The implementation of the NSW Electricity Infrastructure Roadmap is approaching a significant milestone with Tender Round 1 due to commence on 4 October 2022. Tender Round 1 is being administered by AEMO Services and covers Long-Term Energy Service Agreements (LTESAs) for generators and long duration storage projects (LDS), as well as access rights to the Central-West Orana Renewable Energy Zone (CWO REZ). On 12 September 2022, AEMO Services provided further details concerning the tendering process by releasing the tender guidelines for Tender Round 1 (Guidelines).
Tender Round 1
In Tender Round 1, proponents may bid for LTESAs and/or CWO REZ Access Rights. Where a proponent bids only for an LTESA and the project is located outside a REZ, the project must demonstrate ‘outstanding merit’ in addition to meeting all other eligibility and assessment criteria (see further below).
The tender process has not substantially changed from the draft tender documents released in July 2022 and is constituted by the following steps and forms of assessment:
The Guidelines provide substantial detail on the eligibility and assessment criteria applicable to the Project Bid and Financial Value Bid steps of the process, including extensive lists of mandatory, essential and optional documents to be provided for each criterion to AEMO Services.
As noted in the diagram above, the Registration and Project Bid steps include eligibility criteria for the proponent and the project respectively to be determined on a pass/fail basis, with ineligible projects unable to proceed. In contrast, assessments in the Project Bid and Financial Value Bid steps will be conducted on a weighed scoring approach against all relevant merit criteria with the highest scoring projects shortlisted for the next step in the tender process. Outstanding merit, in this context, applies to projects located outside a REZ that achieve a higher aggregate merit criteria score than the lowest shortlisted in-REZ projects. Where a project is assessed at just below the lowest shortlisted score, AEMO Services may undertake a ‘value for money assessment’ and shortlist this project on the basis of the overall benefit that the project will provide via its Industry and Aboriginal Participation Plan.
Finally, the Financial Value Bid stage includes a holistic portfolio assessment and due diligence process, which considers potential adverse impacts of the shortlisted projects on the electricity network and the community (eg, where multiple shortlisted projects without planning approval are in a similar geographic location), or arising from supplier concentration or counterparty risk.
The fundamental features of the LTESAs remain unchanged from the draft tender documents summarised in our earlier article 'LTESA draft documents released for Tender Round 1 by AEMO Services' and can be bid for by any NSW projects committed after 14 November 2019. LTESAs are financial derivatives that offer the proponent options during their term that, when exercised, guarantee a minimum level of income for the asset (while maintaining exposure to the upside if prices are high). This guaranteed income is expected to be bid by the proponent at a level sufficient to meet loan repayments together with an equity return, but likely below applicable commercial rates.
In summary, Generator LTESAs concern:
- the whole or only a part of the project’s capacity;
- a term of up to 20 years;
- a non-escalating fixed price payable (via a swap derivative) by the scheme financial vehicle (SFV) during 2 year options exercisable by the proponent;
- a minimum generation target whenever an option is exercised requiring a potential shortfall payment to the SFV if the target is not achieved; and
- a non-escalating repayment threshold price (applicable when an option is not exercised) above which the SFV is entitled to 75% of additional revenue until all SFV payments are repaid.
LDS LTESAs concern:
- a term of up to 14 years for chemical batteries and 40 years for pumped hydro;
- an annuity cap, being the maximum annual top up by SFV to net operating revenue of the project during 2 year options exercisable by the operator;
- a net revenue threshold, above which the SFV is entitled to 50% of additional revenue until all SFV payments are repaid; and
- escalation of the annuity cap and the net revenue threshold each year by the lesser of CPI and 3%.
Successful proponents will be required to enter into a Project Development Agreement with the SFV, under which the proponent will contract to achieve financial close and commercial operations milestones (after which the LTESA is expected to commence).
Tender Round 1 is to include access rights to the CWO REZ. However, the Guidelines note that the Access Scheme Declaration by the Minister, which is required for the grant of such access rights, is yet to be finalised as at the date of the Guidelines. The Guidelines state that the Declaration is expected on or about 4 October 2022, the date Tender Round 1 commences.
Access rights authorise the proponent to apply to connect to and to send out generation via the REZ and are provided for an initial term of 20 years. These rights are subject to a maximum capacity limits over time to ensure that the project does not trigger substantial curtailment of the REZ. Successful proponent will be required to enter into a connection agreement and an access rights agreement (with the SFV or EnergyCo, as the infrastructure planner for the CWO REZ).
The Guidelines also set out draft CWO REZ access fees with an expected range of between $4,000 - $5,000 per MW p.a. calculated on the project’s awarded maximum capacity, indexed for annual CPI and payable through various mixes of upfront and recuring payments.
Tender Terms and Conditions
Proponents seeking to participate in a tender round must enter into a tender process deed and provide security of $4,000/MW, capped at $800,000 per project. According to AEMO Services, this “bonding is intended to mitigate the risk against a Proponent being successful in the Tender Round but then failing to sign relevant Project Documents reflecting the successful Bid.”
Finally, participation in Tender Round 1 also requires compliance with the Tender Conditions set out in section 5 of the Guidelines. These Tender Conditions contain usual provisions governing confidentiality, use of proponent bids to inform future tender rounds and details concerning conflicts of interest, including a prohibition (subject to written permission by AEMO Services) on a proponent or consortium member becoming a member of or being involved with a ‘competing’ proponent.
Interestingly, section 5.30 of the Guidelines gives AEMO Services (as the Consumer Trustee) broad discretion in relation to the tender process. While the Guidelines make an explicit commitment to “certainty and transparency of process”, section 5.30 enables AEMO Services to (among other things) depart from the merit criteria, assessment principles and processes painstakingly set out elsewhere in the Guidelines; accept or reject a bid notwithstanding its merits ranking; consider information about a proponent (other than what was submitted by the proponent) without notifying the proponent or affording it a right of reply; and “withdraw, cancel or modify (substantially or otherwise) the Project or any part of the Project” without providing further detail as to what this modification may entail for the proponent. AEMO Services is also not required to provide reasons for any action taken or decision made and is robustly protected from liability to and claims from proponents. While some level of discretion and exclusion of liability on the part of AEMO Services is understandable, potential proponents may wish to consider the breadth of AEMO Services’ discretion and protection from liability in the context of the time and resource they dedicate to their participation in a tender round.
Multiple Tender Rounds
In the Guidelines, AEMO Services outlines a 10-year plan involving multiple tender rounds. While no further detail is provided as to the timing or size of these future tender rounds, this approach is intended to encourage proponents of energy assets and services to choose the appropriate time to bid their projects. Proponents are encouraged to develop their projects to the stage where they represent quality offerings capable of delivering for the long-term financial interest of NSW electricity consumers rather than rush to participate in the earliest available tender. AEMO Services also contemplates an evolving selection of products to be made available for tender over time, with firming LTESAs (and details concerning these LTESAs) to be included in future rounds.
Registration Due Date
Registration for Tender Round 1 will remain open until the Project Bid Closing Date and Time or 28 October 2022 at 5pm AEST.