Albanese government expands investment scheme for green energy
Australia’s objective to achieve 82% renewables by 2030 has received a boost from the Albanese government last week. While some in the industry have called for an extension of the Renewable Energy Target, Federal Energy Minister Chris Bowen has instead announced the federal government’s plan to extend its underwriting of investments in renewable generation and storage projects. Via the “National Capacity Investment Scheme”, the Labor government plans to effectively replace the existing Renewable Energy Target in favour of expanding funding of renewables projects to create greater revenue certainty, investment certainty, realise more projects and ultimately minimise costs for energy users.
Renewable Energy Target versus Reverse Auctions
The newly extended scheme will involve a system of underwriting revenues through contracts for difference, aimed at improving flexibility and evenly allocating risk between investors and taxpayers. In effect the proposed mechanism aims stabilise the market for both generators and consumers whereby subsidies are high when electricity market prices are low, and low when market prices are high. It is proposed that contracts will be won through a reverse auction process which operate by large-scale renewables generators receiving a fixed price feed-in tariff entitlement. The first auction will be held in April 2024, to be followed by a new auction every six months until 2027, in a bid to contract enough wind capacity by 2026 and solar capacity by 2027 to ensure that projects are built in time to meet the 2030 targets.
The ACT serves as an example of the scheme’s potential success. By the end of 2021, five reverse auctions had resulted in 840 MW of contracts, contributing approximately three-quarters of the ACT’s 100% renewable electricity target.
The federal Labor government proposes to follow a similar process through a series of similar transactions beginning in April with aims of adding 32 gigawatts to the National Electricity Market by 2027.
Floors and Ceilings
Projects from the auction will be offered Capacity Investment Scheme contracts which will provide both a revenue floor and ceiling. In the case of high wholesale prices where profit exceeds the net revenue ceiling, the project owner will return an agreed percentage to the government and consumers. In the alternative where the price of energy generation falls below the floor, the government will pay the project owner. It is expected that this stronger revenue predictability will make it easier for project developers/owners to secure debt and equity needed to bring projects to a financial close.
While details of the scheme remain unknown, similar schemes, such as the ACT example above, have previously been utilised by governments and have led to the successful delivery renewables projects. We at DLA Piper are excited by the prospects of investment certainty for our clients as we push toward a renewable future.
Read more about the government’s announcement by clicking here.