18/12/2020

The Electricity Infrastructure Investment Act 2020 (NSW) (the Act), described as the most ambitious energy plan in the country, has been passed by both houses of the NSW Parliament and received assent on 3 December 2020.

The purpose of the Act is to co-ordinate investment in new generation, storage and network infrastructure in NSW. The Act gives effect to the NSW Government’s Electricity Infrastructure Roadmap, which sets out the policy framework for investment to deliver a modern electricity system and maintain an affordable, reliable, clean and sustainable electricity supply in NSW as the State transitions from coal to renewable generated power.

The Act represents a fundamental shift in policy towards the encouragement of renewable energy projects in NSW and is targeted at reducing investment risk and providing industry and investors with the certainty they need in relation to new energy infrastructure.

It is projected that the “whole-of-system approach” under the Act will attract $32 billion of private sector investment by 2030 and secure NSW’s future as an “energy superpower”.  

Why was the Act required?

A large portion of the existing infrastructure which provides NSW’s energy supply is nearing the end of its technical life, with four of the five coal-fired power stations in the State being scheduled to close in the next 15 years, starting from 2023. These power stations must be replaced by new energy infrastructure before they are closed to avoid substantial price rises.

It has been recognised that NSW has some of the best renewable energy and pumped hydro resources in the world. However, the view of the NSW Government is that the State has not been able to take advantage of these resources due to congestion in the transmission system, which resulted in limited capacity to connect new generation. Further, it was identified that there was no clear pathway under the existing regulatory and market framework for co-ordinated investment across different types of energy infrastructure to deliver the necessary investment at the scale and in the timeframe required.

The framework under the Act has therefore sought to alleviate these issues, opening up the opportunity for the renewables sector to invest in energy generation and storage in order to meet the future energy needs of NSW.   

Framework

The framework in the Act for investment in generation, storage and network infrastructure includes the following main components:

  • monitoring an energy security target for electricity supply each year;
  • “renewable energy zones” (REZs) in specified geographical areas of NSW that are made up of particular generation, storage and network infrastructure;
  • construction and operation of network infrastructure in NSW (including in REZs);
  • cost recovery in respect of the construction and operation of network infrastructure;
  • derivative arrangements for persons who construct and operate generation, storage and firming infrastructure; and
  • contributions from distribution network service providers.

Certain provisions in the Act commenced by proclamation on 9 December 2020, with the remaining provisions to commence on 1 May 2021 and 1 July 2021.

Key Features

Renewable Energy Zones

The central feature of the Act is the establishment of a process under which the Minister can declare a geographical area of the State a REZ and specify the generation, storage or network infrastructure that will be implemented in that zone.

The main function of a REZ is to enable the coordinated development of new grid infrastructure in energy rich areas to connect multiple generators in the same location. This approach is considered to create economies of scale, which could reduce generation costs, and will provide opportunities for early planning and community engagement.

There are 5 initial REZs declared in the Act, namely:

  • Central-West Orana;
  • Illawarra;
  • New England;
  • South West; and
  • Hunter-Central Coast.

The Minister can also declare REZs on application, which enables the delivery of non-governmental led REZs. A declaration will involve a consideration of planning, environmental and heritage matters, as well as the views of the local community in the proposed REZ.

Access Schemes

The Act gives power to the Minister to declare “access schemes” that operate in REZs. An access scheme authorises (or prohibits) access to, and the use of, specified network infrastructure by operators of generation and storage infrastructure within a REZ.

These access schemes are intended to support investment in the network and provide investors with comfort that their project will be authorised to access a stable grid connection.

The declaration of an access scheme may specify how access rights are to be conferred on participants and the fees payable. The fees under the scheme are envisaged to be applied towards the cost of the network infrastructure required to enable the REZ and for distribution to funds set up for the benefit of communities within the REZ.

The Minister may only amend a declaration in the very limited circumstances set out in the Act and may only repeal a declaration if there are no participants in the access scheme or in accordance with its terms.

Electricity Infrastructure Investment Safeguard

The Act establishes an “electricity infrastructure investment safeguard” that includes:

  • legislative objectives set out in the Act for each type of new infrastructure (i.e. generation, long-duration storage and firming);
  • a process for the consumer trustee appointed under the Act to plan the development pathway to construct each type of new infrastructure; and
  • the ability for the consumer trustee to award “long term energy supply agreements” (LTES Agreements) through a competitive tender process, if the consumer trustee determines that such agreements are required to meet the development pathway.

The LTES Agreement is a derivative agreement under which long term energy supply operators (LTES Operators) will construct and operate infrastructure for eligible renewables and storage projects in return for periodic options to exercise financial derivative arrangements.

The intention of the LTES Agreement is to provide certainty to investors that the project can earn an agreed minimum level of revenue from selling its services to the electricity market and to provide a financial incentive for the development of projects to be accelerated so that they can be brought online quickly, which will enable a swifter build-out of REZs. 

Electricity Infrastructure Fund

The Act requires the scheme financial vehicle which is a party to the LTES Agreement to establish an “electricity infrastructure fund” to receive payments and cover the financial liabilities of the scheme financial vehicle and operations of the consumer trustee and regulator. Distribution network services providers are required to pay a specified contribution to the fund determined by the regulator each year. The fees payable by participants in access schemes are also required to be paid into the fund.

Energy Security Targets

The Act establishes an “energy security target” which is a mechanism to determine how much firm capacity is needed in NSW in the medium to long term to ensure the electricity system remains reliable. The energy security target under the Act is equivalent to the maximum demand experienced in NSW every 10 years, plus a reserve margin. An energy security target monitor will be appointed to calculate annual energy security targets and monitor whether or not the energy security target will be met in the next 10 years.

Considerations for Projects

  • Prohibitions – There is a risk that projects located in REZs which do not have a development consent under the Environmental Planning and Assessment Act 1979 (NSW) for the proposed infrastructure could be prohibited from being connected to network infrastructure in a REZ. This can occur if the infrastructure planner under the Act (Energy Corporation of NSW) considers that there is significant opposition to the project from the local community. Developers should therefore consider engagement strategies with stakeholders as early as possible and spend time genuinely engaging with communities to build and maintain local support for the project.      
  • Compliance – There are offences in the Act for failure to comply with its provisions, including for providing false and misleading information to the entities appointed under the Act. Penalty notices can be issued and financial penalties imposed for breaches of certain provisions in the Act. Fines under the Act apply to businesses, individuals and network operators. Parties involved in the energy sector must therefore be aware of their obligations and liabilities under the Act.
  • Incentives – Developers should consider the impact of the Act on their business, including how to structure their proposed projects and tenders in order to maximise the potential benefits to revenue that could flow from the financial derivative arrangements under the proposed LETS Agreements.

For further information, please contact Adela Smith or Tim Kennedy.

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