In July 2022, AEMO Services, appointed as the NSW Consumer Trustee and tasked to facilitate the implementation of the NSW Electricity Infrastructure Roadmap, released draft tender documents for its first tender round scheduled for Q4 2022 (Tender Round 1). These draft documents enable proponents to familiarise themselves with the tender process as well as the fundamental features of the Long-Term Energy Service Agreements (LTESAs) which are intended to support long term private investment in generation and battery storage projects in the State.

The summaries set out below are derived from these draft documents and thus subject to change by AEMO Services before Tender Round 1.

Tender Documents

Generator LTESA

A Generator LTESA is a financial derivative with a term of up to 20 years that offers the operator options to enter into fixed price cash settled swaps in the relation to the whole or a portion of the output of the generator for set periods of time. The purpose of the LTESA is to provide the operator with guaranteed minimum income when an option is exercised. The fixed price is not adjustable during the term of the LTESA, but is expected to be bid by the operator at a level sufficient to meet loan repayments together with an equity return, but likely below commercial offtake rates.

When the swap options is exercised:

• the scheme financial vehicle (SFV) (the counterparty to the LTESA) is entitled to all green products and capacity product entitlements created in respect of the swapped portion of the generator output; and
• a minimum generation target applies.

If the operator chooses not to exercise the option during the term, it is free to enter into PPAs or to otherwise supply to the NEM. However, if the output is not contracted under a PPA and the weighted floating price for any year in which an option is not exercised exceeds a repayment threshold, the operator may be liable to pay up to 75% of its above threshold income to the SFV to repay the amounts it had previously received from the SFV.

A Generator LTESA is available to any projects in NSW that became committed after 14 November 2019 and achieve commercial operation by 1 January 2025.

Long Term Storage (LDS) LTESA

An LDS LTESA is a financial derivative with a term of up to 40 years that offers the operator of an eligible energy storage project (with a minimum of 8 hours of storage) options to access a variable annuity payment in the form of a top up to the operational revenues of the project. As with the Generator LTESA, the purpose of the LDS LTESA is to provide a guaranteed minimum income at the level bid by the operator. However, unlike the Generator LTESA, the annuity cap receivable per MW p.a. and the net revenue threshold per MW p.a. above which profit sharing applies both escalate at the lower of CPI and 3% p.a.
When the option is exercised, the operator receives 25% of the annual annuity cap for the first three quarters of a financial year, with a reconciliation payment calculated at the end of the fourth quarter by which:

• where the project revenue (minus permitted costs) is at or below the relevant threshold, the operator receives the remainder of the annuity cap; or
• the operator must pay to the SFV a revenue sharing payment of up to 50% of its revenue over the relevant threshold.

If the operator does not exercise the option, it may also be liable to repay up to 50% of its revenue over the relevant threshold to the SFV to repay the amounts it had previously received from the SFV.

An LDS LTESA is available to any projects in NSW that became committed after 14 November 2019 and achieve commercial operation by 1 January 2027.

Project Development Agreement (PDA)

Both the Generator LTESA and the LDS LTESA require the operator to enter into a PDA under which the operator contracts to achieve financial close for and then develop, construct and achieve commercial operations (including all regulatory requirements) for the relevant project within set timelines and to, or above, a specified capacity.

The operator is required to provide security of up to $4 million, and is liable for a termination payment (to the value of the security) if the PDA is terminated for operator default or insolvency.

The PDA also requires that the operator complies with social licence commitments that, while yet to be detailed in the tender documents, are likely to be similar to commitments previously seen in other government tender processes (eg, a local employment quota, a community engagement plan and First Nation consultation and employment standards).

Tender Process

The tender process for Tender Round 1 is expected to proceed through the following steps

Next steps

Since the tender process for Tender Round 1 is set to commence shortly:

• the tender documents are likely in a final draft state; and
• proactive steps may need to be taken by proponents who have not already substantially advanced their development of an eligible project.

Before that, however, a review of the draft LTESAs and PDA and a consideration of expected market conditions over the short to medium term may be warranted to ensure that participation in the tender process is commercially viable.

Author: Michal Magat