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Australia: A new Capacity Investment Scheme to drive investment in clean dispatchable storage and generation

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In brief

Following the Energy Ministers’ meeting on 8 December 2022 and the National Cabinet meeting on 9 December 2022, the Australian Commonwealth government announced that a new Capacity Investment Scheme (CIS) will be established, alongside other measures in the Energy Price Relief Plan.1

The CIS is aimed at unlocking approximately AUD 10 billion in private and public sector investment in new clean dispatchable storage and generation to ensure reliability and security in Australia’s energy market, as well as affordable electricity supply and reduce Australia’s exposure to high coal and gas prices over the medium and long term.

Further details on the CIS will be released in the coming months, with the first auction expected to occur in 2023.

Key takeaways

The CIS looks to drive and support investment in renewables and energy storage, as the clean energy transition in Australia gains momentum. Whether any adjustments to the current market design framework will be required will be an important development to monitor. Market participants should be considering the potential impact of the CIS in respect of both existing and new offtake and hedging contracting arrangements for generation projects.  

Baker McKenzie in collaboration with Cornwall Insight will provide market, policy and regulatory insights on the development of the CIS as part of our Energy Masterclass series in 2023.  

What we know so far

At the Energy Ministers meeting on 8 December 2022, the Commonwealth Government received endorsement from state and territory Energy Ministers to establish the CIS. The CIS is a new Commonwealth revenue underwriting mechanism aimed at unlocking approximately AUD 10 billion in private and public sector investment in new clean dispatchable storage and generation to ensure reliability and security in Australia’s energy market, as well as affordable electricity supply and reduce Australia’s exposure to high coal and gas prices over the medium and long term.

The full details about the CIS have not yet been released. Further details are expected to be released in the coming months. Consultation with states and territories and industry will be required to determine details of the scheme itself.

The first auction is expected in 2023. There is a view to have the scheme operational by the second half of 2023.

Here are some of the other details known so far:

  • The CIS will be available to all jurisdictions nationally.
  • It will be limited to zero emissions dispatchable generation and storge technologies. It is different to the previous Energy Security Board capacity mechanism proposal which considered fossil fuel technology.
  • Where other state schemes already exist, the CIS is to be integrated with these to avoid duplication and ensure confidence in the market. For example, the CIS is to be consistent with existing schemes including the NSW Electricity Infrastructure Roadmap. CIS funding will be available to support the existing NSW Electricity Infrastructure Roadmap framework and not alter competitive tenders underway or scheduled for 2023. The Commonwealth will work with Western Australia and the Northern Territory to explore how CIS or other mechanisms may support their electricity grids and large industrial energy users in remote areas. It will also operate alongside the National Energy Transformation Partnership and Rewiring the Nation plan.
  • Eligible projects will include those eligible under existing state-based schemes as well as on-grid, public and private utility scale projects that achieve financial close from 8 December 2022 onwards.
  • Open tenders will determine which projects gain CIS support. The optimal mix of generation and storage for reliability will be determined through the tender process, and all configurations will be considered (co-located and standalone). CIS support is aimed at decreasing risk for investors and spurring more investment.
  • An agreed revenue “floor” will assist coverage of project operating costs and debt repayments. The Government will pay the difference when revenues fall short, and a share of profits is to be returned if revenues exceed agreed “ceiling”.
  • The CIS will create construction and operations jobs in clean energy projects, especially in the regions.

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1 Energy Ministers’ Meeting Communique, 8 December 2022 <https://www.energy.gov.au/sites/default/files/2022-12/Energy%20Ministers%20Meeting%20Communique%20-%208%20December%202022.docx>; The Hon Chris Bowen MP (Minister for Climate Change and Energy), ‘Capacity Investment Scheme to power Australian energy market transformation’ (Media Release, 8 December 2022) <https://minister.dcceew.gov.au/bowen/media-releases/capacity-investment-scheme-power-australian-energy-market-transformation>; Prime Minister Anthony Albanese, The Hon Dr Jim Chalmers MP (Treasurer) and The Hon Chris Bowen MP (Minister for Climate Change and Energy), ‘Energy Price Relief Plan’ (Media Release, 9 December 2022) <https://www.pm.gov.au/media/energy-price-relief-plan>

Contact Information

Aylin Cunsolo
Partner
Melbourne
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aylin.cunsolo@bakermckenzie.com


Tanya Denning
Partner
Brisbane
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tanya.denning@bakermckenzie.com


Sean Duffy
Partner
Sydney
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sean.duffy@bakermckenzie.com


Raymond Lou
Partner
Sydney
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raymond.lou@bakermckenzie.com

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Author

Aylin Cunsolo is a Partner in Baker McKenzie's Energy and Resources in Melbourne.

Author

Tanya Denning, a Partner at Baker McKenzie, is a recognised expert in the energy and resources sector with over 20 years' experience and strong relationships with industry participants and regulators. She has a reputation as one of Australian's market leading experts in energy, particularly in cross border, multi-jurisdictional transaction, and projects and transaction that break new ground and require a solutions driven, innovative approach. Tanya provides an end-to-end specialist advice covering the full value chain of oil & gas (including LNG), electricity & new energy and resources, and has an acute understanding of the sensitivities and motivations of market players across these industries. Tanya has acted extensively on developing energy sector businesses; energy and resources M&A transactions; power generation (including renewables), energy storage and energy network (electricity and gas) project development, construction, operation and asset management; mining project development; wholesale energy trading and contracting (physical commodity and derivative contracts for electricity and gas including corporate PPAs, electricity retail sale, gas supply and gas transportation); connection application and agreements for the electricity grid; retail energy advisory work and contracting including new energy retail services; and energy and resources market regulatory reform and advisory work. Tanya's broad experience means that she has worked on various projects and supply, storage and transport matters across Australia and offshore, with current market knowledge of the negotiating positions and regulatory issues that arise and the solutions to address them. Tanya's experience has gained her leading recognition as Best Lawyers Australia 'Lawyer of the Year' in Oil & Gas for Melbourne from 2018 to 2020, listed in Best Lawyers Australia for 'Energy Law', 'Mining Law', 'Oil & Gas' and 'Natural Resources Law' since 2015 as well as 'Projects Lawyer of the Year', 2017 by Lawyers Weekly. Tanya is also the National President of AMPLA (Energy, Renewables & Resources Lawyers Association) and trusted advisor to several major electricity and downstream natural gas businesses operating in competitive wholesale and electricity markets.

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Sean Duffy is a partner in Baker McKenzie's Sydney Office. He has practiced in Australia and overseas since 1998, including three years in the Firm's Chicago office.

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Raymond Lou is a partner in the Sydney office of Baker McKenzie where he advises on mergers and acquisitions with focus on energy transition, renewables and major projects.

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