32 gigawatts. That is the headline target sitting at the centre of the federal government’s Capacity Investment Scheme — a contract mechanism that, depending on who you ask, is either the most sensible piece of energy market engineering in a decade or a subsidy programme dressed up in the language of market design. I’ve been watching this play out for a few months now, and the honest read is that both sides have a point, but the critics are overstating their case.
Let me be clear about what the CIS is actually trying to do, because a lot of the commentary has been imprecise.
What the Capacity Investment Scheme is built to solve #
Australia’s National Electricity Market does not, by itself, send a reliable signal to investors considering a new wind farm or a big battery. The spot price is volatile — useful for dispatching existing assets, genuinely terrible for financing new ones. A project developer trying to raise debt against a merchant NEM revenue stream faces a banker who will want to stress-test the price at, say, $40 a megawatt-hour across a base case. That is not fundable at the capital cost of a utility-scale battery in 2026.
The CIS is designed to fix that gap. It works through a two-sided contract for difference: the Commonwealth underwrites a floor price, and above a strike price, the generator pays back the difference to government. Treasury and AEMO settled on this structure because it limits both investor risk and taxpayer exposure. In theory, if the market is performing well, the government gets money back. In practice, most of the value is in the floor, not the ceiling.
ARENA administers the scheme alongside AEMO, which runs the tender process. The scheme targets dispatchable capacity — storage, firm renewables, and some gas in transition — as well as variable renewables where there are identified gaps in the pipeline. The 32 GW target spans both categories and is intended to run to 2030.
How the tender rounds actually work #
AEMO identifies regions and technology types where capacity is short. It publishes tender parameters, developers bid in, and the government signs bilateral contracts with the winners. The contracts run for up to fifteen years on the storage and firming side.
That length matters. It is what makes the debt work. A fifteen-year contract with a government counterparty allows a project to get an investment-grade credit rating against what would otherwise be a purely merchant book. Follow the money: the CIS is essentially a credit enhancement tool. It does not fully remove price exposure — projects still trade into the spot market — but it removes enough uncertainty to satisfy a senior lender.
South Australia was an early focus. The state has a high renewable penetration and a particular need for dispatchable firming. You can see the logic playing out in the grid data — AEMO’s own generation information pages show South Australia regularly touching 100 per cent instantaneous renewables, and the system operator needs confidence that storage and synchronous capacity will follow. The CIS is partly how that confidence gets funded.
On the variable renewables side, the scheme has targeted offshore wind in Victoria and onshore wind and solar in Queensland, where the pipeline behind the Renewable Energy Zone framework has been slower to convert into firm commitments than the state government would like. For a fuller picture of where offshore wind fits, we’ve covered that in some detail in our piece on exploring offshore wind power in Australia.
The firming question everyone keeps ducking #
Here is where I’ll say something the consensus position tends to avoid: the Capacity Investment Scheme is not, on its own, a firming solution. It is a financing solution. Those are different things.
A two-hour battery contracted under the CIS will help with the evening peak. It will not firm a week-long wind drought in winter in New South Wales. That requires either longer-duration storage, interconnection, demand response at genuine scale, or dispatchable gas — possibly all four. The CIS has a role in funding some of those assets, but the scheme’s architecture does not guarantee the right mix will emerge from the tenders.
I’ve made this point to a few people in the industry and the response is usually: that’s what AEMO’s ISP is for — the Integrated System Plan sets the roadmap, the CIS funds it. Fair enough, up to a point. But the ISP is a plan, and plans have a habit of encountering reality. We’ve explored the firming debate in more depth in our comparison of pumped hydro versus big batteries, and the honest read there is that neither technology is obviously dominant — it depends heavily on duration assumptions that no one has locked down.
Who benefits, and who is bearing the cost #
Follow the money on the beneficiary question and you get a more complicated picture than the scheme’s advocates usually present.
