Australia’s Offshore Electricity Infrastructure Regulations in 2022

The Offshore Electricity Infrastructure Regulations 2022 (Cth) and Offshore Electricity Infrastructure (Regulatory Levies) Regulations 2022 (Cth) (the Regulations) came into force on 2 November 2022. This followed the release of draft Regulations in March 2022 and a public consultation process. Gilbert + Tobin was the only law firm to make a public submission on the draft Regulations. Gilbert + Tobin’s submission can be found here: Offshore electricity infrastructure framework: regulations and cost recovery.

This document provides an overview of Australia’s offshore wind regulatory framework and compares the final Regulations with the draft Regulations. Whilst the final Regulations incorporate some feedback from the public consultation process, there remain some issues that will need to be closely monitored by Government, industry participants, investors and stakeholders so that the offshore wind industry can be successfully developed in Australia. 

Background

The Offshore Electricity Infrastructure Act 2021 (Cth) (OEI Act) establishes a legal framework to enable the construction, installation, commissioning, operation, maintenance, and decommissioning of offshore renewable energy generation and transmission infrastructure (OREI) in the Commonwealth offshore area. The OEI Act commenced on 2 June 2022 and has resulted in the announcement of several new offshore wind projects. The OEI Act provides for the making of regulations for the OREI licencing scheme, spatial datum provisions, arrangements for pre-existing infrastructure and the application of fees and levies.

The Government has said that the aim of the OEI Act and Regulations is to provide a consistent and transparent regulatory regime for the full lifecycle of OREI developments, and ultimately a pathway to de-risking investments and reassuring sponsors, financiers, and broader stakeholders alike. The need for this consistency and transparency was emphasised by a number of key speakers at the recent Informa Offshore Wind Conference held in Melbourne on 15 and 16 November 2022, which we attended.

Licencing regime

The OEI Act prohibits the construction and operation of OREI in the Commonwealth offshore area without a licence. The OEI Act sets out three pathways for licensing to accommodate a range of potential types of development (For further discussion, see our article Unfurling the sails - the future of offshore electricity investment in Australia for further discussion). 

The Regulations set out the details of the licensing scheme for OREI. This licensing scheme establishes a system for licence applications, offering and granting of licences, variations to licences, extension of licences, transfers of licences, and changes in control of licence holders. The licensing scheme is administered by the Offshore Infrastructure Registrar, who maintains a register of licences and manages the licence application process.

Before a licence can be granted, an area must first be declared appropriate for OREI. This process includes a thorough due diligence and a 60-day consultation period in which the Minister is required to consider the submissions put forward. Once the Minister is satisfied an area is suitable for OREI, the Minister may declare an area indefinitely or for a limited period. Following the declaration, the Minister will invite applicants to either apply for a Research or Demonstration Licence or a Feasibility Licence as illustrated below.

There are three pathways to grant of a licence. The diagram below sets out these pathways. The applications are assessed against a broad merit criterion, allowing the Minister to consider a range of factors (as set out below).

Public consultation feedback of draft Regulations and the Government’s response

Generally, submissions were supportive of the Regulations. However, they highlighted a number of gaps and omissions. At a high level, industry participants felt that the Regulations in some areas did not provide the requisite certainty and comfort needed to invest in and develop OREI projects. Much of the feedback was around developing more defined and clear processes for the granting of licences, financial offers, overlapping applications and the declaration process.  The key issues raised and how the Government responded are set out below.

1. Merits criteria - Matters to be considered by the Minister when considering a licence application

Generally, it was submitted that the Regulations required further detail as to the specific factors that would be assessed and considered by the Minister when evaluating an application for a grant of a licence, and the form the application should take.  In particular, stakeholders were concerned with the requirement to demonstrate an OREI project’s ‘route to market’ viability. It was submitted that the draft criteria did not give enough guidance in this regard, especially in view of the presently uncharted interplay between State and Commonwealth regulation regarding OREI approvals and grid connection.

