The draft regulations have been highly anticipated as they provide further detail around regulation of offshore electricity infrastructure. Notably, this includes the process and requirements for submission and approval of management plans for activities and payment of financial security. Both are required prior to feasibility licence holders commencing regulated activities.
The draft regulations are accompanied by a Consultation Paper which directs a number of questions to industry in relation to the draft regulations. We encourage industry to take this opportunity to review the draft regulations and provide comment, prior to consultation closing on 12 May 2024.
Snapshot
- An exposure draft of proposed regulations (Draft Regulations) and Consultation Paper with explanatory material and questions for industry have been released, with comments requested by 12 May 2024.
- Addressed: The Draft Regulations cover: management plans; financial security; a new design notification scheme; safety and protection zones; work health and safety; record keeping; reporting on ‘contribution to Australia’s economy’ (foreshadowed to be reflected in ‘local content’ licence conditions) and fees.
- Basis in Offshore Petroleum and Greenhouse Gas Storage Act regime: The approach to management plans proposed could be seen as an augmentation of the environment regime under the Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2023 (OPGGS(E)R), including in respect of requirements for consultation. We anticipate that some of the issues faced under the OPGGS regime in practice may also arise under the OEI regime. Accordingly, industry may wish to closely consider whether the Draft Regulations will be fit for purpose.
- Challenging requirements for financial security including integration with management plan approval: The Consultation Paper seeks specific feedback on the regime envisaged in the Draft Regulations whereby financial security calculation is driven by licensees and integrated into management plans approved by the Regulator. Industry can be expected to closely consider the commercial viability of a range of aspects, including uncertainty as to appropriate methodology and assessment of quantum in light of experience in other offshore industries, timing to provide financial security and limited range of securities that are acceptable (note, for instance, parent company guarantees are not permitted) .
- Additional step for transmission and commercial licences: The Draft Regulations introduce a new requirement for approval by the Regulator of a ‘design notification scheme’ for transmission and infrastructure licences and for commercial licences. This additional step will need to be incorporated into the project development plan and approvals schedule for projects during feasibility licence phase.
- Flagged to be addressed in future consultation: The Consultation Paper foreshadows potential further amendments to OEI Regulations relating to overlapping feasibility licences (FL) applications, including allowing the Minister to proceed directly to financial offers where a declared area is not large enough to accommodate substantial revision of boundaries, and specifying that the Minister may resolve minor overlaps by issuing a licence for an area smaller than that applied for.
Our targeted summary below sets out key elements of the Draft Regulations relevant to management plans and financial security for feasibility licences. The Draft Regulations also address a range of other matters.
OEI Regulatory Regime
The Offshore Electricity Infrastructure Act 2021 (OEI Act) provides for the detail of several matters to be prescribed through regulations. On 12 April 2024, the Department of Climate Change, Energy, the Environment and Water (DCCEEW) released an exposure draft of the Offshore Electricity Infrastructure Amendment Regulations 2024 (Draft Regulations) and Consultation Paper, for consultation (available here). The Draft Regulations would expand upon and amend the existing Regulations (2022).
We focus below on key considerations for FL phase.
Key steps prior to commencement of regulated activities
The OEI Act requires that a feasibility licence holder must prepare and have approved a management plan, and pay the required financial security, prior to commencing offshore electricity infrastructure activities in its licence area.
The Draft Regulations envisage that FL holders may seek approval of an ‘initial management plan’ for initial activities, and a corresponding financial security for those initial activities. The management plan and the financial security would need to be later revised and approved, prior to commencement of additional activities, specified change in circumstances, or at 5-yearly intervals.
Key steps for commencement of work under a FL include:
- Following the current consultation, amending regulations must be made and commence effect. The Consultation Paper indicates this is expected to be ‘mid-late 2024’, noting that consultation closes in mid May. We anticipate that a FL holder would need to have substantially pre-progressed its consultation and documentation, and the Regulator’s decision making would need to be very prompt, in order to achieve the expectation in the Consultation Paper that this will allow for commencement of works in ‘late 2024’.
- Application forms for approval of management plans need to be made available.
- FL holder undertakes consultation required in relation to the licensed activities and management plan.
