The NSW Electricity Infrastructure Roadmap’s second competitive tender round for firming infrastructure commenced on 3 April 2023. This second round is focused on supporting LTESA firming supply proponents, where ‘the LTES Operator will have the option to access a capped annuity payment as a top-up to the operating revenues of the Project.’
The Firming Infrastructure LTESA seeks to support the development of all firming technologies like batteries, gas generators and electrolysers where technology size should be a minimum of 30MW. AEMO Services aim to procure 380MW of firming capacity using the aforementioned technologies (except demand response).
- Revenue support for up to 10 years through a series of one-year options to receive annuity payments.
- Flexible structure to support different financing structures and revenue strategies.
- There is no upfront option premium to the LTES Operator and Historical Net Payments cap upside revenue sharing.
- Projects will be assessed on their ability to reach commercial operations no later than 1 December 2025.1
In this Chart of the week, we aim to quantify a ‘floor annuity payment’ required to cover debt payments (based on project costs using AEMO’s assumptions) and benchmark it against the forecast operational profits for a stand-alone 100MW/200MWh in New South Wales. The objective is to understand two points:
- The floor annuity amount bidders will request to cover the debt payments if they invest in a 100MW/200MWh storage asset.
- The number of years of operational profits is enough to cover debt payments without ‘top-up’.
Using Cornwall Insight Australia’s Storage Investment Model (SIM) for batteries, we have simulated a stand-alone 100MW/200MWh BESS with standard conditions operating from FY2014 to FY2042 and run it through Cornwall Insight Australia’s in-house financial model. Figure 1 looks at the calculated debt payment amount vs the operating cash flow (OCF) across the duration of the project.
Figure 1 illustrates that the historic and forecast operational cash flow[i] is generally higher than the debt repayment required each year. Debt payment is calculated at $4.8mn each year. This means that operational profits earned by the storage asset should be at least higher than this value, or a ‘top-up’ will be required.
One thing to note is that these results assume perfect price foresight. That is, the optimisation algorithm knows with certainty what future prices are.
The financial parameters used to determine the debt payments post the BESS simulation, using the revenues forecasted by the BESS model, are documented in Table 1. The SIM has been run for the period since 2014 to understand the revenue trend in NSW before the LTESAs were introduced.
Table 1: Financial model assumptions
|Battery size||100 / 200||MW/MWh|
|CAPEX build + connection cost||1189||$/kW|
|Equity/Debt ratio||50 / 50||%|
|Cost of debt||6||%|
Source (for CAPEX and OPEX figures): AEMO Draft 2023 Inputs and Assumptions Workbook
The simulation results show that the asset consistently generates an operating cash flow (OCF) greater than the debt repayment required for each year, bar 2014 and 2015. Looking at the chart and considering the model assumptions, an investment in a two-hour storage asset would generally clear the hurdle of covering the debt repayment, while the floor payment from the LTESA would help to give certainty to the developer that this minimum profit level would be achieved. A key point is that the estimations made are Cornwall Insight Australia’s assumptions and AEMO IASR published metrics. The revenues in this chart are merchant revenues and use current FCAS markets. However, with proposed congestion relief markets and a very very fast frequency response FCAS coming in from October this year, additional revenue streams will be available that have not been modelled for this simulation.
Our Storage Investment Model provides battery revenue forecasts based on engineering techniques and assumptions using our vast experience, comprehensive research, and independent view of relevant areas. For more information on the BESS SIM model or other modelling products, please contact firstname.lastname@example.org.
 Operating Cash Flow the earnings before interest, depreciation and amortisation (EBIDA) but after tax