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31 August 2023
Attention:
Electricity Division
Department of Climate Change, Energy, the Environment and Water
Canberra, ACT
Subject: Capacity Investment Scheme - Consultation Paper
BE Power thanks the Department of Climate Change, Energy, the Environment and Water (DCCEEW) for giving BE
Power the opportunity to respond to the consultation process regarding the introduction of a Capacity Investment
Scheme (CIS) to support investment in reliable electricity generation and storage projects in Australia.
BE Power Group is an independent Australian owned company that develops, constructs, and operates dispatchable power plants, with more than $7.5bn of projects under development.
Constructed projects to date; include the 12MW Hudson Creek Power Station and 10MW Batchelor Solar Farm both located in the NT.
BE Power portfolio of project developments include:
• The “Big-T” - 400MW / 10 Hour Pumped Hydro & 200MW /1 hour BESS located at Lake Creesbrook,
Toowoomba, Queensland
• The “Big-G” - 800MW / 12 Hour Pumped Hydro project near Gladstone, Queensland
• The “Big-S” - 400MW / 10 Hour Pumped Hydro project near Molesworth, Victoria
By way of background, in 2020 the “Big-T” project was shortlisted under the now closed Underwriting New
Generation Investment (UNGI) Scheme.
The “Big-T” project has continued its development path and is targeting FID (Final Investment Decision) in Quarter2
2024.
BE Power offer the following observations in relation to the CIS Consultation Paper. We would also welcome further opportunities to engage with the DCCEW to assist with meeting the CIS policy objectives.
Kind regards,
Sam Larkey
Head of Revenue & Risk - BE Power
Signed:
Responses to Consultation Questions
1.The Department is seeking feedback on what other implications the CIS might have on the energy market,
and how the CIS can be designed to mitigate risks while delivering on key policy objectives
Response: BE Power supports the principle that CIS underwriting requirements should be designed with the intention of not constraining the contracting or risk management utility that new capacity will bring to market participants.
2. As per the 8 December Energy Minister Meeting Communique, eligible projects will include those that
achieve financial close from 8 December 2022 onwards. Projects that have achieved financial close before 8
December 2022 will be ineligible. Both publicly and privately owned utility scale projects will be eligible.
The rationale for this approach is that the Department does not wish the timing of project development,
financing and construction activities to artificially concentrate around CIS tenders.
Response: The likelihood that investment will artificially concentrate around CIS is likely to be an unavoidable consequence.
This is not to discount the benefit the CIS can bring to the market, rather it’s accepting that the lowest cost of capital (of most value to project development) will strongly gravitate to the floor-based mechanism provided under the CIS in preference to other projects that don’t have a capacity support mechanism.
3. This can cause unnecessary cyclicality in project development activity and price volatility in supply chains.
Further, under the proposed approach, projects that can construct and operate can progress as quickly as
possible while maintaining their eligibility for future CIS tenders.
Response: The eligibility to participate in the tender is unlikely to advance investor confidence per se.
Rather the other way round i.e., Investor confidence and the ability to advance projects through the development cycle will move quicker post the outcome of a CIS tender. It is unclear what market benefit would arise from projects that are already under construction being able to participate in the tender, as they would likely have already demonstrated market viability through other contracting / risk management approaches.
4. 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.
Response: Noted
5.What minimum storage duration should be required for tender eligibility, to achieve CIS policy objectives?
Response: BE Power suggest that the minimum storage requirement be guided the principal of “balance” of short, medium & long-term storage” solutions as advocated in the 2022 AEMO Integrated System Plan
(ISP).
We also note that the ISP calls for investment in 46GW of storage capacity with an average duration of almost 14 hours.
To that end, BE Power would support the CIS adopting the NSW model of separate tenders for both a shorter & medium-term storage (E.g., The NSW 2-Hour minimum and NSW LTESA 8-hour minimum durations respectively).
6. What methodology for modelling and measuring duration requirements for various technology durations
would be appropriate?
Response: BE Power supports the proposal of the ISP & ESOO as a reasonable basis for evaluating future dated reliability targets.
However, BE Power also suggests that nearer term indicators of reliability such as:
1. Frequency of AEMO Directions for System Security, and
2. Frequency of RERT (Reliability & Reserve Emergency Trader) events should also be considered when assessing CIS reliability targets.
Whilst “unlucky” or co-incident near term market events alone may not represent the most appropriate method for establishing longer-term outlook requirements, BE Power believe a pattern of increased frequency of such events may be an indicator of an emerging reliability problems.
Given that QLD has experienced several RERT events, BE Power suggests QLD be considered into the first round of CIS tenders in conjunction with Vic & SA in 2023, or soon thereafter.
