Offshore wind in Australia: draft regulatory framework emerges

However, some uncertainty remains as to how the proposed regulatory regime will work, with the final regulations yet to be issued.

Earlier this year, the Australian government published drafts of the proposed regulatory framework for the construction, operation, maintenance and decommissioning of offshore electricity projects under the 2021 Offshore Electricity Infrastructure Act (Cth) (OEI Act). These drafts provide some further clarity as to the likely processes which will apply to applications for licences by developers and the interface between offshore renewable energy projects and other marine users.

Applying for a feasibility licence

Developers will be able to apply for a feasibility licence once Australia’s energy minister declares a particular area suitable for the development of offshore renewable energy projects and invites applications for feasibility licences. The minister’s invitation will identify the relevantly declared area(s) and specify any conditions attached to the area.

Applications for feasibility licences must address several details for the proposed commercial offshore infrastructure project, including:

• the type of offshore electricity infrastructure project proposed;
• the total electricity generation and/or transmission capacity in MW or GW and any estimated fluctuations in generation;
• the estimated infrastructure to be installed offshore (such as the number of turbines, all interconnectors, all substations) and methods of installation;
• the estimated grid connection infrastructure, whether 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.

The guidelines also indicate that applicants are encouraged to undertake early engagement with relevant state and territory regulators and energy market participants as for feasibility licence applications, applicants need to include evidence of a ‘connection enquiry’ having been made with energy regulators, where relevant.

Granting the licence: merit criteria

The minister will need to be satisfied that applicants meet the merit criteria set out in the OEI Act and the regulatory framework before any licence is granted.

The merit criteria in the OEI Act are:

• the applicant has the technical and financial capability to carry out an offshore infrastructure project;
• the project is viable; and
• the applicant is a suitable person to hold the licence.

The regulatory framework includes an additional merit criterion of ‘national interest’.

Technical and financial capability

In determining whether an applicant has the technical and financial capability to carry out a proposed offshore infrastructure project, the minister may consider:

• the technical advice that is or will be available to the applicant;
• the financial resources that are or will be available to the applicant;
• the applicant’s ability to carry out operations and works, including its experience in prior and current offshore electricity projects with the type of project, location, size and status; and
• the applicant’s ability to discharge obligations in relation to the licence.

The draft regulations confirm that the applicant may demonstrate that it has the required technical and financial capabilities through its employees or arrangements with third parties such as development partners, investors, consultants and financiers. Actual evidence of the arrangements with those third parties, such as contracts, letters of engagement or evidence of contractual negotiations, will need to be provided.

An applicant is unlikely to have finalised its financial arrangements at the time of the feasibility licence application. Instead, to demonstrate financial capability, the applicant will need to be able to show that it is likely to be able to procure financing for the life of the project. This may include providing evidence of early stage negotiations with lenders or equity contributors and evidence of a previous history of successfully being able to obtain financing backing, as well as evidence of its own financial standing.

Viability

In determining that the proposed commercial offshore infrastructure project is likely to be viable, the minister may consider:

• the complexity of the project;
• the proposed route-to-market arrangements for supply or distribution of the project’s generated or transmitted electricity to onshore; and
• the estimated commercial return.

This will require the applicant to provide details of the commercial assumptions which underpin the project (price per MW installed capacity) and expected financial returns, in the form of a detailed financial model.

Route-to-market arrangements may include evidence of a connection enquiry having been made, grid studies and assumptions, power purchase arrangements and any other arrangements with other downstream stakeholders.

At this stage it is unclear whether evidence of applications to the relevant state authorities for planning and environmental approvals for the onshore portion of a project will be required. Further, the draft regulations do not yet address how this criterion will apply where an offshore electricity project’s primary purpose is to power electrolysers for the creation of green hydrogen and not intended to directly transmit electricity onshore (other than as an ancillary revenue stream).

Suitability of applicant

In determining whether the applicant is suitable to hold the licence, the minister may consider:

• the applicant’s past performance in offshore infrastructure projects in Australia or internationally;
• the applicant’s corporate governance structure.

