Draft Offshore Electricity Infrastructure regulations out for consultation

Background

On 22 March, exposure drafts of the Offshore Electricity Infrastructure Regulations and Offshore Electricity Infrastructure (Regulatory Levies) Regulations 2022 (“Draft Regulations”) and the Draft Guideline: Offshore Electricity Infrastructure Licensing Scheme (together, the “Consultation Documents”) were released for consultation.

The Consultation Documents build on the Australian Government’s legislative framework for offshore electricity infrastructure which was introduced in November 2021 with the Offshore Electricity Infrastructure Act 2021 (“OEI Act”) and Offshore Electricity Infrastructure (Regulatory Levies) Act 2021, both of which will commence by 2 June 2022. For more information on the legislative framework, see our previous article.

It is anticipated that regulations under the OEI Act will be released in stages. This represents the first stage and industry has until 22 April 2022 to respond. We have set out below some of the key takeaways from the Consultation Documents.

No guidance on financial security for decommissioning

The OEI Act contemplates that the regulations would provide details on the financial security requirements for decommissioning, specifically what may be treated as financial security and the methods for working out the amount and timing of financial security that a licence holder must provide. The Consultation Documents do not address these matters and we anticipate that they will be covered at a later stage.

No guidance on declaring suitable areas

The Consultation Documents do not provide any detailed guidance on the process for the Minister to declare an area as suitable for offshore renewable energy infrastructure under Part 2 of the OEI Act. We note the Consultation Documents provide that the process will be informed by public consultation and balancing matters including industry readiness, suitability of conditions, state government readiness onshore and the needs of other users and environmental values. In our view, industry would benefit from guidance on:

the process for declaring suitable areas,
when the Minister will consider it appropriate to impose conditions on the locations and types of licences permitted in the declaration area; and
indicative timelines for the overarching process from the declaration of an area through to the granting of a feasibility licence.

Expanding on the merit criteria

Under the OEI Act, all licences are granted on a suitability and merit-based criteria. In short, the proponent must have the technical and financial capability to carry out the proposed project, the project must be likely to be viable and the proponent must be suitable to hold the licence. The Consultation Documents propose an additional criterion: that the project is “in the national interest”.

The Consultation Documents provide some guidance on the matters the Minister may have regard to in considering the merit criteria in an application. Notably, there is a high degree of ministerial discretion. The Minister may (but is not obliged to) consider the prescribed matters, and may also have regard to any other matters the Minister considers relevant.

The table below sets out, in respect of the merit criteria, the matters the Minister may consider and details which should be included in a licence application to address such criteria. Of particular note is the requirement to demonstrate route-to-market arrangements as part of the viability criteria for a feasibility licence. This may be challenging for proponents given present uncertainty surrounding delivery of transmission and connection infrastructure and potential offtake arrangements (supported by government or otherwise).

Maximum area and overlapping licensing areas

Under the Draft Regulations, the maximum area for both a feasibility licence and a commercial licence will be 700km². The Draft Regulations also provide a framework for dealing with applications for licences that cover the same area. Where multiple applications of equal merit have been submitted in respect of overlapping areas, applicants will be notified and invited to amend their applications to remove the overlap. If the overlap is not remedied (for example, because neither party elects to amend their application), the Minister may invite the applicants to submit financial offers. Though not explicitly stated in the Draft Regulations, it appears that where all other merit criteria are equal, the licence will be awarded to the highest bidder. Acknowledging that there is likely to be competition in some areas, the industry may be assisted by further guidance on how the application process will be managed within a declared area. For example, whether auctions will be run for MW capacity (or plots of seabed) or if proponents will be consulted individually (and in parallel) to minimise conflicting and overlapping proposals.

Information required for a feasibility licence application

The draft licensing scheme outlines the project details that must be included in a feasibility licence application, which include:

the total electricity generation and transmission capacity of the project, the estimated fluctuations in generation and the basis for such estimates;
the estimated infrastructure to be installed offshore (e.g. number of turbines, all interconnectors and substations) and methods of installation;
the estimated grid connection infrastructure, existing or to be constructed;
the estimated life span of the project and project scheduling;
the estimated costs of construction, installation and operation; and
the details of any proximity agreements in place with other users of the environment.

