Capacity Investment Scheme - Western Australia Design Paper

Tesla Motors Australia, Pty. Ltd.
15 Blue Street
North Sydney NSW 2060
Australia

Mr Simon Duggan
Deputy Secretary
Department of Climate Change, Energy, the Environment and Water
GPO Box 3090
Canberra ACT 2601

6 May 2024

RE: Capacity Investment Scheme Western Australia Design Paper

Dear Mr Duggan,

Tesla Motors Australia, Pty Ltd (Tesla) welcomes the opportunity to provide the Department of Climate
Change, Energy, the Environment, and Water (DCCEEW) with feedback on its Western Australia
Design Paper for the Capacity Investment Scheme (CIS).

Tesla’s global mission is to accelerate the world’s transition to sustainable energy. Tesla has an unrivalled track record in successful deployments of large-scale batteries. In total Tesla has over
1.5GWh of energy storage in operation, and a further 2GWh+ contracted or under construction in
Australia. Recently, Tesla has been announced as the OEM for Australia’s largest battery storage facility in the country with Neoen’s announcement of the expansion of the Collie battery energy storage system
(BESS) to 560MW/2240MWh, a substantial 4-hour system that reinforces the importance of the WA market for Tesla and battery storage more generally ahead of accelerating coal retirements.

Globally, Tesla has delivered more than 16GWh of energy storage across over 65 countries. This is accompanied with a total of over 30GWh of contracted storage to be deployed within the next 2 years.

Tesla is encouraged to see DCCEEW’s rollout of the CIS to support new investment into 9 GW of clean, dispatchable capacity, of which 1.1 GW will be in WA. We are supportive overall of the design paper released for WA and believe that it successfully adapts the CIS for the WEM’s unique market features, notably its reserve capacity mechanism (and associated operating requirements) and lower levels of industry experience, investor certainty and market transparency around having independent storage providers participate in energy and ancillary service markets in the WEM relative to the NEM. From
Tesla’s perspective, the two key considerations for DCCEEW’s final CIS design for WA are:

1. Ensure ESR Duration Requirements for dispatchable tenders do not adversely impact
investor certainty (i.e. protect WEM CIS project accreditation for their lifetime); and
2. Accelerate entry and participation of VPPs in the WEM as a significant contributor in
avoiding system peak load and minimum operational demand events.

Tesla looks forward to continued engagement and actively participating in ongoing discussions to support DCCEEW in the finalisation of the CIS.

Kind regards,

Tesla Energy Policy Team energypolicyau@tesla.com
ESR Duration Requirements:

As outlined in the design paper, ‘storage projects will be assessed according to their ability to supply to the grid over the Electric Storage Resource (ESR) Duration Requirement. Starting from the 2025 RCM cycle, the ESR Duration Requirement will be determined annually by AEMO’.

The ESR Duration Requirement is influenced by AEMO’s Availability Duration Gap, which will be published for the first time in the 2024 WEM ESOO. As this figure has yet to be published, Tesla highlights that the lack of future visibility around this metric within the dispatchable capacity duration requirements could lead to increased investor uncertainty, which is already high given the lack of experience having independent (i.e. non-state owned) battery storage operating in the WEM to date, and relative significance that capacity accreditation contributes to the revenue stack.

Furthermore, Tesla notes that the ESR Duration Requirement has specifically been designed in the
WEM Rules to ratchet up over time1, with mechanisms in place to increase the duration requirement but is prevented from decreasing. Instead, Tesla promotes a duration requirement that is based entirely and responsive to what the system and market needs actually are.

For example, to date, the average duration of storage provided by Tesla globally is in the range of 2.5- to 3-hours, dominated by a 4-hour requirement in several US jurisdictions including California (4 hours is driven by the peak load duration requirement to allow vertically integrated utilities to capture the full capital cost of the generator in their rate base; as well as the fact batteries are now out-competing gas peakers as the optimum technology for fast-ramp reserve capacity). NREL’s latest 2021 study shows
US storage requirements “dominated by 4-hour battery technology” past 2040 in all scenarios3.

Another key value proposition is the deployment advantages of shorter-duration storage relative to other large-scale storage technologies and network infrastructure build out, which must navigate several years of approvals and social licence acceptance, before even commencing its multi-year construction time horizons. As such, battery storage deployed in 12-18 months can help expedite connection of renewable assets much sooner, whilst still support renewable energy scaling over time as both a valuable complement to network infrastructure (as ‘virtual transmission’), as well as being a fully flexible asset that can be re-purposed and adapted to other applications as grid needs change over time (for example providing additional firming services once network build-out is complete).

