Capacity Investment Scheme – Public Consultation paper

31 August 2023

Capacity Investment Scheme
Department of Climate Change, Energy, the Environment and Water
Submitted Online

Dear Capacity Investment Scheme team

Capacity Investment Scheme – Public Consultation Paper

CleanCo Queensland welcomes the opportunity to provide input to the Commonwealth Government’s Public
Consultation Paper for the Capacity investment Scheme (CIS).

CleanCo was established by the Queensland Government in 2018. We deliver renewable and low-emission energy solutions and play a critical role in supporting new energy developments to help Queensland businesses thrive in a net zero future. CleanCo owns around 1000 MW of firming/dispatchable capacity and understands the important role that these types of assets in ensuring a secure and reliable system, as well as the commercial aspects of operating these assets, including interactions with forward and retail hedging.

Objectives and Complementarity

CleanCo believes that the proposed design of the CIS will support the delivery of the Commonwealth’s policy objectives but some refinements are available to limit impacts on the energy market and improve transparency.

The CIS is an intervention in the market but we recognise that delivering the dispatchable generation required to support the transition is challenging. The CIS will give additional certainty around the need for dispatchable capacity on a known timeline and offer a competitive pathway for supporting new capacity. There is good consideration in the Paper of the need for the CIS to complement other initiatives and need to integrate with the functioning of the market.

To enable better market integration, CleanCo favours a simplified approach that provides more upfront certainty to investors and does not expose the Commonwealth to the day-to-day complexities of the market. While we will expand on this later, the revenue sharing model proposed in the Paper is complex and doesn’t provide certainty for either the Commonwealth or investors regarding the overall value of the scheme. As the CIS is designed to bring forward capacity, a fixed capacity payment ($/MW or $/MWh) is likely to better reflect the needs of investors and would allow for greater transparency of the costs to the Commonwealth. Alternatively, the proposed commercial structure could be modified to include a revenue floor only.

Core design elements and delivery stages

The overall method for determining the capacity requirements and allocating these requirements seems appropriate. It would be useful for the Commonwealth to provide additional clarity regarding the 6GW of capacity supported under the CIS and the additional capacity outside of the scheme, allowing investors to understand whether the CIS is expected to be the primary driver for investment in dispatchable generation. While understanding that the capacity requirements for each tender will be bespoke, it would be useful to have some indication of the forward schedule and indicative volumes targeted.
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CLEANCO QUEENSLAND LIMITED. ACN 628 008 159
CleanCo also feels it is important that the Commonwealth doesn’t try and fix all the design parameters for the CIS at this stage and allow for refinement over time. It is clear that batteries offer a strong development case in the near- term but focusing the requirements around equivalent storage volumes makes it less clear how other investments might compete in the process and possibly creates a perception that batteries are preferred.

While technology-neutrality is important, CleanCo sees value in the initial tenders being narrowly focused
(potentially batteries only) but allowing the design of the tender and commercial process to refine over time, with latter tenders open to a wider range of technologies (hybrid renewables, renewable fuels). This approach will also enable the Commonwealth to become comfortable with the mechanics of the tender process and allow learnings to be factored into future tenders.

In respect to minimum storage volume equivalents, there are pros and cons to specifying shorter versus longer duration as the reference point. Overall, the design feature that allows an equivalent storage assessment should ensure eligibility for all types of projects. When considering the reference duration, we are observing the market delivering batteries with increasing levels of storage duration, with commercial examples of 4 hour storage being delivered. This tends to suggest a higher level of minimum storage as being the appropriate comparison to receive support. Conversely, shorter duration batteries have proven very effective when dealing with significant market events and could be seen as a good value investment for the Commonwealth.

If the CIS is intended to deliver a significant proportion of the overall need for dispatchable generation, then the reference duration should be set at a lower level to enable broad participation. If the intention is a lower proportion, we would suggest a higher reference storage duration to reflect the challenges in the market delivering dispatchable capacity that can operate for longer periods.

Tender process and Design

CleanCo broadly supports the general approach to eligibility in the Paper, noting specifically that allowing storage to charge from the grid rather than having to demonstrate charging from renewable sources is a welcome feature.
CleanCo also supports the eligibility of demand response as an option under the CIS, noting these options have the potential for lower costs and may be delivered in shorter timeframes than new generation capacity.

One possible area for refinement is the exclusion of renewable fuels blended with fossil fuels. While understanding the rationale, it may miss an opportunity for the CIS to bring forward capacity that offers a pathway to higher levels of renewable input as technology improves and costs reduce. In proposing this, CleanCo recommends that restrictions should be placed on projects that aren’t 100% renewable to ensure integrity in the process. This could include minimum renewable energy contributions, commitments to increase the level of renewable fuel over time, maximum emissions thresholds or a de-rating of capacity to reflect the level of emissions.

CleanCo considers that the two-stage merit assessment process outlined in the Paper is an appropriate way of ensuring that projects are sufficiently advanced to participate and giving confidence that the targets under the CIS can be achieved. Given the intention to conduct multiple tenders across a number of years, CleanCo suggests that projects should be able to effectively “pre-qualify” for Stage A, allowing participation in any tender process if these requirements are met. This will help to streamline the process from an industry perspective and allow the
Commonwealth to have better visibility of projects available to meet the requirements in future auctions.

CleanCo agrees that having support from a scheme complementary to the CIS should not automatically exclude projects for being eligible to receive support. CleanCo notes it will be important to ensure that the support is truly complementary and doesn’t provide some projects with an advantage over others in the tender process.
L18, 140 Creek Street, Brisbane
E info@cleancoqld.com.au W cleancoqld.com.au
CLEANCO QUEENSLAND LIMITED. ACN 628 008 159
Commercial arrangements

As mentioned earlier, CleanCo is of the view that a simplified support arrangement is appropriate to enable the achievement of the Commonwealth’s objective for the CIS. The proposed collar arrangement would, at a minimum, introduce complexity into the tender process. Proponents and the Commonwealth will need to estimate upside value (which is highly uncertain for these types of projects) and downside risk. Given investors will need to give up some of the upside of their projects, they will likely seek to minimise their downside risk to account for this i.e.
seeking a higher floor. At the extreme, the arrangements may not be attractive to investors and reduce participation in tenders, limiting the pool of projects to choose from.

The proposed arrangements are potentially in conflict with the Commonwealth’s desire to ensure the CIS supports the operation of the contract market. While dispatchable capacity can extract value from the spot market at times of high prices, it also plays an important role in providing “insurance-type” products in the contract market. This ability may be limited under the proposed commercial arrangements, where overall revenue is capped. A simplified arrangement commercial arrangement (floor-only or capacity payment) is more likely to enable proponents to operate in a normal fashion, including operating more confidently in contract markets.

In addition to requiring delivery milestones to be met, CleanCo acknowledges that it is reasonable for the
Commonwealth to expect some operating performance requirements from projects receiving support under the
CIS. The case of these requirements is weaker under the proposed commercial arrangements where projects are required to forego upside revenues, while at the same time being required to respond to price signals and be available during LOR3 events (where it is likely that prices will be high). If the Commonwealth moved to a simplified commercial structure where projects are protected from downside risks, there is a clearer case for having this benefit tied to performance requirements.

If you have any queries or would like to discuss further, please feel free to contact me on 0429 800 612 or andrew.burnett@cleancoqld.com.au.

Regards,

Andrew Burnett
Principal Advisor, Regulatory
CleanCo Queensland

L18, 140 Creek Street, Brisbane
E info@cleancoqld.com.au W cleancoqld.com.au
CLEANCO QUEENSLAND LIMITED. ACN 628 008 159