26 Nov 2020

The NSW Government pivots towards renewables in its new Electricity Infrastructure Investment Bill

By Bruce Lloyd, Faith Taylor and Nicholas Fletcher

The NSW Government's Electricity Infrastructure Investment Bill seeks to incentivise industry to invest $32bn in renewable energy infrastructure by 2030, and represents a fundamental policy shift.

Four of NSW's five coal-fired power stations are scheduled to close within the next 15 years, starting in 2023, so the need for future generation infrastructure in the State is obvious. The NSW Government's solution is a plan to encourage investment in the necessary infrastructure to support renewable generation to replace coal-fired generation, as set out in the NSW Electricity Infrastructure Roadmap and the Electricity Infrastructure Investment Bill, which was introduced into the NSW Parliament on 10 November.

The Government's aim is for the market to replace the coal-fired power stations with sources of renewable energy generated in new "Renewable Energy Zones" (REZ) in regional NSW. The objective of a REZ is to co-ordinate the development of new grid infrastructure and connect multiple generators (such as solar, wind farms, gas and storage) within a REZ. The Government envisages REZs as the modern-day equivalent of traditional power stations and has identified three initial REZs in the Bill: Central-West Orana, New England and South West areas, with the Hunter as a potential fourth.

Implementation of the Government's plan and the proposed Electricity Infrastructure Investment Act will create a step change in the regulatory and market frameworks of NSW's electricity industry, which operates as part of the National Electricity Market. This change would occur by displacing parts of the National Electricity Rules and replacing them with NSW-specific regulatory and market requirements.

Key elements of the Electricity Infrastructure Investment Bill 2020

In its Electricity Infrastructure Roadmap, the NSW Government has proposed a fundamental shift in policy direction in an effort to address the changing market conditions and electricity infrastructure economics by developing new platforms and price signals.

It is widely believed the existing market mechanisms have failed to induce the necessary investment in renewable energy, primarily due to investment risk. The lengthy lead times required for infrastructure investment are incongruous with the market dominated by short-term electricity contracts. Further, market access presents a risk for renewable generation as transmission upgrades are often necessary to support the location of renewable energy sources.

In an effort to mitigate investment risk in renewable energy, the proposed Electricity Infrastructure Investment Act contains the following measures:

  • Long-Term Energy Services Agreements: a Consumer Trustee will be appointed to plan a development pathway for the necessary infrastructure investment and tender and manage "Long-Term Energy Services (LTES) Agreements" between infrastructure developers and the government's proposed "Scheme Financial Vehicle". Under the LTES Agreements, the government offers financial incentives to eligible energy infrastructure projects, in the form of periodic options to exercise derivative arrangements – this does not pay for the construction of the project or the power produced, but gives the investor certainty the project can earn an agreed minimum level from selling its services into the electricity market. The terms of the LTES Agreements are to be determined by the Consumer Trustee having regard to the principles set out in the Bill, however the Consumer Trustee has the latitude to agree to additional terms and conditions. LTES Agreements will be option contracts which give a project optional access to a competitively set, minimum price for its energy service.
  • Competitive tendering for LTES Agreements: administrative arrangements will be defined for competitive tendering of LTES Agreements, including frequency and eligibility criteria, which includes new projects committed after the release of the NSW Electricity Strategy and may include extensions of existing projects. The Consumer Trustee will identify a portfolio of projects to be awarded LTES Agreements. The terms of the proposed LTES Agreements will include termination rights for the government if milestone dates are missed – the proponent is incentivised to swiftly develop the project. The government has proposed that generation projects could be supported by "swaption" contracts, swap contracts with put options (for example, an option for the generator to exercise where it would pay the Scheme any revenue it receives from the wholesale electricity market when spot prices are above an agreed level in return for being paid when spot prices are below the agreed level).
  • Fast-track priority transmission projects: the Bill provides for the fast-tracking of priority transmission projects (which go beyond REZs) and the Regulator (appointed under the proposed Act) will determine the amounts payable to network owners for these projects.
  • Energy Corporation of NSW: the Energy Corporation of NSW (Energy Co), as the "infrastructure planner" under the Bill, would be responsible for co-ordinating the delivery of REZs and making recommendations to the Consumer Trustee about network infrastructure projects. After considering Energy Co's recommendations, the Consumer Trustee may recommend the Minister for Energy and Environment (currently the Hon. Matt Kean MP) direct a network operator to carry out a REZ network infrastructure project.
  • Access scheme: the Bill contemplates one or more access schemes for each REZ, in respect of the access to and use of specified network infrastructure by network operators and operators of generation and storage infrastructure. The Bill proposes access rights may be conferred on participants in contractual arrangements between the participants, the infrastructure planner, the Scheme or another person. The Consumer Trustee may determine fees payable by participants in the access scheme, to help pay for the network infrastructure in the REZ.
  • Electricity Infrastructure Fund: the Bill requires the Scheme to establish and maintain an electricity infrastructure fund to support the operations of the Scheme, Consumer Trustee and Regulator.
  • Energy Security Target: a person or body will be appointed as the Energy Security Target Monitor to calculate annual energy security targets and assess whether the Energy Security Target (the equivalent to the maximum demand experienced in NSW every 10 years, plus a specified reserve margin) will be met.

Getting to grips with the Electricity Infrastructure Investment Bill

The Bill represents a fundamental policy shift towards encouraging renewable energy in NSW. Transmission and distribution network service providers in NSW need to start considering how this will impact their business model and regulated revenue. Renewables and battery proponents should consider how to approach the proposed new tools of REZs, access schemes and LTES Agreements to benefit their proposed projects.

The Bill contains a number of significant measures and it is a considerable departure from existing energy policy in the National Electricity Market. Much of the detail is yet to be fleshed out, including access rights, and we will closely monitor the Bill's progress.

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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.