Federal Government announces Capacity Investment Scheme to boost renewable energy investment
The Federal Government has announced its plan to accelerate Australia’s progression towards its 2030 Renewable Energy Target, by implementing an underwriting scheme to drive further investment in Australia’s energy market (Capacity Investment Scheme or Scheme).
Current state of play
While solar and wind are cost-effective forms of energy generation, reliability issues, grid connection, land access, environmental risks, labour shortages, and material shortages, mean that these projects are not being built at the pace required to reach Australia’s climate commitments by 2030.
Further, we’ve seen a major slow-down in investment in renewable energy over the past year, with the first half of 2023 seeing the slowest start for financial commitments on clean energy developments since 2017.
Introducing the Capacity Investment Scheme
Federal Energy Minister, Chris Bowen, has proposed the Capacity Investment Scheme to support investment in new clean power generation and storage capacity. The Scheme aims to de-risk clean energy investment and protect consumers from price volatility throughout the energy transition, and will be available for eligible, uncommitted projects.
How will it work?
The Federal Government will underwrite new renewable generation and storage investments through a contract for difference arrangement, distributing investment risk between taxpayers and proponents.
Contracts within the Scheme will be awarded via competitive tender, with the first auction commencing in April 2024. This will involve six-monthly auctions to secure 23GW of variable renewable generation and 9GW of storage, totalling 32GW.
The cost of each contract will be determined by the market during the auction process. Contracts will include a revenue floor and ceiling which are to be agreed with the Federal Government. This means that:
- if revenue earnt is greater than the agreed revenue ceiling, the proponent will pay the Federal Government a percentage of the revenue above the ceiling; and
- if revenue earnt is lower than the agreed revenue floor, the Federal Government will pay the proponent a percentage of the revenue below the floor.
To support this transition, the Federal Government will also negotiate bilateral agreements with states and territories. These bilateral deals require states and territories to meet reliability criteria and improve their approvals processes to streamline each project.
What is missing?
Although welcomed by the renewable energy sector, the Scheme does not address other material issues with the new projects getting off the ground, including land access, grid connection, labour shortages and material shortages.
While the Scheme is certainly a positive step forward for new projects, the lack of consistent Federal and State legislation, particularly in relation to project approvals, remains a major hurdle for the industry.
For more information about the Scheme, please contact a member of our Resources and Renewables team.
With special thanks to Jack Mallory, Lawyer, for preparing this article.
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