Reviewing the Federal Government’s Capacity Investment Scheme - Market Brief Generation Tender 1 - Briefing Note (May 2024)

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Reviewing the Federal Government’s Capacity Investment Scheme Market Brief Generation Tender 1: Briefing Note (May 2024)

Executive Summary

The Capacity Investment Scheme (CIS) is a framework to encourage new investment in wind, solar and battery storage. The CIS essentially involves taxpayers underwriting clean energy projects and is the key policy mechanism being deployed by the federal government to meet its ambitious 82% renewable energy target for 2030. It is estimated that the CIS will cost $67 billion.

The CIS will be rolled out from 2024 to 2027 through a competitive tender process. The federal government says these competitive tenders will be held every six months.

On Friday 10 May 2024, the federal government released a market brief for CIS Tender 1, which seeks to deliver 6 GW of renewable electricity generation across the National Electricity Market (NEM). This is the largest ever single tender for renewable energy in Australia.

Competitive tender processes are a common tool for encouraging renewable energy projects

Over the last decade, more than 100 countries worldwide have adopted auctions as a way to deploy renewable energy. This common tool of government policy is also consistently used by governments to achieve specific outcomes - such as more inclusive growth, host community and other local benefits, and First Nations outcomes.

For example in Canada, it is clear Indigenous equity will be considered a standard requirement for those submitting tender responses. There, BC Hydroʼs call for power puts Indigenous people upfront, requiring a minimum 25% equity ownership by First Nations of each project, and it has a pass/fail assessment (i.e. a bid wonʼt progress without this minimum requirement).

In contrast, the Australian governmentʼs second CIS tender document - while moving the needle slowly - falls well short of some of these international examples where First Nations consent, participation, inclusion, ownership and equity are embedded in processes.

In this Tender 1, despite ʻsocial licence commitmentsʼ and ʻFirst Nations engagement and benefitsʼ being listed as ʻkey elementsʼ, there is nothing in the Eligibility Criteria (i.e. the pass/fail section of the tender process) about First Nations requirements, outcomes or benefits.

However, in a sign that the needle is slowly moving, First Nations requirements, outcomes and benefits are included in Merit Criteria 4 and 7.

While there is more detail to unpack in this CIS Tender 1, and also more detail to be provided about how responses will be scored - at present, and unfortunately, it seems that a proponent's proposed actions on First Nations outcomes will be conflated with and assessed alongside other broader community outcomes. Our concern is that this could diminish from the potential of the CIS, and the projects the scheme will incentivise and underwrite, to deliver strong, beneficial First Nations outcomes.

Tender 1 represents approximately one fih of the capacity the CIS is intended to deliver, and accordingly billions of dollars of Commonwealth expenditure. Whilst there are some positive inclusions, it could be said that Tender 1 pits Australia a long way behind international examples that have been around for decades for these sorts of auction processes.

Given the scale of Tender 1, it represents a missed opportunity to match international standards on First Nations outcomes and back up government rhetoric with genuine action about First Nations participation in and benefits from the clean energy transition.

Recommendations for the next Tender:

1. Include requirements for First Nations social and economic outcomes in the Eligibility Criteria (see further the Networkʼs submission for building First Nations outcomes into the CIS)

2. Include a requirement in the Eligibility Criteria about a proponentʼs cultural capability / cultural competency.

3. First Nations outcomes should not be conflated with general social and host community outcomes. Merit criteria for First Nations outcomes should stand alone and be assessed separately from general host community outcomes.

Background

On 10 May 2024, the Department of Climate Change, Energy, the Environment and Water (DCCEEW) announced that it had released a market brief on the upcoming “Capacity Investment Scheme (CIS) Tender 1, Generation in the National Electricity Market (NEM) (Tender 1).”

As contained in that announcement, this Tender 1 is “expected to commence on 31 May 2024 and seeks to deliver 6 GW of renewable energy electricity generation across the National Electricity Market.”

In total, the CIS is seeking to incentivise the deployment of 32 GW of renewable and storage capacity over the next few years, so this 6 GW tender is significant (19% of the capacity the CIS is intended to deliver will be covered in this tender).1

Tender 1 is only for electricity generation in the NEM, and will be allocated as follows:

How the tender process works - Stage A, B and C

Tender 1 is divided into three stages, A, B and C. To progress through the stages, applicants must demonstrate compliance with the eligibility criteria and merit criteria 1-4 (stage A), merit criteria 5-7 (stage B), before progressing to a recommended list of bids (stage C).

