Changes to the Government’s Capacity Investment Scheme means future expansions to Frontier Energy’s Waroona solar and battery project could benefit. Pic: Getty Images
Energy
Special Report: Frontier Energy has welcomed the final design of the Federal Government’s Capacity Investment Scheme in WA for its provision of an extra level of financial certainty for clean energy projects.
This includes its Waroona renewable energy project, which combines a 120MWdc (megawatts of direct current) solar facility with an integrated battery storage facility to supply clean electricity into the South West Interconnected System.
Notably, the 4.5 hour duration 80MW/320MWh lithium-ion phosphate (LFP) battery will allow Frontier Energy (ASX:FHE) to benefit from the high average energy price of $143MWh during peak periods by storing electricity generated by the solar panels during off-peak hours when the sun is shining.
Besides offering superior safety, longer cycle life and other benefits, the selection of LFP batteries also resulted in a ~5% reduction in cost compared to the definitive feasibility study estimate of $118.5m.
Along with a reduction in the cost of solar panels, this is likely to deliver significant improvements to the definitive feasibility study, which had indicated that Waroona will deliver annual EBITDA of $68m over the first five years of operation and a post-tax IRR of 21.6%.
These estimates might prove conservative given expectations of a tightening electricity supply market in the years ahead.
The CIS is managed by the Australian Energy Market Operator and seeks to underwrite 1.1GW/4.4GWh of new, clean dispatchable energy in WA with the first tender seeking 500MW/2GWh of projects to be released this month.
While originally contemplated as a battery-only tender process, the final design now recognises that a co-located solar and battery project can provide genuine clean dispatchable renewable energy as opposed to a plain grid-connected battery.
The scheme is eligible for projects with more than 30MW capacity and will provide annual revenue underwriting of up to 90% based on the units of $ per MW of capacity credits, if the project falls below a revenue floor for up to 15 years after commissioning.
Should a project’s revenue exceed a ceiling rate, half of its revenue will need to be returned to the Government to cover the costs of the scheme, depending on the capacity credits generated and ceiling bid.
This is aimed to address expected electricity generation shortfalls in WA which the AEMO has forecast to hit 945MW in 2025-26 and about 4000MW (4GW) by 2032-33.
FHE currently plans to have the current Stage One of its Waroona project, which will use just 303 hectares of the 865 hectares available on the project site, operational by 1 October 2026, just in time for the CIS/Capacity market cycle.
It expects the CIS to potentially underpin Stage Two and future expansion stages of the Waroona project by providing revenue certainty for 15 years.
The company added that supply constraints and higher than expected energy demand has resulted in a surge in average peak electricity prices, which could further boost expected project returns.
Peak prices for the first six months of 2024 averaged $164/MWh, a 24% increase on 2023 levels and ~14.7% higher than the assumed $143/MWh price used in its DFS.
“Frontier would like to thank the Department of Climate Change, Energy, the Environment and Water; and Energy Policy WA for taking on board feedback from industry, which we believe has resulted in an enhanced design that will incentivise genuine green dispatchable energy supplies,” Frontier Energy chief executive officer Adam Kiley said.
“The CIS represents a significant potential boost to Frontier’s plans, as it guarantees a minimum level of support for renewable-energy-supplied battery projects for up to 15 years.
“This is an increase from the current five years in existing electricity market mechanisms, providing investors and developers greater confidence to invest significantly in renewable energy projects in Western Australia.
“Recent market events highlight the urgent need for renewable capacity to be added in the WEM and forecasts for capacity shortfalls paint a sobering picture of electricity supply over the next decade, as demand continues to increase while fossil fuelled generation is planned to be retired.”
He added that Stage One of the Waroona project will help address this urgent need and fill the gap as it is located in an unconstrained part of the Western Power network.
“Fortunately for the company and for the WEM, the scope to expand is significant, with potential for subsequent stages that represent multiples of Stage One capacity,” Kiley noted.
“The company plans to kick-off expansion studies soon after FID for Stage One has been reached.”
This article was developed in collaboration with Frontier Energy, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