7. How could the CIS eligibility criteria and assessment methodology change and adapt over time?
Response: BE Power considers the type and ‘flexibility’ of services the capacity provider can provide (not just ‘duration’) should be considered in the CIS.
For Example, the increasing requirement for fault level ‘System Security’ & ‘Inertia’ given the increase of asynchronous generation should be given significant weight as to what is deemed valuable under a
Capacity Investment Scheme. It should be noted that these important requirements are not always linked to “Low Reserve Conditions” (LOR) notifications.
8 What methodology for considering a project’s contribution to zero scope 1 emissions would be
appropriate?
Response: The methodologies outlined in the consultation paper Re: Scope 1 emissions appear reasonable.
9. The Department is seeking feedback on the eligibility requirement of projects in the NEM for equal to or
greater than 30MW registered capacity.
Response: BE Power does not have a firm view on this issue.
10. 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.
Response: BE Power considers the 3 categories proposed being; Land, Planning & Connection advancement as a reasonable basis for eligibility.
In relation to public utilities participating – Both State and Federal Govt utilities have demonstrated capability to and willingness to provided specific support to their market participating entities.
Competing against public utilities for CIS contracts may have the effect of discouraging private investors, thus lessening the opportunities for a larger pool of projects.
11. The impact of participation in other government schemes on CIS eligibility.
Response: The continuance of other government schemes resulting in potential impact to a CIS is likely to be unavoidable. However, this impact should not be a limiting factor in introducing a CIS.
However, the interaction with such schemes in relation to the ‘Net Revenue’ calculation will need to be considered. Specifically, as to where priority lays under such arrangements between discharging financial or compliance obligations under alternate schemes versus CIS contracts?
It should also be clarified whether a project entering a market-based offtake arrangement with a government owned corporation would be considered a normal risk management contract, or a form of government revenue support.
12. The eligibility of existing projects to bid into the CIS, and questions of CIS additionality that result from this
approach.
Response: BE Power’s experience is the earlier the certainty of the execution of a CIS…. the greater investment certainty it will bring. Notwithstanding the evaluation criteria previously outlined, a CIS should aim to provide support as early as possible in the development cycle to provide the greatest value to investors who wish to support new capacity.
BE Power is of the view that the CIS eligibility should be limited to projects that have yet to reach FID or
NTP (Notice to Proceed).
Allowing existing projects to participate will likely result in capital gravitating to de-risked projects versus new capacity opportunities. This would defeat the purpose of the CIS as existing projects provide no additionality and reduces the incentive for capital to support new build projects.
13. The technology risk appetite of the CIS
Response: BE Power is of the view that CIS should adopt a generally technology agnostic approach, however the scheme should consider if stronger weight should be given to proven technologies.
Emerging technologies are already supported via Early Research & Development Programs and ARENA.
To maintain a technology agnostic approach, careful consideration will need to be given to construction time periods – the requirement for this first round for operations by 2027 by itself effectively rules out several technologies.
14. The Department is seeking feedback on the evaluation criteria, on the appropriate structure to assess a
project’s contribution to system reliability and feedback on the potential development and application of de-
rating factors.
Response: As previously mentioned, a project’s contribution to reliability should not just be limited to a
“time” value during periods of low reserve, but also consider that technology’s proven capability to provide other important reliability requirements such a fault level System Security & Inertia for the benefit of either
AEMO or TNSPs.
For Example – Pumped hydro’s unique ability to provide ’Mechanical Inertia‘ Vs Synthetic Inertia would likely be a strong contributor to future grid stability (as synchronous base-load thermal generation is retired).
15. 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
Response :Please see remaining responses.
16. The Department is seeking feedback on all aspects of the high-level commercial model including:
• The floor price support mechanism?
Response : BE Power supports the principal of the ‘cap & floor’ mechanism.
However, the CIS should consider the following features:
a) That the Capacity Provider does have an ‘option’ trigger to exercise the CIS for selected years (as
per the NSW LTESA), or
b) The Capacity Provider can terminate the CIS arrangements at any time provided it is:
i. Not in deficit to the Guarantor, or
ii. Elects to pays out any existing floor deficit owed to the Guarantor.
This optionality would bring the following benefits:
1. Allows a deeper access to varied capital pools with different investor appetites.
2. Provides a potential relief valve should the CIS mechanism once operational indeed result in the
stifling regular market contracting or restricts the assets capability.
3. If the project terminates the CIS early (after any monies owed have been returned or does not
option “in”), then the remaining financial risk to the guarantor is nil.
To the extent the Government still wishes to ensure the asset provides the “capacity performance” during low reserve conditions when a CIS period is not activated, then the project and guarantor could negotiate a separate penalty provision should availability metrics not be achieved.
