Capacity Investment Scheme - Western Australia Design Paper

Level 8, 77 Castlereagh Street
Sydney NSW 2000
atco.com.au

10 May 2024

Mr Matthew Brine
Division Head
The Office of the Capacity Investment Scheme
The Department of Climate Change, Energy, Environment and Water (DCCEEW)
CapacityInvestmentScheme@dcceew.gov.au

Dear Mr Brine,

Re: Capacity Investment Scheme (CIS) – Western Australian Design Paper

Thank you for the opportunity to respond to the Western Australia Design Paper for the Capacity
Investment Scheme. The Wholesale Energy Market (WEM) CIS presents a significant opportunity to mobilise investment in renewable energy capacity to help resolve reliability risks and decarbonise the energy sector.

ATCO recognises the work of DCCEEW and has been actively following the development of the Scheme, including being involved in the consultations. It is encouraging to see the Scheme’s focus on WA with clear Variable Renewable Energy (VRE) and storage targets till 2030 as well as indicative tender timings.

ATCO’s comments in this submission are limited to refinements in the proposed design to provide revenue certainty and reduce financial risk, secure investment backing and better serve the long-term interests of consumers in WA.

The key points in this submission are:

1. Timeframes for the CIS to operate ahead of RCM processes appear appropriate and will assist
in providing complementary support for investors.
2. Aligning the WEM CIS with SWISDA’s future ready scenario will help steer investment in longer
duration technologies, which would be able to meet reliability needs post-2030.
3. Eligibility to participate in the CIS be expanded to include blended lower emission fuels for
generation as part of a technology-agnostic approach in incentivising investment.
4. Assessing public and private projects on a level-playing field would ensure the CIS supports the
most efficient projects in being brought to market.
5. Ensure the merit criteria for the CIS encourages greater consultation with First Nations to
incentivise proponents to prioritise Indigenous engagement during project development.

ATCO Australia Pty Ltd | ACN 74 091 033 546 | Registered Office: Level 12, 2 Mill St Perth 6000
Timeframes for the CIS to operate ahead of RCM processes appear appropriate and will assist in providing complementary support for investors.

The timing of the RCM cycle and requirements are well known to market participants in the WEM and building the CIS around these requirements will assist proponents to progress their projects through each process.

The proposed approach to link the CIS to the existing RCM processes appears appropriate, allowing time for investors to progress projects between the application and award of a CIS and in advance of
RCM processes, except for the first CIS tender which will consider projects from the 2023 RCM cycle.
There is a risk that delays in project development may impact the proponent’s ability to meet the timing of the RCM cycle and affect its CISA, because of the linkage between the two processes.
Flexibility in the start date of a CISA may assist to address the issue and provide proponents with certainty on the continuing validity of their CISA, should delays in the RCM process be experienced.

Interactions between the CIS and RCM may lead to duplication in the application requirements between the two processes. It is suggested that wherever possible, measures must be taken to streamline the processes and ensure duplication is minimised. A scheduled review of the operation of the CIS in relation to the RCM will assist to ensure that both processes operate efficiently.

Aligning the WEM CIS with SWISDA’s future ready scenario will help steer investment in longer duration technologies, which would be able to meet reliability needs post-2030.

ATCO notes in the consultation paper that storage projects will be assessed against their ability to supply the grid over the Electric Storage Resource (ESR) duration requirement of four hours, which aligns with the Benchmark Capacity Provider determination from the Coordinator of Energy (the
Coordinator) published in December 2023. 1 ATCO acknowledges commentary provided by the
Coordinator of Energy in this publication, which responds to concerns from submissions that a four- hour ESR may not be sufficient to reach the Availability Duration Gap requirements in the future as existing firm capacity retires and low renewable generation output periods emerge as a challenge to system reliability. The Coordinator noted that reliability forecasts anticipate no unserved energy to
2033 with typical exit and entry assumptions.

However, ATCO also note the supply mix forecast in the South-West Integrated System Demand
Assessment (SWISDA) under the future ready scenario, which show “large-scale solar paired with long duration energy storage (LDES)” to be “the most cost-efficient form of firmed renewable generation.” 2
The future-ready scenario models 10-hour and 8-hour storage solutions entering the market from
2030.

