Federal Government's new $10 billion Capacity Investment Scheme

Susan Taylor, Stuart MacGregor and Katy Warner
28 Sep 2023
Time to read: 4 minutes

One of the key benefits of the CIS is that it is expected to complement and adapt to existing State and Territory initiatives, and support investment in REZs, rather than overlapping with existing schemes.

In an effort to encourage new investment in clean dispatchable energy that is affordable and reliable, the Commonwealth, State and Territory ministers have agreed to establish the Capacity Investment Scheme (CIS).

What is the Capacity Investment Scheme (CIS)?

The CIS is a Commonwealth scheme designed to support the development of renewable generation and storage throughout Australia. It replaces the Energy Security Board's (ESB) original "capacity mechanism" which was considered to be too complex, would push up prices and artificially prolong the life of ageing coal-fired power generation, earning the nickname "coal keeper".

On 4 August 2023, the Commonwealth Department of Climate Change, Energy, the Environment and Water (DCCEEW) released a consultation paper seeking industry feedback on the design and delivery of the CIS. The consultation paper forecasts that the CIS scheme, which operates as a revenue underwriting mechanism, will unlock $10 billion of new investment and 6GW of capacity in renewable power by 2030. The objective of the scheme is to support reliability by encouraging new investment that harnesses Australia's abundant renewable energy resources, and to better insulate domestic energy markets from global energy trends and pressures.

The consultation period ended on 31 August 2023 and submissions indicated general support for the establishment of a national CIS. In particular, the introduction of jurisdictional reliability targets which will guide the allocation of the 6GW of additional dispatchable capacity by forecasting the total capacity required in each jurisdiction. However, a number of submissions recommended that all projects which meet the specified eligibility criteria be assessed equally for CIS support, whether or not they are located within Renewable Energy Zones (REZs).

Geographic coverage

Although the CIS is a national scheme, it will only apply to established wholesale electricity markets and will not operate in off-grid electricity grids or small stand-alone electricity networks. These established wholesale markets are the National Electricity Market (NEM), which operates in Australia's eastern and southern States, and Western Australia’s Wholesale Electricity Market (WEM). The CIS may eventually also include the Darwin-Katherine Electricity System (DKIS).

How does the CIS work?

The CIS will invite bids in response to project-specific competitive tenders for access to long-term revenue underwriting facilities provided by the Commonwealth to support the delivery of dispatchable renewable energy and storage projects necessary to meet expected reliability gaps. The CIS tenders are expected to be progressively rolled out from late 2023.

Projects that offer the lowest cost for the highest provision of capacity, while also meeting reliability requirements, are anticipated to be more successful in the tender process. The underwriting agreement will set an agreed floor and ceiling revenue for each project. The agreed floor is directly referable to the project’s operating costs and debt. If the project experiences a shortfall in revenue below the floor, the Commonwealth will pay the difference (so long as it is not below zero), and if revenue exceeds the ceiling, the Commonwealth will receive an agreed share of the revenue above the ceiling. The design of the CIS ensures that costs are borne by the Commonwealth and not directly passed on to electricity consumers.

Eligibility criteria

Publicly and privately owned projects that reached Final Investment Decision on or after 8 December 2022 and satisfy the following criteria, may be eligible for support under the CIS:

  • if located in the NEM, the project must be registered with the Australian Energy Market Operator (AEMO) and have a registered capacity of at least 30MW (this threshold is expected to be lower in the WEM);
  • the project has a fuel source (eg. hydrogen) or storage source (eg. BESS) that contributes no scope 1 emissions;
  • for storage-only projects, the project is capable of charging only from the grid;
  • the project can demonstrate that it contributes to system reliability (this excludes stand-alone wind or solar PV projects from being eligible for the CIS);
  • there is evidence of secure access to land, a planning pathway with relevant planning approvals, and a viable grid connection; and
  • the project has adopted established, proven technologies where delivery risk and the project's commissioning dates are reasonably assessable.

Projects that already receive revenue support from either the Commonwealth, State or Territory Governments, that operate similarly to the CIS as a periodic or ongoing payment, will be ineligible for CIS tenders. However, the receipt of large-scale generation certificates (LGCs), ARENA or Clean Energy Finance Corporation grants will not affect eligibility.

Coal-fired plant projects are also ineligible to participate in the CIS, which is intended to address much of the criticism of the ESB’s original "capacity mechanism".

Phase 1 of the Capacity Investment Scheme

The first phase of the CIS is proposed to be delivered in late 2023, and involves:

  • a Commonwealth partnership with NSW Electricity Infrastructure Roadmap; and
  • a joint tender in South Australia and Victoria, to be delivered by AEMO,

details of which are provided below.

On 29 June 2023, Minister Bowen and NSW Minister Penny Sharpe announced a partnership between NSW and the Commonwealth which confirmed that the CIS will boost NSW's Firming Infrastructure Tender Round (Round 2) from 380MW to 980MW of generation capacity. Bids totalling more than 3.3GW were submitted to AEMO Services, acting as the NSW Consumer Trustee, by 21 May 2023. Final tender outcomes are expected to be announced in September 2023.

Last month, Minister Bowen, Victorian Minister Lily D'Ambrosio and South Australian Minister Tom Koutsanidis announced the launch of the new CIS joint tender for 600MW of dispatchable capacity with the equivalent of four-hours of duration of energy storage capacity in Victoria and South Australia. This project will help to "cover the loss" of capacity expected from the retirement of South Australia’s Torrens Island B power station in 2026 and Victoria’s Yallourn Power Station in 2028.

The joint release confirmed that AEMO will release a detailed tender timeline in coming weeks. Registration for the tender will open some time this month (September 2023).

Key takeaways on the Capacity Investment Scheme

The NSW and South Australian-Victorian projects are anticipated to unlock a significant amount of firmed renewable capacity and provide much-needed support for grid-scale dispatchable generation and storage such as battery systems, hydrogen and pumped hydro.

One of the key benefits of the CIS is that it is expected to complement and adapt to existing State and Territory initiatives, and support investment in REZs, rather than overlapping with existing schemes. In NSW, the Electricity Infrastructure Roadmap in conjunction with the CIS will enable the proponents of tenders for development to proceed more quickly, given the improved certainty over returns on investment. As a result, the CIS approach is considered to be a more effective and fit-for-purpose funding mechanism compared to the ESB's original capacity mechanism.

If you would like to understand whether your project might be eligible for the CIS, please contact a member of our expert energy team.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.