Careful consideration will also need to be given to the inclusion of eligible wholesale contracts. Requiring them to be above the Floor (and therefore not locking in a payment from the Guarantor) has merit, but this could result in projects avoiding wholesale contracts (and counterparties not being able to manage their risk effectively). If, however the wholesale contracts were at a higher price, then the Floor (and CIS) would become less useful.
Mention is made of the ‘floor sharing percentage’ being set by the Commonwealth. It is unclear from the consultation paper whether this is set in advance (i.e., before CIS contracts are signed) or later, potentially varying from year to year, and whether it is project-specific or is constant for every CIS project. BE Power’s view is that if the percentage is not known by the project’s prior to entering into a CIS contract, then it is unlikely to be of benefit to a project and the CIS would likely not meet its objectives.
17. The Department is seeking feedback on all aspects of the high-level commercial model including:
• The use of a single ‘net revenue’ floor for both VRE and scheduled generators (including
storage)?
Response: BE Power acknowledges the requirement to manage the financial risks to the guarantor.
However, the calculation on ‘net revenue’ will require careful consideration.
Storage assets when part of an energy ’portfolio‘ are not always operated on a ‘standalone‘ arbitrage basis.
A storage asset’s market utility as a risk management tool will often be in conjunction with the output of various portfolio positions including other assets both Physical (dispatchable, non-dispatchable, DSM), financial (weather derivatives, OTC & Futures) and active pool exposure.
Additionally, these assets can be a mix of a partial or full PPA and contain a mix of various owners or equity partners.
As noted in the consultation paper this would make storage very different to a generic swap support mechanism previously entered into with intermittent renewable generation.
Consequently, establishing a clear & transparent ’net revenue calculation‘ will require on-going consultation.
18. The Department is seeking feedback on all aspects of the high-level commercial model including:
• The term of the contract, including financing requirements around revenue tenor?
Response: This varies amongst investors & debt providers. However, BE Power’s experience around tenor for revenue certainty is as follows:
i. Pumped Hydro - Minimum 20-year term, and
ii. Battery - Minimum 7-year term.
19. The Department is seeking feedback on all aspects of the high-level commercial model including:
• The performance requirements, including the LOR3 performance requirements?
Response: BE Power is of the view that LOR3 availability as a performance trigger would be a reasonable requirement (outside of reasonable scheduled maintenance periods).
The statement in the consultation paper “respond to price signals in relevant markets” would benefit from further clarification? Would this be limited to the price bid at LOR3, or bidding to price signals in the normal course of operation?
If seeking to link “price signals to performance standards” generally then this would require careful consultation as real time bidding decisions is a complex area.
BE Power’s view that as a project owner – is it would likely be possible to contract the plant to a 3rd party off-take with modest conditions linked to LOR3 type conditions. However, constraining the off-taker on a
“price basis” during regular operations may be significantly limiting to the value of the asset in the marketplace and the ability to enter into market contracts.
Hence, overreach in this area may have the effect of reducing the value of the CIS and risk not achieving the intention of the scheme.
20. The Department is seeking feedback on all aspects of the high-level commercial model including:
• The milestone requirements, penalty provisions and termination provisions?
And
• A contract structure that divides development/construction and operating periods into two
contracts, similar to the NSW Project Development Agreement and LTESA division
Response: The dual ability to submit both a 1) default bid and/or alternate (commercial ) proposal would be welcomed.
The inclusion of milestones, penalties and termination rights are common in commercial offtake agreements and would likely be well understood and accepted by the market, subject to how achievable they are.
21. The Department is seeking feedback on the commercial model’s applicability to pumped hydro energy
systems.
Response: BE Power accepts the urgency to address forecast capacity shortfalls as quickly as possible & maintain a technology neutral approach. However, it also urges the DECCW to not lose sight of the ISP’s equally important position that a “balance of multiple storage sources” is also key requirements to a future de-carbonised energy system.
Pumped Hydro does take considerable time in the development cycle and construction, however the long- term asset life of 50-80 years & lower degradation versus batteries will results in lower on-going operating costs with long term benefits.
We also note that capacity shortfall forecasts may change relatively frequently and will be subject to timing around existing asset retirement decisions, but the ability for prospective pumped hydro investors to respond to constantly changing forecasts and maintain to momentum to investment is more difficult.
To that end, BE Power recommends the following in relation to the CIS proposal in relation to Pumped
Hydro:
1. Broaden the first round of tenders to allow all jurisdictions (i.e., include also Tasmania &
Queensland) equal opportunity to provide capacity solutions to future requirements that will
invariably emerge.
2. Extend the allowable target time beyond 2027 for the first round of tenders for at least the
first stage development underwriting agreements or ensure the following rounds have longer
timelines.
