Australia introduces offshore renewable energy regulatory regime

On 2 September 2021, the Australian government introduced the Offshore Electricity Infrastructure Bill 2021 (Cth) into Parliament. The Bill follows a consultation process undertaken by the government following a discussion paper in February 2020. The introduction of the Bill is the first step toward the passing into law of a framework to facilitate development, construction, operation and decommissioning of fixed and floating renewable generation and transmission projects within Australia’s territorial sea.

Key points

• Australian Federal government introduces proposed regulatory framework for the development of fixed and floating offshore renewable energy generation and infrastructure projects within Australia’s territorial sea; dealings with State and Territory governments will still be required for transmission infrastructure within coastal waters (i.e. landward of 3 nautical miles), onshore transmission infrastructure (including grid interconnection) and onshore support facilities.
• Four key licence categories proposed – feasibility, commercial, research and development and transmission and infrastructure licence – but much of the detail left to be determined in regulations.
• Framework allows for financial offers in connection with awards of feasibility licences, which are precursors to commercial licences, allowing for the possibility of auction processes.
• Strong controls on transfers and changes of control, as well as tracing and anti-avoidance measures.
• National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) to assume principal regulatory role.
• Offshore electricity infrastructure levy to be introduced, with rates to be set by regulation. 

Scope

The Bill provides a basis for the future development of both fixed and floating offshore projects and is broad enough to apply across a range of renewable sources, including wind, tidal, solar and geothermal energy.

However, consistent with limitations on the Australian Federal government’s legislative powers, the Bill only regulates activities within Australia’s territorial sea and exclusive economic zone – seaward of three nautical miles from the baseline of the territorial sea, beyond coastal waters of the States and the Northern Territory. Within coastal waters – landward of three nautical miles from the baseline of the territorial sea – State and Northern Territory laws apply.

This limitation means that all offshore project developers will need to engage with both Federal and State and Territory governments, including in relation to tenure and permitting, at very least for the purposes of development and operation of transmission infrastructure within State and Northern Territory coastal waters, as well as grid interface and onshore support facilities. One critical area for future State and Territory policy development will be harmonisation with the Federal offshore regime.
This limitation has also shaped the strategy of some early offshore aspirants in Australia, with at least one developer seeking to limit their proposed projects in Victoria, South Australia and Western Australia to within State coastal waters.

Declared areas

The Bill adopts a familiar approach to area releases by prohibiting the development of offshore renewable energy projects and infrastructure without a licence and providing a mechanism for the Minister to declare areas as a prerequisite to the award of licences.

The declaration process includes a requirement for notice of a proposal to declare an area, for public submissions (minimum 60 day duration), and for consultation with the Ministers responsible for defence and navigation laws. The Minister’s determination as to whether or not to declare an area must be made with regard to potential impacts on other marine users, public submissions, advice from relevant Ministers, and applicable international obligations.

The approach is reflective of the principles of ‘shared use’ and co-existence with other users, both of which were strongly emphasised during the development of the Bill, and were linked to a strong focus on consultation throughout the regulatory process, commencing with the process for determining suitable areas for release.

Licencing scheme

The Bill contemplates four categories of licence – a feasibility licence, a commercial licence, a research and demonstration licence and a transmission and infrastructure licence. The key features of each licence are set out in the table below.

The Bill leaves much of the detail of the licences – including applications for licences, offering and granting licences, transfers, changes of control and management plans – to be determined in a ‘licensing scheme’ to be set out in regulations. Accordingly, even if and when the Bill passes into law, sector participants will have to wait a little longer to get all the details.

However, the Bill does frame the core requirements applicable to key areas, including in relation to financial offers, merit criteria, key licence obligations, protection of other activities and infrastructure, decommissioning and dealing with licences.

Financial offers

The Bill includes the option for the licensing scheme to provide for the Minister to invite applicants for feasibility licences to submit ‘financial offers’ in relation to their applications and for the Minister to decide the award of licences on the basis of those offers.

It will be interesting to see how the financial offer mechanism is used. Offshore petroleum exploration areas have been made available on a competitive basis, through either work program bids or cash bids. In general terms, work program bids are used in areas where less is known about the prospectivity, and cash bids are used in areas where more is known about the prospectivity. One of the questions that arises in the renewables context is the question of how the new regulatory framework may assess competitive bids in respect of offshore renewable resources, given those resources are relatively undefined.

