Capacity Investment Scheme

Success has many mothers, failure is an orphan.

The recent announcement from federal and state ministers of the Capacity Investment Scheme represents a major milestone for the decarbonisation of the NEM. It’s also a victory for sensible, evidence-based policy reform, and a repudiation of the ideological crusades of the last decade.

It took a long time to get to this outcome, with a lot of effort from many devoted people.

It’s important that we talk about the processes behind development of good policies like these. There is no single person who is responsible for this outcome. However, I can proudly say that the Clean Energy Council and our members played a central role in achieving this outcome, by working collaboratively with all levels of government as well as climate and industry advocates.

Despite some powerful interests pushing for it, the ESB’s original ‘capacity mechanism’ was an outmoded design that would have delayed the transition to a stable and decarbonised NEM. The Clean Energy Council’s clear-headed advocacy exposed the multiple failures of the proposed capacity mechanism.

The best way to deliver good policy is to surround yourself with smart people. So that’s what we did. Standing on the shoulders of these giants, listening closely, and working with our members, the Clean Energy Council developed our own response to the original design. This was a multi-staged approach, including the development of a detailed submission to the ESB’s capacity mechanism paper, followed by direct advocacy to explain our proposed alternatives.

We began by clearly identifying the problem to be solved. This was best described as a two-pronged problem – how to control the exit of coal, while bringing forward necessary investment to maintain a reliable supply of energy to consumers.

We demonstrated that the proposed mechanism was not up to the task. A single mechanism could not control coal generation exit, while also bringing on new investment. We identified that capacity markets are blunt instruments that cannot accurately target the various elements of a successful NEM decarbonisation.

We then looked for targeted policy mechanisms as an alternative to the ESB’s proposal.

Bruce Mountain of the Victorian Energy Policy Centre had published a paper that described a Renewable Energy Storage Target, which was basically a certificate market scheme for supporting energy storage. Clean Energy Council members Iberdrola and Flowpower also proposed alternative models, based on bringing forward investment renewables to provide a reserve of capacity.

Next, we set out how each of these models might work in practice, also considering other mechanisms such as reverse-auction-based direct procurement. At that time, we considered a certificate-based storage target was probably the best option. This was on the basis that such a mechanism was already ‘known’ (given similar models like the LRET), and likely to be efficient at delivering lower costs for consumers.

We also looked to reforms already afoot. The Reliability Standard was being reviewed at the time, and we demonstrated how certain design choices could do a lot to bring on additional storage. Mechanisms such as the Operating Reserve market, originally proposed by Iberdrola could also play a role in maintaining reliability.

And, of course, we highlighted the critical role of federal and state-based mechanisms, such as the various REZ design frameworks and Rewiring the Nation.

All of this went into a detailed submission. That’s when we started engaging directly with the states and federal energy departments, explaining the economics of storage and renewable investment, and why targeted policy mechanisms were preferable to a monolithic capacity mechanism.

But what is it they say about the best laid plans? So it was that we saw a rapid succession of announcements from Victoria, Queensland and New South Wales in mid-2022, all of which proposed some form of direct procurement of storage. This meant we needed to adapt our central proposed mechanism, a certificate-based storage target, to better align with the direction being taken by the states, all of which seemed to be leaning toward some form of reverse-auction model.

So, we re-engaged with the states and federal departments. We explored what direct procurement models might look like, and how they could be designed to best support storage investment while minimising costs for consumers.

The result is the Capacity Investment Scheme (CIS). There are many others who played a role here, but I’m nevertheless proud of the hard work from my team here at the Clean Energy Council, and the many Clean Energy Council members who supported us in delivering this great outcome.

Of course, the work is not done yet. There are still many details to be worked through to understand how the CIS will operate and how it will integrate with the Rewiring the Nation program. But we should also take a moment to celebrate a major win. We are now seeing action from the Australian and State governments to deliver sustainable decarbonisation of the NEM.