It is unclear whether the introduction of the CIS in Western Australia, and the choice to adopt a 4-hour requirement for the upcoming tender, is intended to support investment in assets identified in the future ready scenario of the SWISDA. As currently designed, the WA CIS is unlikely to provide an additional incentive for asset developers to consider expanding the duration of their facilities beyond
4 hours without additional updates or amendments to the payment schemes and capacity factors already prescribed in the Reserve Capacity Mechanism Frameworks. There may be merit in DCCEEW considering in further rounds the ways that the CIS can explicitly incentivise investment in longer- duration assets identified in the SWISDA’s future ready scenario, or alternatively signal to the market whether this function is better implemented by alternative policy frameworks within the WEM.

1
Coordinator of Energy Determination: Benchmark Capacity Providers, Energy Policy WA, December 2023.
2
South West Integrated System Demand Assessment (SWISDA), Government of WA, May 2023

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In any case, updates to the CIS design, either implemented in stand-alone or in parallel tenders, could play a key role in helping to bring LDES technologies online. This way, the CIS would be able to consider reliability needs post-2030 and firm electricity supply reliability for the decades after, allowing more projects to participate in the program and achieve the revenue certainty they otherwise may not be able to attain if the program solely focused on reliability needs till FY2030.

Eligibility to participate in the CIS be expanded to include blended lower emission fuels for generation as part of a technology-agnostic approach to incentivising investment.

AEMO’s 2023 WEM Electricity Statement of Opportunities (ESOO) highlights the urgent need for new generation to meet strong growth in demand forecast from increasing consumer electrification, electric vehicle uptake and new energy intensive industries (including green hydrogen production).
Reliability gaps have already been signalled by the market operator for every year up until 2026.
Increasing electricity demand, combined with the exit of state-owned coal generation by 2030 will exacerbate the supply shortfall.

All sources of generation with emission intensities lower than the current grid emission intensity should be considered given the scale of the decarbonisation challenge ahead. Blended fuels (hydrogen with natural gas) and biogas offer the opportunity to provide much needed dispatchable generation at greater capacity factors than renewables and lower carbon emissions than coal. A technology- agnostic approach should be taken to solve the issues of reliability to allow the market to identify the solution at lowest cost to consumers. Expanding the CIS to include generation technologies utilising blended fuels or renewable gases will boost generation capacity helping to alleviate future reliability issues.

Assessing public and private projects on a level-playing field would ensure the CIS supports the most efficient projects in being brought to market.

WA’s electricity market is characterised by Government Trading Enterprises (GTEs) and private market participants working to meet future energy needs. Western Australian consumers benefit from some features of this mixed market, where public and private players can compete for the provision of services.

As the CIS is introduced in WA, it must consider the merits of the mixed-market approach and the ways to advance it, and to mitigate the risk of entrenching a concentrated market, which due to the legacy presence of GTEs in the market, may be better placed to score highly on some merit criteria. The WA
Government, through Synergy, has already committed to two battery storage projects in Kwinana and
Collie and plans to build a further 3GW of storage by 2025 3.

In order to encourage new investment and competition, it is important that the private sector has confidence that the CIS will not inadvertently favour GTEs. Assessment of public and private projects on a level playing field is crucial for the Scheme to entice new investment in generation and storage assets fairly and effectively. This will ensure the most efficient projects are bought to market and consumers receive the best value.

3
‘Construction starts on one of Australia’s biggest batteries in Collie,’ WA Government, March 2024.

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Ensure the merit criteria for the CIS encourages greater consultation with First Nations to incentivise proponents to prioritise Indigenous engagement during project development.

ATCO notes the CIS tender merit assessment includes consideration of First Nations engagement.
There is the opportunity for the CIS to incentivise proponents to consider a range of benefits beyond
‘standard’ Indigenous engagement and create innovative models to incorporate First Nations participation into renewable energy development. Greater, earlier, and more effective consultation with First Nations People, will lead to better outcomes for the entire community. Provisions within the merit criteria to differentiate between projects with comprehensive Indigenous engagement strategies, such as inclusion of equity partnerships, will incentivise proponents to prioritise First
Nations engagement.

About ATCO

ATCO is a global integrated energy, housing, transportation, and infrastructure company and has been operating in Australia for over 60 years. Our Australian footprint includes the ownership and operation of Western Australia’s natural gas distribution network, power stations in Karratha, WA and Osborne,
SA, as well as the development of renewable and hydrogen assets. We have a long history of partnering with communities and Indigenous groups, energising industries, and delivering customer-focused infrastructure solutions.

If you have any questions or would like to discuss any of the comments made in this submission, please contact Hugh Smith, General Manager – Regulatory Strategy & Policy at hugh.smith@atco.com or 0459
894 397.

Yours sincerely,

Chris Judd
Executive General Manager, Energy Infrastructure
ATCO Australia chris.judd@atco.com

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