- FL holder applies for approval of an ‘initial’ management plan, including:
- The OEI activities to be undertaken, how the FL holder will comply with relevant legislation, and management of work health & safety and infrastructure integrity risks;
- Payment of the $10,000 application fee plus an unspecified ‘assessment fee’;
- Demonstrating satisfaction of the consultation requirements - includes consultation for a ‘reasonable period’, a response to claims raised in consultation and commitment to any measures to address potential adverse impacts;
- Describing a ‘stakeholder engagement strategy’ that explains how the FL holder will consult on an ongoing basis throughout the project;
- Calculation by the FL holder of the appropriate financial security amount, calculation method and verification process relied on, (which may not be significant as the security is cast by reference to the removal and restoration costs associated with installed licensed infrastructure); and
- Importantly, the management plan will need to include a timetable for payment of the financial security in relation to the timing of particular licensed infrastructure, otherwise the Draft Regulations provide that the FL holder must provide the financial security as set out in the initial management plan prior to the Regulator’s decision whether to approve the management plan, in order to satisfy the Regulator of mandatory considerations for approval. Industry may have comments on these timing interactions.
- The Regulator has 90 days to make a decision on the application. However, the Regulator may extend the time more than once and the Regulator’s failure to comply with the timeframe does not affect the validity of any decision. The Regulator may also require the licence holder to amend and resubmit, which will extend the period for making an assessment.
- FL holder may then commence the activities that are covered by the initial plan. Further consultation, amendment of the management plan and payment of any additional financial security is required prior to commencement of any additional activities, relevant changed circumstances or after 5 years.
- The ‘management plan summary’ that would be made publicly available under the OEI Act must be provided within 30 days of approval of the management plan. Specific questions are directed to industry on whether this is considered appropriate.
As feasibility activities progress to conclusion, the sequencing envisaged by the Draft Regulations would require that the FL holder undertake consultation on the proposed commercial activities, provide the ‘design notification’ and obtain the Regulator’s feedback, reflect that consultation and feedback in its proposed management plan for commercial stage and provide the required financial security in accordance with any timetable set out in the management plan, before obtaining approval of the management plan, which provides the basis for the commercial licence to be granted.
Consultation requirements for management plans
In this note, we have focused on consultation required during preparation of a licence holder’s initial management plan under a feasibility licence. We note the Draft Regulations propose that a licence holder may be required to undertake additional (and potentially more specific) consultation when preparing a revised management plan for approval, either at the Regulator’s direction or on its own initiative when required under the Draft Regulations.
What is the scope of consultation?
The Draft Regulations provide that the ‘activities subject to consultation’ include all of the licence activities, however it also indicates that not all activities will need to be reflected in the initial management plan. We anticipate this nuance may need careful consideration in consultation with stakeholders and community.
The FL holder must provide sufficient information to allow each person or entity to make an informed assessment of potential impacts on them, but the Consultation Paper confirms that disclosure of commercially sensitive information is not expected.
Who must be consulted?
- The Draft Regulations set out a list of government agencies, persons, organisations, communities and groups whom the licence holder must ‘make reasonable efforts to identify and consult’, including: recreational fishers; permitted commercial users of the licence area; nearby communities who may be affected by the licence activities; and holders of overlapping transmission and infrastructure licences. This is a very broad suite of individuals and organisations who may need to be consulted.
- Consultation is required with Aboriginal or Torres Strait Islander communities or groups that the licence holder reasonably considers may have: (i) native title rights and interests (within the meaning of the Native Title Act 1993) in relation to the licence area; or (ii) sea country in the licence area.
First Nations consultation requirements have been the subject of uncertainty and court challenges in the analogous context of environment plans under the OPGGS(E)R. For further information, see our note here. As a result, this is an aspect of the Draft Regulations that we recommend be closely considered by industry to ensure the clarity and workability of the regime.
- The licence holder will not be required to consult with a person, organisation, community or group if the licence holder has consulted another person, organisation, community or group that could reasonably be regarded as ‘representing the interests’ of the first person, organisation, community or group. In the Consultation Paper this is the subject of a specific request for comment by the Regulator.
- To date, the declared area declarations have also included requirements for consultation when preparing a management plan for a licence within that declared area. For example, the Gippsland, Hunter and Southern Ocean declared area declarations all require consultation with AMSA, the Department of Defence and commercial fisheries, among others. The Draft Regulations require much more extensive consultation than the declaration requirements.
- The Regulator may also direct or require specific consultation.
Financial security
Section 117 of the OEI Act requires licence holders, including FL holders, to provide financial security to the Commonwealth, and include details within their management plans. The Draft Regulations detail the process for, and the requirements of, this financial security.