The Regulations provide additional guidance on criteria that may be taken into account by the Minister when considering a licence application. For example, the Minster may take into account past performance in other large infrastructure projects in Australia or internationally, or past financial performance. Additionally, under the limb of National Interest, the Minister may consider the project’s impact on and contribution to the Australian economy and local communities, whether the project is likely to be delivered within a reasonable time, and whether project is likely to make efficient use of the licence area. However, the Minister retains broad discretions in relation to grant of a licence. Therefore the pathway to approval remains unclear.

2. Procedure for declaration of an offshore renewable energy area

A number of stakeholders expressing a desire for more guidance concerning the Minister’s declaration process. However, the final Regulations did not include any additional information around how potential applicants can participate more actively in identifying areas for declaration.

We consider this to be a lost opportunity for both Government and proponents alike, particularly given the potential to maximise industry and Government data and analysis regarding the suitability of a potential OREI area. In practice, we still see potential benefits for proponents proactively engaging with regulators early in their assessment process – in our experience, such processes typically result in better outcomes for stakeholders.

3. Overlapping licences and revision of applications

One of the more substantive changes to the Regulations deals with overlapping licences and how such a conflict would be resolved. The Regulations clarify how an overlap is determined and the matters the Minister must have regard to when assessing overlapping applications. This is a step in the right direction. However, the limbs are broad and leave much to the discretion of the Minister. They include:

• technical and financial capability that the applicant is likely to have, or to be able to arrange to have, to carry out the proposed commercial offshore infrastructure project;
• likely viability of the proposed project;
• suitability of the applicant to hold the licence;
• national interest; and
• any other matter the Minister considers relevant.

Additionally, the Regulations include a revision mechanism whereby proponents of overlapping licenses are given the opportunity to revise the boundaries of their proposed OREI development and resubmit their application. The Government has noted that allowing project developers the option of revising boundaries so projects can co-exist, promotes industry collaboration and can potentially result in achieving more cost-efficient projects. We consider this a pragmatic change, providing a measure of flexibility to the application process and allowing overlaps to be resolved before triggering the financial offer process. While flexibility can be beneficial to the private sector in this sense, the potential overlapping of boundaries does, in itself, create the risk and issue of wake impacts between projects.  That can be a material source of both technical and performance difficulties, as well we controversy between competing projects.  It may have been better for the Regulator to have taken more proactive steps to simply avoid the possibility of these impacts arising in the first place.  In our experience, wake impact management and analysis will likely slow delivery of neighbouring or adjacent projects.

4. Financial offers

One aspect of the Regulations that received significant feedback during the public consultation process was in relation to how bids are conducted and valued in respect of overlapping applications which cannot be otherwise resolved. 

The Regulations now include a new section, “Procedure for dealing with financial offers”.  This section sets out how bids will be valued, ranked and considered.  Interestingly, the Regulations have not followed the price-capped bidding model which has been recently utilised in the successful ScotWind auctions in the United Kingdom. Instead, unless specified otherwise, the Minster’s invitation will require financial offers to be made by secret auction with a single round of uncapped bids. In our view, the revised financial offers procedure is designed to reward those who are confident in their development and the commercial viability of the particular project (noting the project will be in the pre-feasibility stage of development at the time of auction). 

Given the uncapped bidding model, we expect stakeholders will be concerned with the possibility any follow-on pricing regulation dealing with the effect of high bids on future electricity prices, which has been of key concern in the recent auctions for offshore wind capacity in the United States. The final Regulations and explanatory materials are silent on this point.

5. Change in Control (CiC)

Again, feedback on the draft Regulations was that they required more clarification regarding how the regulator will approach CiC issues.  Industry noted the opportunity to nominate potential CiC within a few months of a licence application but recommend the Regulations go a step further to enable potential CiC to be carved out including where the licence moves from one fund to another within the same corporate group or where a party’s share of ownership in a project changes when certain milestones are reached.  The Government did not make any substantive changes to the CiC / transfer of licences provisions.

Fees and levies under the OEI Act

Finally, the Regulations provide the amount of fees for dealing with certain applications made under the OEI Act.

Gilbert + Tobin will continue to monitor the regulatory environment, sharing our perspectives on regulatory and approval pathways, financing and project structuring. If you have any questions, we would be delighted to assist.