Renewables infrastructure and investment prioritised in NSW energy roadmap

The NSW Government released its Electricity Infrastructure Roadmap on 9 November 2020, setting out how the state aims to ensure grid stability over the next 15 years, with four of its five coal-fired power stations due to close during this time, and how it intends to promote investment in energy generation, transmission and storage infrastructure between now and 2030. 

The purpose of the Electricity Infrastructure Roadmap is to enable the transition of NSW’s electricity system from its coal-reliant state into something more renewables-focused and internationally competitive. It also intends to allow electricity consumers access to cheap, clean, reliable energy.

What is the Electricity Infrastructure Roadmap?

By 2030, the Roadmap aims to have:

• delivered 12 GW of new transmission capacity through three Renewable Energy Zones (REZs);
  
  
• spurred up to $32 billion in investment in energy generation, transmission and storage infrastructure;
  
  
• created 6,300 construction and 2,800 ongoing (mainly regional) jobs;
  
  
• reduced household and small business electricity bills by $130 p/a and $430 p/a respectively;
  
  
• delivered 3 GW of firming capacity; and
  
  
• reduced carbon emissions by 90 million tonnes.

These goals are to be delivered through a ‘whole of system’ approach, designed to balance transmission, REZ-based generation and storage/firming developments in order to maximise electricity reliability and affordability.

Renewable Energy Zones

The delivery of the three previously-announced REZs in the Central-West Orana, South West and New England regions forms a key element of the Roadmap. The first REZ is Central-West Orana, which is slated to be shovel-ready by the end of 2022.  

Investment in renewable energy infrastructure within a REZ will be facilitated through regulatory reform and by a new process known as the Electricity Infrastructure Investment Safeguard (discussed below).

A key aspect to maximising the potential of the REZs is the augmentation of the relevant shared transmission network. The Roadmap reveals the NSW Government’s intention to make targeted regulatory reforms allowing for REZ areas to avoid transmission line approval chokepoints. These reforms will involve the establishment of a NSW-specific regime similar to the regulatory investment test for transmission process and cost recovery aspects of the National Electricity Rules, which will be known as the Transmission Efficiency Test (the Test).

The Test will involve multiple stages, which are envisaged to proceed as follows:

• a proposed transmission line is declared by the NSW Government as a ‘declared REZ transmission line’;
  
  
• the independent regulator will assess the declared REZ transmission line and will determine the prudent and reasonable costs to be recovered; and
  
  
• the transmission company will be required to develop the declared REZ transmission line and recover its costs as determined by the independent regulator.

Regulatory reforms will also allow transmission companies to access low cost financing in relation to transmission development.

The Roadmap foreshadows that a ‘REZ Transmission Development Scheme’ may also be put in place to ensure the timely addition of REZ capacity to the National Electricity Market (NEM).

In delivering the REZs, the Energy Corporation of NSW[1] will engage with local communities to achieve a balance between electricity, agriculture, heritage, aesthetics, mine and other land uses within each REZ, and will be able to restrict network connections of 30 MW or more where they could cause community disruption. A key aspect of the Corporation’s role will be to develop transmission line route options.

Access fees will apply to generators and storage projects connecting to a REZ shared network.

The Safeguard and Long Term Agreements

With the increase in large-scale storage and firming projects being a key focus for the Roadmap, new projects will be incentivised through the use of the new Electricity Infrastructure Investment Safeguard (the Safeguard), backed up by Long Term Energy Services Agreements (LTES Agreements).

Indicative project eligibility criteria for the Safeguard is very broad, but at this stage includes projects which are:

• capable of registration as scheduled or semi-scheduled on the NEM in NSW;
  
  
• backed by parties with appropriate commercial and technical capabilities;
  
  
• capable of participating in AEMO’s central dispatch process;
  
  
• for REZ generation projects, capable of registration under the Renewable Energy (Electricity) Act 2000 (Cth);
  
  
• not receiving certain financial support; and
  
  
• in receipt of any necessary approvals or have credible plans to obtain such approvals.

The Safeguard is designed to drive long-term electricity infrastructure investment, with an emphasis on generation in and around REZs, and on storage and firming projects. The Safeguard will be a competitive process run by a yet-to-be-appointed Consumer Trustee, with the culmination of the process being the awarding of an LTES Agreement to successful parties.

LTES Agreements will be long-term agreements made with a dedicated scheme vehicle and will take the form of an options contract, allowing the project sponsor to ‘put’ its option to access a set minimum price for energy services. The scheme vehicle will then recover any such payments by on-selling those services or via contributions from distribution network businesses, who will themselves recover network charges.

Risks under LTES Agreements will be hedged by the Consumer Trustee, with strategies yet to be determined, but potentially involving back-to-back deals with retailers, contracts with existing generators, corporate power purchase agreements, wholesale market swaps, and the selling of futures/derivatives. Projects which already have offtake agreements will be favoured, as this reduces the risk the project will ‘put’ its minimum price option under any future LTES Agreement.

While there is little detail on the precise contractual structure of the LTES Agreements, the Roadmap states that the goals will be to preserve existing NEM price signals, conform to industry standards, be sufficiently flexible to deal with market change, and allocate risks to the party best able to manage them. An example given is the potential to use price-levelling ‘swaption’ contracts to remove price risk.

The ultimate purpose of the Safeguard, and any LTES Agreements made under it, is to create a long term contract investment market and reduce the cost of capital for investors. The Roadmap notes that the expected weighted average cost of capital for new projects which are in or connected to a REZ will be reduced by between 0.64 and 1.30 basis points. The levelised costs of energy for solar, wind and mixed solar/wind/storage under the Safeguard are projected to be, variously, $2-14/MWh lower compared to corporate offtake and merchant agreements.

Hydro a focus for firming

With forecast storage shortfalls affecting NSW grid reliability in the future, the Roadmap is targeting pumped hydro generation as one of the best ways to increase the state’s firming capacity through the introduction of a recoverable grants program.  This program is intended to create a 3 GW pipeline of pumped hydro projects designed to compete for long term agreements, with the program having $50 million in recoverable funding to be used in feasibility studies for pumped hydro projects of 30 MW and over.

Hydrogen technologies

While the Roadmap does not include any dedicated policies related to the adoption of hydrogen technologies, it is highly cognisant of hydrogen’s potential as an emerging technology, and is intended to be broad enough to capture developments in this space.  This includes, for example, a potential requirement for gas peaking plants to have the ability to run on hydrogen for a minimum proportion of their annual operation time in order to be eligible for an LTES Agreement.

What does this mean?

The Roadmap should boost investor confidence in renewable generation projects in NSW, particularly in areas nearby or within the proposed REZs. While scant on detail, the foreshadowed regulatory reforms indicate that existing chokepoints to the approval of transmission lines will be reduced or avoided in REZ areas, providing more certainty on project timeframes and delivery.

While we await the creation of the Consumer Trustee and the associated eligibility requirements, the proposed Safeguard and LTES Agreements look set to create long-term certainty for REZ generation, storage and firming projects, with the projected reduction in the cost of capital being as attractive to investors as the projected reduction of electricity prices is to consumers.