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Energy Insights

Long Term Energy Service Agreements; Implications for the Market and Customers

In 2020 the New South Wales (NSW) Government published its Electricity Infrastructure Roadmap as a plan to transform its electricity system through coordination of investment in transmission, renewable generation, storage and firming infrastructure as ageing coal-fired generation plants retire.  Under the Roadmap, the NSW Government is aiming to construct a minimum of 12GW of renewable generation by 2029. A key component of the Roadmap includes running competitive tenders to offer a Long-Term Energy Services Agreement (LTESA) for renewable generation larger than 30MW, long-duration storage and firming.  It is likely that the first LTESA tender would be in 2022.

What are LTESAs?

The specific design of LTESAs is not yet finalised.  In August 2021 the NSW Government released a consultation paper with submissions due early September 2021. 

The LTESA is likely to be a 20-year energy option contract that gives renewable project developers optional access to a competitively set (via a tender process) fixed minimum price for their energy generated.  The LTESAs will bundle energy and renewable certificates.  These agreements are designed to provide longer term revenue assurance to help drive investment in new renewable projects.

The Government is considering the LTESA should include 10 options each of two years in duration granting the renewable project developer the right (but not the obligation) to exercise a swap arrangement (contract for difference) at the agreed fixed price for their energy.  Options would need to be exercised six months in advance of each two year period. 

So in practice, if the market price for energy is low, the developer can exercise the option and receive the fixed price swap for their energy for the two year period.  Conversely, if the market price is high, the developer would not need to exercise the option. 

The LTESAs also intend to include a repayment mechanism that applies in those two year periods when the options are not exercised.  In these periods it is intended that the renewable developer would share a proportion of the higher energy prices with the State and effectively ‘pay money back’ to compensate for money received during those periods where prices are lower.

What are the potential implications of LTESAs?

Some stakeholders have commented on the complexity and risks associated with the LTESAs potential design as well as queries if it will distort the energy markets.

The intention of the LTESA is most certainly to provide protection to renewable developers and investors against low energy prices but it is unclear if this will then necessarily mean consumers may be prevented from benefiting from these same low prices.  The ultimate outcome for NSW electricity consumers is unknown and will be dependent on electricity prices over the 20-year LTESA time horizon.

Given the LTESA is likely to be bundled and include renewable certificates such as Large Scale Generation Certificates (LGCs) they may adversely impact the availability of LGCs for voluntary surrender.  This may result in impacts on the future prices of LGCs and the costs for corporate customers to achieve their net zero ambitions.  Further consequences may also include setting a potential floor price for LGCs based on the fixed prices in the LTESAs.  

Over the longer term, the intention of the Roadmap and the LTESAs is to stimulate growth in renewables and decarbonisation of the electricity grid.  This should eventually reduce prices and diminish the need for voluntary surrender of renewable energy certificates.  However, consumers who currently enter long term obligations for renewable certificates via mechanisms such as corporate power purchase agreements may have unintended risks and consequences.

An alternative approach for consumers that may avoid these risks and consequences would be to consider shorter-term (two to five years) and more flexible products such as our renewable backed Energy Supply Agreement (RESA).  The RESA bundles standard electricity supply with the same flexibility and load as current agreements with voluntary LGCs from a nominated source for a forward term. 

Conclusions

Given the significant scale of the NSW Government’s ambitions, the LTESA will almost certainly have a significant influence on the liquidity and future prices of energy in NSW and potentially broader national energy markets. 

If you have any questions or need advice on procuring renewable energy for your business please contact your Energy Action account manager or contact us by clicking here

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