‘Social licence commitments’ and ‘First Nations engagement and benefits’ are listed as ‘key elements’ for the Tender 1 process

Amongst other things, the market brief lists the following as key elements in Tender 1 as to how tenders will be assessed:

1. Social Licence commitments: The Australian Government has a strong expectation that, as the energy transition evolves, genuine economic and social partnerships will emerge between industry and communities to better support and seize the opportunities of a net-zero economy. Social licence commitments will be assessed against Merit Criteria 4 and 7 and commitments will become contractually binding and are subject to monitoring and enforcement conditions should a proponent be successful in Tender 1 process. Merit Criteria 4 and 7 will be weighted 25% each compared to 20% each for the CIS South Australia-Victoria tender. Projects assessed as having low merit against any individual Merit Criteria (including social licence) may not be further assessed and may not be progressed to the financial value shortlist.

2. First Nations engagement and benefits: First Nations people are important partners in the clean energy transformation. The Australian Government is committed to meaningful engagement with Aboriginal and Torres Strait Islander peoples to achieve our priorities, while contributing to Closing the Gap. First Nations engagement and commitments will be assessed against Merit Criteria 4 and 7, to form contractually binding commitments. The assessment is looking for evidence of respectful and productive engagement with First Nations communities, and for First Nations groups to be afforded genuine social and economic opportunities through the CIS.

But despite being listed as a ‘key element’ unlike the BC Hydro process in Canada, there is nothing in the Eligibility Criteria about First Nations requirements

As for the December 2023 CIS South Australian-Victoria Tender process there is nothing in the proposed Eligibility Criteria relating to First Nations outcomes.

This is unlike Canada's BC Hydro process which requires a minimum 25% equity ownership of each project, and includes a pass/fail assessment (i.e. a bid wonʼt progress without this minimum requirement).

In this CIS Tender 1, to be eligible to bid, a proposed proponent is required to demonstrate3 that they:

• are an Australian company (EC1)
• do not owe employee entitlements (EC2)
• have not been named as have breached the Workplace Gender Equality Act 2012 (Cth) (EC3)
• have not, in the last 10 years, been subject to an inquiry by the National Anti-Corruption Commission (or similar) where a finding has been made against the proponent (EC4)
• are not named as an organisation on the Consolidated List by DFAT (EC5)
• have complied with the Modern Slavery Act 2018 (Cth) (EC6).

As can be seen, while there are ʻsocialʼ outcomes included as eligibility criteria in Tender 1, there is nothing in the eligibility criteria that is about First Nations outcomes and ensuring that only entities who are culturally competent and capable are able to bid, or that there must be First Nations social and economic benefits.

Stage A has four merit criteria. Of these, merit criterion 4 is used to assess a proponent’s approach to engagement and understanding of First Nations AND local community engagement strategies

The following are the four merit criteria for Stage A:

• Merit Criterion 1: Contribution to system reliability and system benefits (the impact each project may have on the electricity system, including congestion, reliability and the projectʼs ability to provide essential system services and/or contribute to system strength)
• Merit Criterion 2: Project deliverability and timetable (This criterion will be used to assess the projectʼs ability to be operational by its Target COD. Proponents that can provide detailed evidence to demonstrate their ability to deliver each milestone, with clear articulation of strategies for mitigating delivery risks, are likely to be assessed more favourably. Successful proponents will have the target financial close, COD, and other key dates scheduled as milestones in the final CISA.)
• Merit Criterion 3: Organisational capability to deliver the project (This criterion will be used to assess the track record, capability and capacity of the proponent and its delivery partners involved in the project to provide assurance that the project can be delivered as outlined in the Project Bid.)
• Merit Criterion 4: First Nations and community engagement (see further below).

Whilst merit criterion 4 includes First Nations engagement, it is split into two parts, (i) First Nations engagement and (ii) local community engagement and benefit sharing - it is not solely about First Nations outcomes. Viewed critically it could be said to be said to encourage ‘best endeavours’ behaviour.

Because it also includes a focus on ʻlocal community engagement and benefit sharingʼ, merit criterion 4 accordingly is not solely about First Nations outcomes.