In the European context, auctions have been used successfully used in relation to identified areas where governments have already undertaken to mitigate potential negative impacts on commercial fishing, defence activities, natural heritage and shipping. This has allowed investors to submit strong bids in auction processes in confidence that some of the hurdles to successful commercialisation have been at least partly de-risked.

Merit criteria

Each of the licence categories includes a set of ‘merit criteria’ for applicants in relation to the following:

1. technical and financial capacity;
2. viability; and
3. suitability.

These criteria apply differently to different licences and have some significant nuances. For example, both the technical and financial capacity and the viability criteria are, at the stage of applying for a feasibility licence, focused on the ability of the applicant to carry out the proposed commercial offshore infrastructure project and the viability of the commercial offshore infrastructure project. Accordingly, the merit criteria are likely to award those applicants for feasibility licences who are most advanced in their desktop feasibility work and costings, and are able to demonstrate detailed consideration of the ultimate commercial development case, as well as capacity to execute.

In another important detail, the suitability criterion allows the licencing scheme to assess the suitability of the applicant with regard to the suitability of others, including entities having control of the applicant, contemplating the possibility of enquiries up the corporate structure – for example, consideration of the commercial, environmental and other outcomes of projects of applicants or their associated parties in other jurisdictions. This measure appears to be consistent with the tracing and anti-avoidance provisions included the Bill (discussed further below).

Key licence obligations

Each licence is subject to three key obligations:

1. a management plan;
2. compliance with the conditions of the licence; and
3. compliance with financial security.

The management plan is the key document setting out how a licence holder will carry out its activities, manage environmental impacts, decommission the infrastructure and compliance with requirements in relation to financial security. The Bill contemplates that the licensing scheme may set out a range of additional requirements for the management plan, including infrastructure integrity, work health and safety, emergency management and outcomes of consultation.

The Bill leaves most of the conditions to be determined by the licensing scheme, although it does impose a condition to pay the relevant levy (discussed further below).

The financial security provisions of the Bill impose a core requirement for security sufficient to pay any costs, expenses and liabilities associated with decommissioning, removal and remediation. The Bill provides that financial security is required to be in place for the direction of a licence, but leaves detail as to the form of the security to be determined by regulations.

We expect decommissioning and financial security to be a strong focus, given recent controversies that have arisen in relation to the issue of decommissioning of offshore petroleum facilities. Partly in response to these controversies, the Federal government has recently implemented significant legislative and policy amendments to the offshore petroleum decommissioning regime to impose stricter requirements in relation to decommissioning and ‘trailing liability’ for decommissioning after operations have been completed. The Federal government also plans to implement enhanced financial security requirements on oil & gas industry proponents.

We expect that there will also be significant financial security requirements imposed on offshore industry proponents under the Bill and regulations, particularly for commercial licence holders. In issuing financial security requirements, the regulations and NOPSEMA will need to walk the fine line between adequately protecting the Federal government and taxpayers from the often significant liabilities associated with decommissioning, while at the same time not imposing security requirements that proponents will find overly burdensome or even impossible to comply with.

Guidance on timing and extent of any financial security requirements will welcomed by proponents, so that these costs (whether in the form of procuring credit support or building up a cash reserve from operating revenue), can be built into modelling and provide greater certainty on project costs.

Protection of other activities and infrastructure

Consistent with the principles of ‘shared use’ and coexistence referred to above and emphasised during earlier consultations, the Bill includes a strict liability offence for interference with other activities, including navigation, exercise of native title rights, fishing, marine conservation and offshore petroleum activities.

The Bill also includes mechanism for the protection of infrastructure and movement of vessels, including determination of safety zones around relevant infrastructure, including offshore renewable energy infrastructure, offshore electricity transmission infrastructure and subsea interconnectors.

However, the principle of shared use will need to be carefully managed in some areas. The Bass Strait, one of the highest potential areas for offshore wind energy in Australia, also happens to host to an important fishing industry, as well as one of the oldest offshore oil and gas areas in Australia, the Gippsland Basin. There is a large number of petroleum tenures issued in the Bass Strait under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (OPGGSA) seaward of the three nautical mile mark, and some petroleum tenures issued landward of the three nautical mile mark under the equivalent Victorian legislation. These tenures may allow for shared use, including with offshore renewable energy developments.