Developers with shovel-ready projects in the right regions benefit most directly. A project that can bid into a CIS tender with a completed environmental assessment and grid connection offer is in a materially better position than one still working through planning. That creates a selection effect: the CIS accelerates projects that were already advanced, which may or may not be the projects with the lowest long-run cost.
Consumers bear the cost through two channels. First, the Commonwealth’s contingent liability — if strike prices are below the long-run market price, the contracts pay out and that ultimately flows through to consolidated revenue, which is everyone’s money. Second, if the scheme successfully raises wholesale prices by contracting capacity at prices above where a fully competitive market might land, retailers pass that through. The Default Market Offer picks up some of that, and we’ve covered how the DMO interacts with retail pricing in our piece on the Default Market Offer and your power bill.
I’ll admit I got this framing wrong for a year or so: I assumed the CIS would be essentially invisible to household bills because the two-sided structure would net out. The AER’s analysis suggests it is more visible than that, particularly in regions where strike prices are set above prevailing futures curves.
Where the Coalition’s criticism lands, and where it doesn’t #
The opposition has, at various points, characterised the CIS as a blank cheque. That is not accurate. The two-sided contract structure does provide a genuine backstop on government exposure. But the Coalition’s broader point — that the scheme creates implicit guarantees that distort private investment — has some validity.
If the government is willing to underwrite 32 GW of new capacity, private capital that might otherwise have taken a merchant position may instead wait for the next CIS tender. You can see that dynamic in the lag between the scheme’s announcement and the acceleration of uncontracted private commitments. The CIS may be crowding out some of the very investment it was designed to encourage. That is not a fatal flaw, but it is worth watching. For the broader argument about how the nuclear alternative compares on cost and timeline, the Coalition’s nuclear plan piece is worth reading alongside this one.
The gas question nobody wants to answer straight #
Dispatchable gas sits in an awkward position under the CIS. The scheme technically accommodates it as a transition technology in some configurations — gas peakers that firm an otherwise renewable-dominant system. But the political environment makes contracting gas through a Commonwealth programme difficult.
The honest read is that the government is hoping it will not need to make explicit decisions about gas under the CIS, because storage and demand response will fill the gap. That may be right. It is not yet proven. The Energy and Climate Change Ministerial Council has been deliberate about keeping gas options nominally on the table whilst the storage pipeline builds out, which is probably the correct call — but it leaves a genuine gap in the scheme’s logic for deep winter security in the southern states.
The role of fossil fuels and renewables in the transition is something we’ve examined at some length separately in The Role of Fossil Fuels and Renewables in Australia, and the conclusion there is roughly the same: the transition has a gas problem that policy has so far preferred to defer rather than resolve.
What to watch in the next round #
The tender parameters for upcoming CIS rounds will tell you more than any minister’s press release. Watch specifically for: the strike price levels relative to current futures; the duration requirements on storage contracts; whether offshore wind in Victoria gets its own dedicated tranche or continues to be folded into broader variable renewables tenders; and whether the scheme extends into demand response in a meaningful way.
If strike prices are set conservatively — below forward market prices — the scheme will attract a lot of bidders and may produce cheap contracted capacity. If they are set generously, you get quicker investment but cost that eventually finds its way to bills. That balance is really the whole game.
The scheme is three years old now, and it has moved the dial on project announcements. Whether those announcements convert to construction at the pace AEMO’s ISP requires is the question that will define the next two years. A construction start is not a commissioned plant. In cricket terms, you don’t count the partnership until someone’s actually at the crease.
My read: the CIS is a pragmatic, imperfect tool for a market that was not delivering investment fast enough. It will not solve the firming problem on its own, and the consumer cost impact deserves more scrutiny than it has received. But as a mechanism for moving private capital off the fence, it is working better than the sceptics predicted two years ago.
The question now is whether the grid the tenders are building actually matches the grid AEMO says we need. That answer is still a few tender rounds away.
— Marcus Wren, Editor
Photo by Patti Black on Unsplash