Here’s a shocking truth: despite the booming growth of battery storage projects, the wind and solar sectors are facing a silent crisis—a buyers’ strike that’s stalling progress. But why is this happening, and what can be done to fix it? The Capacity Investment Scheme (CIS) was launched with a bold mission: to accelerate renewable energy deployment by auctioning underwriting contracts, aiming for 26 GW of renewables and 14 GW of dispatchable capacity by 2030. Sounds promising, right? But here’s where it gets controversial: while the scheme is in place, only a handful of solar and wind projects that won CIS tenders have actually reached financial close and moved to construction. So, what’s going wrong?
The slow progress of these projects has sparked heated debates. Some argue that projects are still tangled in planning and transmission processes, delaying financial closure. And this is the part most people miss: market participants claim that intense competition among projects has driven CIS auction prices so low that they’re insufficient to satisfy debt funders. This means projects are left scrambling for Power Purchase Agreements (PPAs) with retailers or corporate buyers to bridge the gap. But here’s the catch—retailers have barely signed any PPAs with new solar and wind projects in recent years, leaving the Corporate PPA sector to shoulder the burden.
The Corporate PPA market has indeed become a lifeline for renewables, with around 60% of renewable capacity built since 2017 relying on it at some point. But here’s the harsh reality: this market isn’t equipped to carry the weight alone. The Federal Government insists that 6,000 MW of solar and wind generation must be installed annually to meet the 2030 target. Yet, since 2020, Corporate PPA deal volumes have hovered between 1–1.5 GW annually, with pre-financial close deals rarely exceeding 500 MW (except for last year’s anomaly with large resource companies signing 2 GW+).
The NEM review has highlighted the ‘tenor gap’—the shortage of buyers willing to sign PPAs longer than 7 years. But the more pressing issue is the ‘offtaker gap’—the lack of buyers signing PPAs to help projects reach financial closure. This article dives into Corporate PPA trends, their implications for the CIS, and potential solutions to bridge this critical gap.
Government Auctions 2.0: What’s Changed?
Unlike earlier government auctions, such as the Victorian Renewable Energy Target, which provided revenue certainty and eliminated the need for PPAs, the CIS keeps projects in the PPA market. Previous auctions offered contracts-for-difference (CfDs) where the government guaranteed a strike price, topping up if wholesale market prices fell below it. Under the CIS, winning bidders receive an options contract with a ‘cap and collar’ structure, designed to provide minimum revenue for debt security. However, intense competition has driven bid prices so low that many projects struggle to secure debt finance, leaving them dependent on PPAs.
The PPA Dilemma: Three Paths, Limited Options
Projects with CIS awards have three PPA options: a utility PPA from a retailer, a PPA with a government-owned utility, or a Corporate PPA from an electricity buyer. However, options 1 and 2 are limited. The three largest retailers, holding 70% of the market, have signed few PPAs since 2020, and tier-2 retailers often lack the scale or creditworthiness to step in. Government-owned utilities, like Queensland’s CleanCo, were major players until the recent election of a Liberal-National Party government with an anti-renewables stance, further narrowing the field.
Can the Corporate PPA Market Save the Day?
The Corporate PPA market has been a cornerstone of Australia’s renewable energy sector, but can it scale up to fill the offtaker gap? Here’s the controversial part: while it’s grown, there are limits. Buyers are postponing contracts due to rising project costs, uncertainties in the energy transition, and a widening price gap between expectations and PPA prices. Additionally, most Corporate PPAs are signed by large buyers via wholesale PPAs or tier-2 retailers, and these deals often come after projects reach financial close, not before—when they’re most needed.
Policy Crossroads: What’s Next?
If the CIS isn’t delivering sufficient prices for financial closure, change is inevitable. But what’s the best path forward? Returning to standard CfDs seems unlikely, given criticism from the NEM review. Adjusting the CIS to offer better pricing and certainty could create a virtuous cycle, boosting retailer PPA activity. Alternatively, incentivizing tier-1 retailers to enter the market—through mechanisms like a carbon price or coal closure policy—could be a game-changer. However, if these retailers remain on the sidelines, the government may need to explore bolder instruments.
The Real Gap: Offtakers, Not Tenure
While the ‘tenure gap’ has grabbed headlines, the more urgent issue is the ‘offtaker gap.’ Most corporate buyers prefer short-term PPAs and often wait until projects reach financial close to contract. A standardized contract for years 8+ could streamline processes, but assuming the market will fill the gap for years 1–7 is wishful thinking. Policymakers must prioritize closing the offtaker gap to accelerate solar and wind farm deployment and meet Australia’s ambitious targets.
Thought-Provoking Question: Is the CIS’s auction model fundamentally flawed, or can tweaks to pricing and incentives bridge the offtaker gap? Share your thoughts in the comments—let’s spark a debate!