This is relevant because that creates a possibility that in assessing a tender proposal, a proponent could still score well on this merit criterion because of excellent ʻlocal community engagement and benefit sharingʼ, and yet not have exceptional First Nations engagement approaches.

Appendix 1 sets out a table of what merit criterion 4 requires a proponent to demonstrate in relation to the First Nations engagement component.

As can be seen, merit criterion 4 is about forming relationships and minimising impact on First Nations communities - it does not direct proponents to economic inclusion or partnership type outcomes.

If a proponent progresses through Stage A, there are a further 3 merit criteria. In Stage B, merit criterion 7 is about ‘social licence commitments’ which includes First Nations economic and social outcomes.

Stage B of Tender 1 includes the following 3 merit criteria:

• Merit Criterion 5: Financial value (This criterion will be used to assess financial value, based on the forecast cost of the CISA compared to the benefits associated with the project, including its effect on wholesale electricity costs, contribution to achieving 82% renewable energy by 2030, and contribution to reliability and system benefits)
• Merit Criterion 6: Commercial departures (This criterion will be used to assess the nature and extent of any commercial departures and the resulting risk-transfer from the proforma project documents, in particular the CISA)
• Merit Criterion 7: Social licence commitments (This criterion will be used to assess the quality of the projectʼs approach and strength of binding social licence commitments to improve First Nations economic and social outcomes, and regional economic development, including local supply chains and workforce).

Appendix 2 sets out a table of what Tender 1 directs a proponent to consider. Whilst it includes ʻownership, revenue sharing and energy oake agreement modelsʼ these are not mandated. On a positive note, there is an indication that ʻprojects that demonstrate stronger financial commitments...may be found to be of higher meritʼ.

Because merit criterion 7 covers both ‘First Nations economic and social outcomes’ AND ‘regional economic development, including local supply chains and workforce’, there’s the potential for proponents to conflate the two issues to the detriment of First Nations outcomes.

Merit criterion 7 will assess proponents against both their ʻFirst Nations commitmentsʼ and their ʻSocial licence commitmentsʼ.

Although presumably unlikely, the potential exists in the structure of the tender for proponents to focus more on general social licence commitments and less on First Nations outcomes, and to still score well on merit criterion 7.

Despite significant opportunities for improvement, this Tender 1 is a minor improvement on the December 2023 SA Vic auction and it’s clear we’re moving the needle slowly

Appendix 3 provides a comparison of the difference between this tender and the December 2023 SA Vic auction.

As can be seen, there are improved tender guidelines written into this Tender 1 and weʼre moving the needle slowly (see here and here for some of the Networkʼs advocacy on the CIS).

Summary and recommendations

There are likely additional details to be released about how tender responses will be assessed - this information paper is based on the market briefing released on Friday 10 May 2024.

Whilst there are some positive inclusions in the tender process, Tender 1 pits Australia a long way behind international examples that have been around for decades for these sorts of auction processes. Representing nearly one fih of the capacity the CIS is intended to deliver, and accordingly billions of dollars of Commonwealth expenditure, this represents a huge opportunity to match rhetoric about First Nations participation in the clean energy transition with genuine action.

Recommendations

1. Include requirements for First Nations social and economic outcomes in the Eligibility Criteria (see further the Networkʼs submission for building First Nations outcomes into the CIS)

2. Include a requirement in the Eligibility Criteria about a proponentʼs cultural capability / cultural competency.

3. First Nations outcomes should not be conflated with general social and host community outcomes in the tender assessment process. Merit criteria for First Nations outcomes should stand alone and be assessed separately from general host community outcomes.

Appendix 1: Merit criterion 4 - First Nations engagement component

Appendix 2: Merit criterion 7 - First Nations commitments process

Appendix 3 - comparison of Tender 1 (this auction) with the December 2023 SA Vic Tender Guidelines - we’re moving the needle slowly

Endnotes

1 Alternatively, could say that this represents 26% of the renewable capacity of the CIS (given the CIS is seeking to deliver a total of 23 GW of renewable capacity (generation projects) and 9 GW of clean dispatchable capacity (storage). In dollar value, at 19% of the CIS, this represents $12.73 billion, or if itʼs 26% of the CIS, then thatʼs $17.42 billion of taxpayers money that this Tender 1 could underwrite.

Thanks to Moritz Kindler for use of the photo.