New South Wales (NSW) is implementing significant adjustments to its renewable energy tender process, shifting the focus from securing the lowest bid price to ensuring that selected wind and solar projects are actually constructed and become operational. These changes, managed by the Australian Energy Market Operator (AEMO) Services (ASL), aim to overcome a critical hurdle in the state’s transition to clean energy: the gap between auction success and project completion.
Addressing the “Buildability” Challenge in Renewable Projects
The core issue ASL is tackling is that many renewable energy projects, particularly wind farms, that have won bids in previous tenders have failed to reach financial close or commence construction. This problem has been exacerbated by rising costs for wind projects, a lack of corporate and utility buyers for the generated power, and underwriting arrangements that have proven insufficient to guarantee project viability. Under the federal government’s Capacity Investment Scheme (CIS), few of the 31 wind projects awarded underwriting agreements have progressed beyond the initial stages.
NSW, having met its allocation under the federal CIS, is now running its own state-specific auctions. These auctions are set to award at least 2.5 gigawatts (GW) of capacity initially, with another 2.5 GW planned for later this year. The state has faced particular difficulties in bringing wind projects to fruition, with only one currently under construction – the Uungula project by Squadron Energy. This situation underscores the need for a revised approach.
Shifting the Tender Evaluation Criteria
The pivotal change in the tender design means ASL will no longer solely prioritize the lowest bid. Instead, the evaluation will focus on identifying bids that represent the best overall value, with an emphasis on the project’s ability to secure necessary financing and proceed to construction. This means that bids will be assessed on their realistic potential to be built, not just their initial cost.
ASL CEO Nevenka Codeville highlighted the urgency, stating, “We believe market conditions will improve – but we cannot wait.” She explained that the primary constraint in NSW is not a lack of potential projects but the difficulty in converting projects from the pre-final investment decision (FID) stage through to financial close, construction, and eventual operation. The revised tender process is designed specifically to facilitate this conversion.
Understanding the Evolving Market Landscape
Codeville acknowledged the significant challenges developers face today, including cost pressures, supply chain disruptions, difficulties with grid connections, and risks of energy curtailment. She contrasted the current environment with the conditions during previous tenders, when corporate power purchase agreements (PPAs) were more accessible, sustainability targets were driving demand, contract terms were longer, and Renewable Energy Certificates (LGCs) offered a more substantial revenue stream. In that past environment, long-term energy supply agreements (LTESAs) were often seen as a form of insurance rather than a critical financial necessity.
“That is not the environment we are operating in today,” Codeville noted. “Many of you are dealing with stronger inflationary pressures, higher capital costs, tighter financing conditions, supply chain constraints, grid congestion and connection risk, and fewer long-term offtake opportunities.”
Despite these headwinds, the state and national renewable energy ambitions remain high, with NSW aiming for 16 GW of new generation by 2030. Codeville emphasized that LTESAs priced merely at the break-even point for debt financing will not be sufficient to meet these ambitious targets. The agreements must now be structured to support reasonable project returns.
Value and Deliverability: The New Assessment Framework
Thimo Mueller, ASL’s head of commercial, clarified the new assessment approach. He stressed that competitive bidding does not equate to unrealistically low prices but rather to bids that are sufficient to ensure a project’s completion. “Bidding competitively does not mean bidding unrealistically low. It means bidding just enough to get the project built,” Mueller stated.
He further explained that higher-cost projects can still be successful if the benefits they provide to consumers justify the required support. ASL will consider factors like generator-specific network upgrades or anticipated near-term curtailment, potentially through “sculpted pricing” – offering higher prices initially that decrease later when curtailment risks are lower. The assessment will weigh these increased costs against the consumer benefit of bringing generation online sooner.
Broader Implications for the Energy Transition
Industry observers suggest these changes align NSW’s tender process more closely with the successful “contract for difference” model used in the Australian Capital Territory’s (ACT) auctions nearly a decade ago. The effectiveness of this approach in the broader federal CIS, which aims for 40 GW of new capacity by 2030 but has seen slower progress, remains to be seen.
Battery storage projects have generally fared better due to multiple revenue streams, falling costs, and their modular nature. However, the new emphasis on value and buildability will also extend to long-duration storage projects in NSW, specifically those offering eight hours of storage or more.
Matthew Brine, secretary of the federal Department of Climate Change, Energy, the Environment and Water, acknowledged that while progress is being made, faster development is needed. He indicated that the federal scheme is increasing its focus on project deliverability over financial costs and is actively managing contracts to ensure progress, with potential termination for underperforming projects. As of recent reports, 14 CIS projects had reached financial close, with an additional 33 anticipated by year-end, encompassing solar and battery storage projects.
The shift in NSW’s tender strategy signals a pragmatic recognition that ambitious renewable energy targets require robust mechanisms that guarantee project realization in a challenging economic climate. By prioritizing “buildability” and “value,” the state aims to unlock the necessary investment and overcome the practical barriers to constructing the clean energy infrastructure it needs.
