The New South Wales Government's Electricity Infrastructure Investment Roadmap provides for tenders for Long-Term Energy Service Agreements (LTESAs) and access rights. AEMO Services, as Consumer Trustee, has released draft model term sheets for generation LTESAs and Project Development Agreements (PDAs). These term sheets will be adapted and approved for use within the five NSW Renewable Energy Zones.

In this article we outline four key takeaways for parties considering entering into these contracts.

1. The fixed shape fixed volume generation LTESA seems a risky proposition

The LTESA includes an options mechanism, which greatly improves project bankability by allowing a project to mitigate the risk of low spot prices. Unless the Scheme Financial Vehicle (SFV) (as counterparty) agrees to one year swaps, a generation LTESA gives the LTES Operator (the project company) the right to enter into a maximum of 10 two year swaps. When enlivened, the swaps settle against the 'notional quantity' (in MWh) for a trading interval.

The two types of swap profiles under a generation LTESA, fixed shape fixed volume (FSFV) and variable volume (VV) generation, differ in their calculation of the notional quantity. Under a FSFV swap, the notional quantity for each trading interval is the quantity included in the LTES Operator's bid (i.e. a pre-defined hourly profile), not the actual quantity dispatched by the project.

The swap is settled on the basis that the SFV pays the fixed price and the LTES Operator pays the floating price. There is an adjustment to the notional quantity for a FSFV swap in limited circumstances (e.g. project force majeure events, network events and scheduled maintenance). In contrast, a VV swap will settle against a notional quantity equal to sent-out generation / actual dispatch (adjusted for loss factors) during a trading interval. There are also penalties for missing P90 yield estimates by more than 25% under a VV swap.

Due to these differences in how notional quantity is calculated, we expect that FSFV generation LTESAs will prove less popular than variable volume (VV) generation LTESAs. An FSFV swap exposes the project to the full risk of forced outages occurring during trading intervals where the spot price is higher than the fixed price. This exposure arises because the LTES Operator will not earn revenue from spot sales corresponding to amounts payable under the swaps during the outage period.

The LTES Operator could seek to manage this risk across a generation portfolio, by the project overbuilding capacity, although that would be an inefficient allocation of capital, or by entering into firming contracts with batteries to defend the fixed shape.

2. When the sun goes down the project is lost

Sunset dates in PDAs, and the limited opportunities to extend them, make project planning important to avoid the loss of the project and associated termination payments for delay. Under a PDA, there is a sunset date for achieving financial close (a FC Sunset Date) as well as a sunset date for achieving the Commercial Operating Date (COD) which is 18 months after the COD target date included in the bid. Force majeure events provide a limited opportunity to extend these sunset dates:

• The FC Sunset Date may be extended for a 'project force majeure event', however, the FC Sunset Date may not be extended by more than 18 months.
• The COD sunset date may be extended by up to 18 months due to a project force majeure event (i.e. 36 months after the COD target date) or indefinitely (theoretically) by a 'connection force majeure' event.

If the SFV terminates the PDA for delay, the LTES Operator must pay a 'termination amount' which is expected to cover retendering costs and the impacts of the delay on installed capacity (i.e. presumably, higher prices for electricity consumers). As security for this termination amount, the LTES Operator must provide a bank guarantee / bond equal to the lesser of $30,000 multiplied by nameplate capacity (in MW) and $5 million.

3. LTESA upside is capped under the repayment provisions

Repayment amounts payable by the LTES Operator to the SFV will limit the profits an LTES Operator can earn from an LTESA. This is because any excess profits in non-exercise years up to the 'repayment amount' are subject to claw-back where the SFV has been the net payer under exercised options.

The LTES Operator must pay a 'repayment amount' to the SFV if:

• up to a non-exercise year the SFV has been the net payer under the LTESA; and
• the LTES Operator's dispatch weighted average price for the project during the non-exercise (financial) year is above the 'repayment threshold price' included in its bid.

If the LTES Operator is required to pay a 'repayment amount', it will be:

• 75% of the difference between the dispatch weighted average price for the non-exercise year less the repayment threshold price multiplied by sent-out generation (adjusted for loss factors); and
• capped at the level of historical net payments from the SFV.

When determining sent-out generation, the volume the LTES Operator has contracted with the wholesale electricity market under PPAs and CFDs is discounted. The rationale behind this design is to limit interference with PPA cash flows and encourage the LTES Operator's participation in the wholesale contracts market via PPAs.

Under these arrangements, the setting of the repayment threshold price is an important consideration when generators bid for projects.

To be competitive against other bids, the repayment threshold price in $/MWh bid by generators will likely be set at a level equal to debt service plus fixed and variable O&M costs plus the targeted equity return for the project. It will also be important when arranging financing, as we expect that lenders will require that spot price receipts during a non-exercise (financial) year above the repayment threshold (or 75% thereof up to the aforementioned cap) be paid into a reserve account established for this purpose.

4. No credit support for SFV

As the counterparty to a LTESA, the statutory right of the SFV to recover its costs from Distribution Network Service Providers (DNSPs) supports the bankability of the LTESA arrangements for the LTES Operator.

While neither the NSW Government, AEMO nor the Financial Trustee will provide financial guarantees or credit support for the SFV's obligations under a LTESA, the SFV will have a statutory right to recover its actual costs by way of contributions from the DNSPs. Such contributions from DNSPs will be subject to a cost determination process by the regulator.

This right enhances the creditworthiness and bankability of LTESAs due to the creditworthiness of the DNSPs. The DNSPs are currently wholly or partially owned by government, are geographic monopolies and benefit from credit support from electricity retailers. Due to these characteristics, it is likely that DNSPs will be considered highly creditworthy for the purposes of the LTESA scheme, reflecting the NSW Government's intention that the SFV will be viewed as a sovereign credit.