This detail is important because the grant of a commercial licence under the OEI Act requires the Minister to either (A) be satisfied that the project is substantially similar to the proposed project described in the feasibility licence application or (B) determine that the project is appropriate having regard to the nature and scale of the project, other activities that could be carried out in the licence area, any matters prescribed by the licensing scheme and any other matters the Minister considers relevant. As a consequence, it will be important for proponents to accurately describe the project in their feasibility application to avoid further ministerial discretion when applying for a commercial licence. This may be challenging given some of the details required will be dependent on testing and refinement during feasibility studies.

Fees and levies

The offshore electricity infrastructure legislative framework is intended to be administered on a fully cost recovered basis. Though the Draft Regulations do not specify the quantum of fees which will be payable by developers, they provide some guidance as to when such fees will be payable and the cost recovery rationale that sits behind them.

Administrative fees will be payable on application for each type of licence under the OEI Act and three separate annual levies will apply to licence holders:

an annual licence levy – which will be a flat rate for the first 100km² of licence area and an additional rate for each additional 10km², covering costs of administration of the licensing scheme;
an annual compliance levy – which will be a flat rate for the first 100km² of licence area and an additional rate for each additional 10km², covering costs of stakeholder engagement, provision of legislative and policy support and monitoring and enforcing compliance of licence holders; and
an annual Commonwealth levy – which is applied as a flat rate irrespective of licence area and covers the costs incurred by the Commonwealth in assessing areas and regulatory development.

Next steps

As noted above, this is the first round of regulations released for public consultation. For now, the Draft Regulations are with industry to respond by 22 April, after which we expect both refinement of the current Draft Regulations and further materials addressing matters such as financial security arrangements to be released.

Merit criteria (OEI Act)	Matters the Minister may consider (Draft Regulations)	Details to include in an application (Draft Licensing Scheme)
Technical and financial capability	The technical advice that is or will be available to the person. The financial resources that are or will be available to the person. The person’s ability to carry out the operations and works that will be authorised by the licence. The person’s ability to discharge the obligations in relation to the licence that will be imposed by the Act, these regulations or any other instrument made under the Act.	The technical advice that is or will be available to the applicant by way of employees, consultants or other providers with supporting evidence (such as contracts, guarantees or evidence of current contract negotiations) to demonstrate engagement of the consultant or provider. This includes any technical advice or support provided by a parent company. Descriptions of experience of the applicant in prior and current offshore electricity projects stating type, location, size and status. Details to demonstrate that the applicant is likely to have, or be able to arrange to have, the financial capability to carry out the proposed commercial offshore infrastructure project for the licence, including the likelihood of it being able to finance the project on an ongoing basis. Evidence of financial capability or resources may include provision of documentation that is confidential in nature.
Viability	The complexity of the project. The route-to-market for the project. The estimated commercial return to the licence holder.	The commercial assumptions and cost estimates on which the proposed project is based, including $ / MW installed and MW / km2. The estimated commercial return to the project developer. Route-to-market arrangements for supply or distribution of the project’s generated or transmitted electricity to onshore, including any agreements or contracts with upstream and/or downstream participants, grid capacity assumptions and grid connection infrastructure requirements, where relevant. Note: the Draft Licensing Scheme also requires (1) for a feasibility licence application, a connection enquiry to be submitted; (2) for a commercial licence application, details of onshore infrastructure requirements to connect to the grid, details of any offtake agreements and evidence of a connection application and either a connection agreement or substantial progress having been made towards a connection agreement; and (3) for a transmission and infrastructure licence application, details of any agreements for the supply of offshore electricity into the cable and for the supply/offtake of electricity onshore. In practice, this means proponents must progress connection and offtake arrangements in parallel with OEI Act licensing.
Suitability of the applicant	The person’s past performance in offshore infrastructure projects in Australia or internationally. The person’s corporate governance structure.	Past performance in offshore electricity infrastructure projects in Australia. Past performance in offshore electricity infrastructure projects overseas. Corporate governance structure.
National interest	The impact and contribution of the project to the economy and the community. National security. The complexity of the project. Conflicts that might arise with other uses or users of the licence area. Any measures that are proposed to mitigate such conflicts.	Impact and contribution of the proposed project to the economy and the community, for example, benefits to the broader economy, job creation, regional development, electricity grid supply, emissions reduction and/or international relations. National security considerations, if any. Co-existence with other uses or users of the marine environment (e.g. Defence) and any mitigation measures that are proposed to mitigate such conflicts e.g. proximity agreements.