These benefits have been accurately reflected in the current WEM rules for storage participation – e.g.
in the Reserve Capacity Mechanism that rewards 4-hour storage with full accreditation, as well as flexible and ramping services being introduced – all of which have benefited from extensive EPWA analysis combined with thorough industry and stakeholder engagement – including through a global review of best practice storage policies and bespoke modelling of potential outcomes on the WEM. It would be counterproductive to undue all of this work by increasing investor uncertainty due to timing mismatches and lack of transparency between ESR duration requirements, capacity accreditation, and
CIS tenders. Therefore, we recommend government commits to protecting ESR duration requirements for the duration of each contracted project (i.e. by matching CIS contract tenure, allow WEM CIS projects to receive Capacity Credits on the basis of the Duration Requirement at the time they were first certified).

Over time, noting the market need for additional energy capacity may increase as WA’s thermal coal generators retire, modular technologies such as battery storage can be built to value power capacity now (as per system needs), with additional storage capacity added over time, if and when it becomes required (i.e. from 2030 onwards). This will also allow the CIS to benefit from the technology cost

1
Page 54, reserve_capacity_review_wem_amending_rules_exposure_draft.pdf (www.wa.gov.au)
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improvements over coming decades – which means consumers won’t have to wear the risk of over built infrastructure and the Government can drive an optimum, and dynamic economic solution that evolves based on market requirements and price signals. Further, it will unlock the inherent flexibility and optionality advantages of deploying shorter duration storage from the outset of the CIS program.

Most importantly, it allows for investment decisions to be timed with price signals, significantly reducing reliance on direct government subsidies that would ultimately result in increased costs to consumers.

VPP Participation:

“Virtual power plants, demand response, and other virtual aggregation and flexible load technologies will not be eligible for the upcoming April/May generation CIS tender. However, the intention is to include these technologies in future clean dispatchable tenders.”

Tesla recommends accelerated inclusion of VPPs into national storage policies, based on several data- based insights into why VPPs can resolve reliability issues for the grid rather than exacerbate them, including:

• CEC’s report with Oakley Greenwood’s modelling of orchestrated storage benefits.2

• SAVPP knowledge sharing report.3

• Tesla’s own experience deploying and operating VPPs around the world.

From Tesla’s perspective, we believe the following:

1. CER – particularly distributed behind-the-meter batteries – are one of the most cost-effective technologies that should be considered within the broader renewable energy technology stack; and

2. CER provides greater market benefits when they are orchestrated and actively responding to market signals, rather than just providing self-consumption benefits to an individual customer.

These statements and world views are not unique to Tesla. A large proportion of homes across Australia have already invested in rooftop solar, and AEMO views behind-the-meter battery storage, and particularly orchestrated CER as the key storage technology in the broader storage mix.

Figure 2: AEMO 2024 Draft ISP results - Step Change scenario

2
https://assets.cleanenergycouncil.org.au/documents/Home-Battery-Saver-Program-Public.pdf
3
https://arena.gov.au/assets/2021/08/tesla-virtual-power-plant-lessons-learnt-1.pdf
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For the NEM, AEMO is projecting 6.6GW of behind the meter storage operational by 2030 (of which
3.7GW is in VPPs), 24.4GW by 2040, and 44.1GW by 2050. Orchestration of these systems is critical as AEMO predicts that 37.3GW of CER in 2050 will be orchestrated, which will make up 65% of all storage capacity. Whilst the WEM is unique in many aspects, we see the importance for orchestration of behind the meter systems as an important parallel, perhaps having earlier impacts in the WEM noting the increasing impacts of rooftop solar.

To demonstrate the difference in market benefits between non-orchestrated batteries and orchestrated
(or VPP) batteries, the CEC highlighted Oakleigh Greenwood’s findings based on market analysis on the benefits of orchestrated vs non-orchestrated BTM storage.

Figure 3: CEC report using Oakley Greenwood Modelling4

The real benefit of orchestrated CER comes from their ability not to provide one single service, but rather in being able to flexibly provide a wide variety of services. The Oakleigh Greenwood benefits outlined above are based on an example 5kW/10kWh battery providing the following services:

• FCAS – providing a response to frequency market signals.
• Wholesale energy arbitrage – responding to peak wholesale energy prices.
• Network services – providing targeted benefits to the distribution networks.

As demonstrated in Tesla’s SAVPP knowledge sharing report, VPPs can take many forms beyond typical retail offerings, including centrally managed and owned systems for social housing, schools, and hospitals. Tesla identifies these project structures as being most suitable to a CIS tender.

Given that orchestrated CER is able to address the key objectives of the CIS dispatchable tenders,
Tesla recommends the inclusion of VPPs in future tender rounds, or accelerated development of a complementary program that directly incentivises households to install orchestrated behind the meter batteries.

4
https://assets.cleanenergycouncil.org.au/documents/Home-Battery-Saver-Program-Public.pdf
4