Designing the Capacity Investment Scheme, Australia’s flagship tenders for renewables backed with energy storage

It commits the federal government to underwriting revenue risk for 32GW of renewable energy, with competitive solicitations being held across Australia’s states and territories.

While that number includes variable renewable energy (VRE) capacity from wind and solar, a significant portion – 9GW – must be deemed dispatchable, meaning energy storage has to play a leading role too.

From its first announcement by energy minister Chris Bowen in late December 2022, when he and his state-level counterparts convened to agree the scheme’s launch in principle, by the standards of government energy policy, its rollout to New South Wales (NSW) on a pilot basis in 2023, then Victoria and South Australia together, and most recently Western Australia (WA), has been rapid.

Interest in the tenders from the developer community has been immense, with the Victoria-South Australia iteration receiving some 19GW of bids for the initial 600MW on offer, according to a speech by Bowen a couple of months ago.

At Solar Media’s Energy Storage Summit Australia 2024, held in Sydney in May, Salim Mazouz, head of the branch office of the government Department of Climate Change, Energy, the Environment and Water (DCEEW), presented an outline of how the scheme would work, its aims and various details of the planned tender structures.

A few weeks after the event, Mazouz speaks with Energy-Storage.news Premium to give an overview and go into more depth on some of the big questions around the Capacity Investment Scheme.

Expanded scope

“I came over to the Capacity Investment Scheme when it was still a task force and we, at the time, were trying to basically get some tenders going for dispatchable capacity. At the time, it was 6GW of that. We started designing it, we allied with New South Wales to deliver some of the capacity there through their Electricity Infrastructure Roadmap. So we did a joint programme there, and the current auction in Victoria-South Australia, was essentially the first instantiation of this Capacity Investment Scheme design,” Mazouz says.

The scheme was quickly expanded to include VRE, and multiplied six times over to its current 32GW framework with the 9GW dispatchable portion.

Mazouz’s own role is as the head of the branch office for policy and engagement for the scheme at DCEEW, looking after the “detailed policy design,” while colleagues in the office’s other branch look after implementation.

It’s worth noting, Mazouz says, that while 9GW of the CIS is specifically for storage-backed renewable energy, the growth of VRE overall, through the CIS and through other government initiatives as well as private investment, will drive a further need for energy storage in Australia.

“The more variable renewables we push in, the more there’s opportunity for arbitrage, for storage, and as that accelerates the retirement of thermal assets, that also potentially opens additional revenue sources in terms of some of the ancillary services that batteries and also storage more broadly can bid for.”

Additionally, the VRE components of the tender scheme themselves are open to the addition of energy storage resources.

“We’re also open to hybrids. Some of the VRE bids can have storage associated with them that is not supported through the CIS necessarily. So that’s another avenue for storage proponents to potentially deliver capacity in Australia.”

The scale, and the scope, of the initial tenders was determined with consideration of a number of “key inputs,” according to the DCEEW office branch head, including the Australian Energy Market Operator (AEMO) Integrated System Plan (ISP), and its Electricity Statement of Opportunities (ESOO) for the National Electricity Market (NEM).

“We also did our own modelling. With any of these kinds of modelling exercises, there are many ways you can land, so part of what we were doing is to look at how do you achieve 82% [renewable energy by 2030]. That’s the government’s target and the Capacity Investment Scheme is a very important part of how to achieve that.”

Mitigating a ‘high level of uncertainty’

“The Australian context is that you’ve got a system that, with the National Electricity Market, is one where the states have a lot of power as well and so you’ve got sort of a set of institutional structures that bring that together.”

At the same time, states have targets of their own for renewables, and various schemes to support those, and the CIS is a coordinated effort to complement them, bring in more VRE and energy storage, and achieve the ambitious national renewables target for the end of this decade.

The scheme can potentially help do this through filling gaps in market-based investment signals for clean energy technologies. So, for example, the revenue stack for large-scale battery energy storage system (BESS) assets in the NEM, or WA’s Wholesale Electricity Market (WEM) has to date been largely based around AEMO’s Frequency Control Ancillary Services (FCAS) markets.

At the same time, revenues from energy trading, aka arbitrage, are expected to play an increasingly significant role, but are not yet as strong as they could be.

The Capacity Investment Scheme seeks to address that imbalance which exists essentially between the overall value renewables and storage can provide to the grid, and to society, and the amount of money developers and investors can confidently expect to make from them in a merchant context.

“Fundamentally, what we found, both for storage and variable renewables, is that there’s a high level of uncertainty currently in the market, including about prices. That includes price volatility, which batteries, of course, benefit from in terms of the arbitrage opportunity,” Mazouz says.

“We sought to ensure that there is downside risk protection for investors. So, we went in with the design of the Capacity Investment Scheme to ensure that, for example, debt has more of a chance of being harnessed in the context of these kinds of investments because increasingly, equity holders were finding it difficult to get debt coverage due to, again, the risk levels.”

Increasing the adoption of renewable energy on Australia’s grids will see electricity prices go down over time, versus continued reliance on expensive and polluting fossil fuels—in Australia’s case almost entirely from coal.

In the second part of this interview, to be published next week, Mazouz explains more about the specific ways the CIS was designed to facilitate capital intensive investments in a future electricity system dominated by renewables.

“As we push in additional levels of variable renewables, prices on average have more potential to come down,” Mazouz says.  

“So it’s not just that we’re seeking to ensure that debt can sign on the dotted line, we also want to make sure that what we’re doing is robust to low-price environments. Ultimately, we’re covering risk, but we’re doing it in a way that allows the market itself to tell us what level of coverage is needed in order to get over the line.”