Decommissioning

The Bill includes clear obligations regarding removal of all structures not used in connection with relevant activities. This base ‘removal’ obligation replicates the base obligation that applies to offshore petroleum facilities under the OPGGSA.

However, decommissioning obligations for offshore renewable energy facilities have yet to be tested in a meaningful way in any market, and recent research suggests that decommissioning is the least sustainable approach to management of these assets (as opposed to, say, reconditioning). Just as industry and the Federal government are assessing different approaches to decommissioning of offshore petroleum facilities in Australia (such as the ‘Rigs to Reefs’ program), so should the industry and the Federal government be open to different approaches to decommissioning of offshore renewable energy facilities where they can deliver equivalent or better environmental outcomes.

Dealing with licences

The Bill includes controls in relation to both asset and share transactions related to offshore renewable energy infrastructure – i.e. licence transfers and changes in control of licences holders. Again, these provisions echo provisions recently applied to oil & gas industry proponents under the OPGGSA.

In relation to licence transfers, the Bill effectively provides that the Minister must be satisfied that the licence will continue to meet the relevant merit criteria (as referred to above, being technical and financial capacity, viability and suitability) and that the transferee can comply with the financial security requirements. Significantly, the Bill contemplates that the licensing scheme may require both a transferor and a transferee to maintain some form of financial security including, in respect of the transferor, after transfer and for the duration of the licence.

The provisions in relation to change of control apply where one or more persons acquire or cease to have either the power to exercise (or control the exercise) of 20% or more of the voting rights in a licence holder or an interest in 20% or more of the issued securities in a licence holder. Unlike the licence transfer, changes of control are assessed by the registrar rather than the Minister, although the decision is also made with reference to the merit criteria.

Notably, the change of control provisions are supplemented by tracing mechanisms that deem control in the context of certain structures, including certain trust and partnership arrangements, as well as anti-avoidance mechanisms targeting schemes with the sole or dominant purpose of avoiding the change of control provisions.

The proposed restrictions on dealing with licences and the associated consent requirements are reflective of the Federal government’s desire to maintain a high level of control and vigilance over the sustainable, orderly and viable development, operation and decommissioning of offshore renewable energy projects and proponents. A significant amount of capital is typically required to deliver early stage offshore projects through to operation and, consequently, early stage developers of such projects who will ultimately need to seek significant capital investment to construct and commission their projects will need to carefully consider and identify the merits of their proposed long term investment partners to ensure they can comply with the licence dealing restrictions within the regime.

The regulator

The Bill contemplates that NOPSEMA, the key regulator under Australia’s offshore petroleum legislation, will assume the role of regulator for the offshore renewable energy infrastructure regime. The Bill confers a range of functions on NOPSEMA as regulator under the offshore renewable energy infrastructure regime, including in relation to work health and safety, environmental management and infrastructure integrity.

It will be interesting to see how NOPSEMA will adapt to regulatory oversight of offshore renewables. We anticipate that the regulatory philosophy NOPSEMA will apply to offshore renewable energy activities will be similar to that it has historically applied to petroleum activities. Under this ‘risk based’ regulatory model, the sponsor owns project risks and must manage those risks via management plans that are submitted to NOPSEMA, which monitors compliance. Previous consultations in relation to the approach to the regulation of offshore renewable energy activities indicated that NOPSEMA would focus on ‘higher risk aspects of the industry with no unnecessary regulation for low risk activities that have minimal impacts on other users or the environment.’ This focus on minimising unnecessary regulatory burden will be very important to reduce the impacts of regulation on the often narrow commercial margins experienced in the industry. NOPSEMA’s approach to regulation will also need to be flexible and adaptive to accommodate industry innovation and the wide variety of types of offshore renewables projects.

We hope there is equal recognition in the change of control regimes that as a result of the significant capital investment in these projects, the investors the Federal government desires take on these projects utilise capital recycling through sell-downs during the lifecycle of these projects in their business models. Constraints on the ability of proponents to sell down their stake, especially during the operations phase, will impact on a proponent’s investment case.

