Posted: 25 Nov. 2020 05 min. read

Blues get an edge in this state of origin

In November 2020, the NSW Government released its Electricity Infrastructure Investment Roadmap and the supporting Electricity Infrastructure Investment Bill 2020. The roadmap and supporting bill signal a significant departure away from the existing national electricity market arrangements, with NSW taking on a transmission infrastructure planning role and providing itself with an avenue to implement a market arrangement that provides revenue certainty.

The Bill was passed on 25 November 2020.

What is NSW doing?

While there are a number of interesting elements to the NSW Electricity Infrastructure Investment Bill 2020, some of the most significant departures include:

  • Allowing the NSW Energy Minister to:
    • Declare a renewable energy zone – with the Central-West Orana (3 GW), New England (8 GW) and South West renewable energy zones declared on commencement of the Act
    • Declare an access scheme for renewable energy zone, which authorises or prohibits access to, and use of, specified network infrastructure in a renewable energy zone
    • Direct a network operator to carry out a REZ network infrastructure project or a priority transmission infrastructure project (effectively removing the requirement for an investment to satisfy a Regulatory Investment Test for Transmission (RIT-T)). The prudent, efficient and reasonable costs of this investment will be determined by a regulator, who may or may not be the Australian Energy Regulator
  • Establishing an electricity investment safeguard that applies to renewables with a generation capacity of at least 30 MW, long-duration storage infrastructure that has a registered capacity of at least 8 hours and firming infrastructure. Projects that qualify may be able to enter into a long-term energy service agreement (LTES agreement), which in exchange for the construction and operation of infrastructure, the project will have a guaranteed floor price to enable financial close.
    • Payments under the LTES will be supported by the establishment of a fund. Distribution network businesses will be required to make contributions, amongst other sources. While not explicit, typically any government-directed financial contributions levied on distribution networks are recovered from end use customers via their electricity bills.

Why is this happening?

The stated objectives of the NSW Government in embarking on this program are:

  1. To improve the affordability, reliability, security and sustainability of electricity supply
  2. To co-ordinate investment in new generation, storage, network and related infrastructure
  3. To encourage investment in new generation, storage, network and related infrastructure by reducing risk for investors
  4. To foster local community support for investment in new generation, storage, network and related infrastructure
  5. To support economic development and manufacturing.

Stated objectives aside, the NSW Government has been positioning an aggressive agenda on renewables investment, with a focus on renewable energy zones.

While there is considerable excitement from investors in the announced zones, to reach financial close, investors need an offtake agreement of some tenure.

There were (until the NSW Government’s announcement) reasonable questions to be asked about where these offtake agreements would come from. There are three to four main buyers in the market, with balanced portfolio and may not require additional supply before their coal assets retire. This would put pressure to find offtake agreements in the corporate Power Purchase Agreement (PPA) market in NSW, which is growing but is yet to mature. This posed a significant risk to the development of the zones, which has been addressed through the reform package.

Let the battle of the states begin…

NSW is already a hot market for renewable energy investment, with many investors privately noting that it is their priority market. There are a couple of key reasons for this:

  1. NSW is the largest market in the NEM, with the biggest load base
  2. There is about 8.8 GW of coal capacity due to retire by the mid-2030s, which is expected to have an upwards impact on wholesale prices
  3. With few state government incentives to date, NSW has seen less investment relative to other states who targeted renewables entry. As a result, some of the grid connection issues prevalent in other states are currently immaterial.

Combined, these factors make NSW an attractive market for investment. The NSW reforms don’t fundamentally change this, but they may mean that (at least in the short run) we see little investment outside of the mechanisms proposed and AGL has already commented on this.

The NSW reforms may also have significant impacts in Queensland and Victoria, with the NSW Government essentially providing investors an avenue for investment certainty and a relatively easier route to connection. Given that these states have aggressive renewable energy targets, we consider that it’s feasible that they will respond with their own, similar reforms. 

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