Purpose of financial security
Financial security under the OEI Act and the Draft Regulations is required to cover certain costs, expenses, liabilities and debts, that may arise in relation to decommissioning of infrastructure, removal of property and remediation of a licence area. An important element to be noted is that while the object of the security arrangements is to protect the taxpayer against direct exposure for the costs of decommissioning of installed infrastructure and associated site rehabilitation upon a failure by the licence holder to properly do those works, the security needs to be posted prior to the commencement of construction or installation of such infrastructure (and maintained until those works are completed).
Careful consideration required
We recommend industry should carefully consider the draft financial security provisions, in particular in terms of the implications during the commercial stage of a project:
- It is proposed that the Regulator can only approve a management plan if it is satisfied of the requirements related to any financial security, although industry feedback is specifically sought on the question whether the link between the financial security and management plan is appropriate.
- The Draft Regulations and the Consultation Paper propose that generally the security will be provided prior to the commencement of construction or installation of licensed infrastructure.
- In addition, it is envisaged that licence holders will be responsible for calculation of the appropriate financial security amount, demonstrating the appropriateness of the calculation method and verification process relied on. For a commercial project these are complex issues and unlikely to be simple to administer in practice.
- Industry can be expected to closely consider the Draft Regulations in respect of timing of payment of financial security, including amounts due upfront or staged through the licence term related to delivery of particular licensed infrastructure and decommissioning activities over time, as this may be relevant to commercial viability of a project.
- We discuss below the limitations on the acceptable forms of financial security e.g. a parent company guarantee is not acceptable.
How will financial security be calculated?
Under the Draft Regulations, it is the responsibility of the licence holders to establish a satisfactory methodology to calculate the financial security, which must identify and quantity costs, expenses and liabilities that arise in relation to:
- decommissioning of licence infrastructure;
- removing relevant structures, equipment and property from the licence area;
- removing things from a vacated area, including structures, equipment or property, as though they were still within the licence area;
- remediation of the licence area and vacated areas, and any other area affected by licence activities; and
- taking into account expenses and liability that might arise from emergencies or unexpected circumstances in relation to any of the above items.
What arrangements can be used as financial security?
Under the Draft Regulations, the types of arrangements that may be used as financial security include:
- an amount received by the Commonwealth under section 119(3)(a) of the OEI Act;
- a cash deposit held by a financial institution;
- a credit facility with a financial institution;
- a guarantee from a financial institution; or
- an insurance policy with a financial institution.
The Consultation Paper seeks comments on what ‘financial institutions’ should apply and whether a certain credit rating should be required.
What arrangements cannot be used as financial security?
Under the Draft Regulations the arrangements that cannot be treated as financial security include:
- an arrangement involving self-insurance;
- an arrangement where the Commonwealth is a beneficiary of a trust; or
- a guarantee provided by a related body corporate of the licence holder.
Additionally, an arrangement cannot be a financial security if:
- the arrangement does not limit the ability of persons other than the Commonwealth to recover amounts from financial security (ie only the Commonwealth can be able to recover amounts under the arrangement);
- it is not certain that the Commonwealth would be able to recover amounts under the arrangement when required; or
- the terms of the arrangement are unclear.
Amendments to financial security
The Draft Regulations and Consultation Paper envisage that financial security for the initial stage may be made in one form, with another form (or multiple forms) used for later stages or where higher amounts of financial security are required.
What must be included in management plans in relation to financial security?
As foreshadowed above, the Draft Regulations propose that management plans must contain information in relation to financial security as relevant to the activities covered by the management plan, including:
- the method used to calculate the amount of financial security provided;
- a description of how the licence holder has verified the calculation method;
- the amount and form of the financial security;
- any determinations made by the Minister in this regard (noting that under the Draft Regulations the Minister holds the ability to set the form that the security must be in).
the timetable of when financial security will be provided, if it is to be provided at different times in relation to particular licenced infrastructure.
Next steps
The Department expects to make the Draft Regulations in mid-late 2024, said to allow all OEI licence holders to progress work within their licence areas by the end of 2024.
The Consultation Paper includes a number of questions directed to industry in relation to the Draft Regulations. We encourage industry to take this opportunity to review the draft regulations and provide comment, prior to consultation closing on 12 May 2024.
If you wish to discuss the Draft Regulations or other matters relevant to licensing and activities under the offshore electricity infrastructure regime, please contact us at our details below.
Written with assistance of Benita Williams and Paige Mortimer