Other provisions

The Bill includes a range of typical administrative provisions, including in relation to the establishment of a register (the ‘Register of Offshore Infrastructure Licences’) by a registrar (the ‘Offshore Infrastructure Registrar’) and conferral of a robust set of compliance and enforcement powers upon NOPSEMA, as regulator.

Offshore electricity infrastructure levy

The Bill was accompanied by the Offshore Electricity Infrastructure (Regulatory Levies) Bill 2021 (Cth), which introduces an offshore electricity industry levy, the details of which are left to regulation. The Bill contemplates that different levies may be applied to different assets.

Learning from Europe

In further developing the regulatory framework, including the detail of the licensing regime, the Government will also be looking to lessons learned from the European power and energy markets. The CEO of NOPSEMA, Stuart Smith, previously spent significant time in Europe studying offshore renewables regimes under a Churchill Fellowship. It might be expected then that the ‘leading practice’ in regulation seen in Europe will have a strong influence on the Australian regulatory regime.

The European market has successfully developed a flourishing offshore wind sector which continues to expand. Liberalised power markets and developed regulatory schemes have allowed the sector to thrive in certain EU member states, and made Europe one of the most popular locations for domestic and international investors. In a little more than a decade, some 4,500 turbines have been deployed across the North Sea, the Baltic and the Atlantic. The European Commission has high ambitions for total offshore wind capacity - between 230 GW and 450 GW by 2050.

To support the offshore renewables industry in Europe, EU member states have undertaken massive marine spatial planning exercises and strategic assessments, and crafted comprehensive tenure, safety and environmental regimes administered by independent regulators which provide certainty and security to investors. These aspects of ‘leading practice’ regulation can be adopted here in Australia and are reflected to some extent in the regulatory framework.

One aspect of the European regulatory frameworks that has perhaps been most instrumental in supporting the offshore renewable sector's development is the subsidy schemes that are adopted in various EU states. One of these schemes is the Contracts for Difference (CfD) scheme in the United Kingdom, which operates by providing 15-year contracts to generators at a given strike price. If the spot market price for power falls below that strike price, the government tops up their revenue to match it; if the spot price is higher than the strike price, the generator pays the excess to the government. Similar CfD schemes are also in place in other leading practice jurisdictions including Denmark and France.

CfD schemes have been a significant factor in stimulating a decline in costs for offshore renewables, as they are bid for on a reverse auction basis. Indeed, in the UK, offshore wind auctions have driven prices so low that certain developers are considering whether to take merchant risk on their projects rather than take part in the next CfD round. The historically high levels of competition in each CfD round highlight the value that equity finds in the revenue security, enabling access to low cost finance. There has also been a notable increase in interest in the corporate Power Purchase Agreement (PPA) market for the offshore wind sector. This follows the advanced PPA market that has developed in the European onshore wind sector.

Aside from CfD schemes, State regulation of grid connection priorities and grid connection costs has also played a significant role in catalysing the development of the European offshore wind sector. Certain EU member states provide offshore wind projects with higher priority for grid connections than other (onshore) projects. Certain EU member states have also adopted a so-called ‘super-shallow’ approach to regulation of grid connection costs for offshore wind, whereby the proponent bears only the costs of the facility’s internal electrical infrastructure for the purposes of grid connection, and the third-party grid operator covers grid extension and grid reinforcement costs. This has significant impacts on project costs and can, in certain circumstances, reduce capital expenditure by up to 25%.

The issue of government subsidies to support offshore renewables development, and providing priority to support grid connection, is a difficult one given the involvement of Federal and State government agencies. As the regulatory framework continues to advance, we look forward to monitoring the policy measures implemented to support this important new market.

Next steps

The Bill has been referred to the Senate Standing Committee on Environment and Communications for inquiry and report by 14 October 2021. The Committee is accepting submissions through to 15 September 2021.

DLA Piper’s global Energy & Natural Resources practice includes significant expertise in relation offshore wind project developments and financing. We regularly advise sponsors and lenders in relation to projects across the globe. DLA Piper will be monitoring developments in the nascent offshore renewable energy projects space in Australia and contributing to the conversation.