for PHES projects. Refer to the third key point in our cover letter for more detail.
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The Department is seeking feedback on the commercial model’s applicability to pumped hydro energy systems.
Please refer to our cover letter, particularly the third and fourth key points for our detailed response.
Fundamentally, ATCO believes that PHES projects should not be considered as an extension to the CIS, and instead needs to be considered independently from BESS and other dispatchable generation technologies given its unique characteristics and risk profile, as outlined in the cover letter.
It should also be noted that in the current market settings, synchronous generation is undervalued.
The Commonwealth, in collaboration with market experts and grid modelling consultants, should seek to develop a view of future market signals and pricing that appropriately considers the value that projects like PHES deliver through their operating lifetime (often greater than 80 years). The risk of not appropriately considering this additional future value may result in the CIS supporting projects that will not be able to meet the grid’s requirements as it evolves or provide energy supply reliability throughout our necessary energy transition and beyond 2050.
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