Renewable project developers, investors, funders and other stakeholders are being given the opportunity to have their say on the proposed design of long-term energy service agreements (LTESA), which offer revenue underwriting for approved large-scale renewable projects in New South Wales.

A copy of the NSW Government's Long-Term Energy Service Agreement Design August 2021 Consultation Paper can be viewed here.

Proposed design

Along with establishing designated Renewable Energy Zones (REZ), LTESAs are a central element of the New South Wales government's Electricity Infrastructure Roadmap. As we outlined late last year, the Roadmap sets out an integrated, whole of system approach to attract and secure investment in electricity infrastructure in New South Wales.

The Electricity Infrastructure Investment Safeguard sits at the heart of the Roadmap, and aims to offer financial support to eligible projects in the form of such agreements and reduce risk premium for investors by providing minimum revenue certainty.

As detailed in the Consultation Paper and in further detail below, LTESAs will offer eligible generation, long duration storage (including batteries or pumped-storage hydropower) or firming projects the option to access price guarantees, structured as a series of derivative options over the design life of the asset.

What does this mean for you?

Though a lot depends on the final scheme design, we anticipate revenue certainty provided by a LTESA would offer supported projects commercial advantages over competitor projects and, subject to our comments below, improved project bankability as a result of de-risking merchant revenue. That would of course be attractive to both private and institutional investors.

From a bankability perspective, the real test will come when the final terms of the LTESAs are available. Financiers will pay close attention to how the terms differ from government "offtake" arrangements provided by other Australian state governments together with fundamental bankability considerations, such as:

  • term, volume and price certainty,
  • how any revenue refund mechanism will operate;
  • risk allocation (especially around change in law);
  • availability of a tripartite agreement to be entered into with a project's financiers; and
  • how the document work alongside other offtake/revenue contracts that the project has been able to secure.

Something that would be particularly attractive from a financier's perspective is if the Scheme Financial Vehicle had the benefit of a performance guarantee under the Government Sector Finance Act 2018 (NSW) or other government-backed credit support. The Roadmap instead proposes a budget-neutral funding scheme to cover the Scheme Financial Vehicle's costs, and confirms LTESA payments will not be guaranteed by the State. In case of any temporary funding shortfall, the Roadmap suggests a liquidity facility (or other support) could be provided by the State or a financial institution on an arm's-length basis. We expect this will be critical for bankability, however no details have been provided at this stage.

Subject to these and other considerations (in particular how LTESAs will operate in conjunction with the REZ scheme), it may offer a price advantage if the project or an asset is sold with an attached LTESA, as is generally the case for projects with a long-term power purchase arrangement with a government or investment grade counterparty.

Consultation process

Submissions can be made in the form attached to the Consultation Paper and will be accepted until 5.00pm on Friday, 10 September 2021.

Clayton Utz welcomes you to contact the authors of this article to discuss the proposed design of the LTESA scheme and what it means for your business.