Given the nascent nature of the offshore wind industry in Australia, meeting this criterion is likely to initially require the involvement of international stakeholders, either as development partners or through direct employment. This can be seen in the recipients of the first round of Victoria’s Energy Innovation Fund, the majority of which involved international developers.

National interest

In relation to national interest, the minister may consider:

• the impact and contribution to the economy and community;
• national security;
• the complexity of the proposed project; and
• any conflicts that may arise with other uses of the marine environment (such as fishing or defence) and proposed measures to mitigate conflicts.

Evidence as to how the project will contribute to job creation, net zero targets, community engagement, regional development, renewable energy zones and broader economic policies is likely to be required. The project’s ownership structure will also need to be considered given the focus on national security, and the recent difficulties experienced in certain sectors in obtaining FIRB approval.

Interaction between offshore wind and other stakeholders

One area the OEI Act did not address was the interaction of offshore electricity projects with other industries that use the marine environment, with no proposed processes to tackle any potential conflicts. The draft regulations now indicate that it is the applicant that must consider such conflicts and the responsibility is on developers to mitigate and manage potential conflicts with other industries.

Applicants should anticipate having to liaise with the multiple industries that could be users of the proposed marine environment, including commercial fishing, oil and gas exploration and development, maritime security, defence and Australian marine parks.

Overlapping licences and project size

The OEI Act allows for multiple licences to be issued for a declared area, which the draft regulations have now confirmed will be a maximum area of 700 km² for feasibility and commercial licences. The draft regulations require applicants to take early steps to manage overlapping applications between stakeholders.

If applications for feasibility licences are ultimately received which cover wholly or partly the same area, and are of equal merit, applicants will have the opportunity to revise their applications to remove the overlap. Following this process, if there is still overlap, the regulations stipulate the parties can make a financial offer which the minister will take into account in deciding whether to grant the application. This may pose issues for smaller developers, in circumstances where larger competitors are interested in the same area.

Fees and levies

The draft cost recovery implementation statement and draft regulations give an overview of the regulatory costs which will be incurred by applicants not only when lodging applications, but also throughout the life of the project. These will include:

• the initial licence application fee;
• other fees stipulated in the OEI Act (such as for transferring a licence or assessments of management plans);
• an annual licence levy which covers costs of the registrar administering the licensing scheme;
• an annual compliance levy which covers the regulator’s costs of monitoring and enforcing licence holder compliance; and
• an annual Commonwealth levy which covers the costs incurred by the Commonwealth in identifying, assessing and declaring offshore areas and ongoing policy and regulatory development.

The amounts of each of these fees and levies have not yet been set, however the explanatory memorandum confirms that the fees imposed are not designed to generate revenue above the costs the government has incurred. It remains to be seen what level of financial burden these fees and levies will place on developers.

Interaction with the environmental protection regime

The draft regulations themselves have not provided any further guidance as to the interface between the OEI Act and the 1999 Environment Protection and Biodiversity Conservation Act (Cth) (EPBC Act). However, recent guidance issued by the federal government has confirmed that licensing under the OEI Act and permitting under the EPBC Act will be concurrent processes. This means that applicants for feasibility and commercial licences under the OEI Act will also need to obtain EPBC Act approval (and any other relevant planning and environment approvals).

Obtaining a licence under the OEI Act will not guarantee approval will be provided under the EPBC Act, or vice versa. Therefore, developers will need to carefully manage the licensing process to ensure there are no delays to their project. 

Next steps

The draft regulatory framework provides further clarity on many of the processes set out in the OEI Act. However, it remains silent on other significant issues including environmental protection, workplace health and safety provisions and Native Title rights and interests.

The Australian government acknowledges in its supplementary consultation documents that because the offshore wind regime is a new framework, there will undoubtedly be refining to legislative instruments that will need to occur in the future. Pinsent Masons has a rich history advising on offshore wind projects across five continents. We will continue to monitor the progress of the Australian regulations and provide updates as the offshore wind industry moves forward in Australia.

Co-written by Toby Evans of Pinsent Masons, with additional contributions from Elsie Richardson.