Winds of change: an update on Australia's offshore wind industry

Australia has made significant strides in its offshore wind industry in recent weeks, with the regulatory regime expected to commence on 2 June 2022. Victoria has announced Australia’s first offshore wind energy targets, and the Commonwealth Government released the exposure draft of the Offshore Electricity Infrastructure Regulations 2022 for public comment. These are important steps in the development of Australia’s offshore wind regulatory framework.

Snapshot

• The Victorian Government announced Australia’s first offshore wind energy targets on 4 March 2022, with a long term target of 9GW by 2040.
• On 22 March 2022, the exposure draft of the Commonwealth Government’s Offshore Electricity Infrastructure Regulations 2022 (Regulations) was released for public comment. Among other things, the Regulations set out the specifics of the licensing scheme and details regarding the offshore electricity infrastructure levies and fees.
• The Offshore Electricity Infrastructure regulatory framework is expected to commence on 2 June 2022.

This note summarises:

1. the Victorian Government’s launch of its Offshore Wind Policy Directions Paper;
2. the recently released exposure draft of the Regulations; and
3. the current status of the offshore wind market.

Part 1: Victorian update: Launch of Australia’s First Offshore Wind Targets

On 4 March 2022, the Victorian Government announced Australia’s first offshore wind energy targets of 2GW of offshore wind energy production by 2032. Its policy is set out in the Victorian Offshore Wind Policy Directions Paper (Paper), which details how the creation of an offshore wind industry will help Victoria reach its target of halving emissions by 2030 and achieving net-zero greenhouse gas emissions by 2050.

According to the Paper, winds off Victoria’s coastline are among the best not only in Australia, but also on a global scale, with the potential for Gippsland and Portland regions to support 13GW of capacity using fixed platforms in shallow waters. The Paper indicates a strong intention by the Victorian Government for Victoria to be the leader in the Australian offshore wind market, an industry that is developing rapidly internationally, and for which competition for investment is strong.

Key points

• Victoria's nation-first targets are:
  • 2GW by 2032;
  • 4GW by 2035; and
  • 9GW by 2040.
• The aim is to achieve first power from offshore wind by 2028, to provide sufficient time for Government and proponents to prepare for and complete necessary development activities, such as:
  • planning and approvals;
  • procurement, supply chain and workforce development;
  • stakeholder impacts;
  • the Commonwealth’s regulatory framework (refer to Part 2 below); and
  • enabling infrastructure such as ports and transmission.
• In November 2021, Victoria pledged approximately $40 million from Round 1 of the Energy Innovation Fund to fund the initial development of three offshore wind projects, which collectively could generate 4.7GW of new capacity:
  • Star of the South – $19.5 million to support pre-construction development activities;
  • Macquarie Group – $16.1 million to facilitate prefeasibility works; and
  • Flotation Energy – $23 million for scoping studies and surveys.
• As well as the 13GW using fixed platforms, there is also potential to increase capacity to 33GW and beyond through the use of shore or floating wind turbines in deeper waters off the south-west coast and Bass Strait.
• Exactly how the targets will be implemented is yet to be determined.

Next steps

Later this year, the Victorian Government will release an Offshore Wind Implementation Statement that will outline details regarding:

• the expected scale and timing for the first offshore wind procurement;
• the approach to transmission network development to provide offshore wind farms with grid access; and
• the approach to facilitate port upgrades to support the construction and operation of wind farms.

Future offshore wind tranches will form part of the future renewable targets and the Victorian Renewable Energy Target (VRET) auction process. Factors that will guide the deployment of Victoria’s offshore wind pipeline are:

• achieving net-zero emissions by 2050 – given the demand profile for renewable electricity, offshore wind must be included in Victoria’s energy mix;
• enabling energy resilience – adding offshore wind farms to complement onshore wind and solar will increase diversity in the sources of Victoria’s renewable electricity, which will enhance grid resilience; and
• supporting Victorian jobs and industries – the offshore wind industry will facilitate the creation of new jobs capable of supporting Victorian, national and international offshore wind projects.

The Paper also states that the Victorian Government proposes to work closely with the Australian Government to coordinate respective actions to establish offshore wind in the waters off Victoria. The Commonwealth offshore electricity infrastructure framework was introduced last year, with the regulations currently being developed, as detailed below. We expect Victoria’s enabling legislation and the Commonwealth regulatory regime will need to be harmonised as much as possible to keep regulation simple, and therefore more attractive to investors.

Part 2: Commonwealth update: Offshore Electricity Infrastructure Regulations 2022 Exposure Draft released

Public consultation is open until 22 April 2022 through the Department of Industry, Science, Energy and Resources (DISER) consultation website. Consultation materials include exposure drafts of the Offshore Electricity Infrastructure Regulations 2022 and Offshore Electricity Infrastructure (Regulatory Levies) Regulations 2022 and their explanatory statements, as well as a draft Guideline: Offshore Electricity Infrastructure Licensing Scheme and the Cost Recovery Implementation Statement.

The DISER materials state that the Offshore Electricity Infrastructure Act 2021(OEI Act) and the Offshore Electricity Infrastructure (Regulatory Levies) Act 2021 and the associated Regulations will commence on 2 June 2022. DISER has announced that it will release further regulations in stages.

Key points

The OEI Act establishes a regulatory framework which allows licence holders to undertake offshore electricity infrastructure activities in Commonwealth offshore areas (see HSF’s note: Unlocking the seas: Commonwealth Government introduces legislation to drive offshore renewable energy investment).

The exposure draft Regulations which are to accompany the OEI Act set out, and the guidelines further elaborate on:

• the application requirements for each type of licence under the OEI Act;
• the process for offering and granting of licences;
• further information on the matters to be considered by the Minister in deciding whether a licence meets the merit criteria, in deciding whether to grant a licence, including a 'national interest' merit criterion;
• process for extending and varying licences;
• the conditions to which licences are to be subject, including annual reporting;
• process and criteria for transferring licences or for change in control of the licence holder; and
• procedural fairness provisions for when the Minister proposes to refuse to grant/extend/vary etc. a licence, in particular inviting the applicant to make a written submission about the proposed decision.

Application requirements

Licences that may be granted under the OEI Act relate to feasibility, commercial, research and demonstration, and transmission and infrastructure activities. The Regulations leave scope for the approved licence application forms to specify further requirements above those in the Regulations.

Application criteria

Feasibility licence

Following declaration of a declared area, the Minister may issue an invitation to apply for a feasibility licence, which will be registered on the Federal Register of Legislation as a notifiable instruction (reg 45). The maximum area for a feasibility licence (and subsequent commercial licence) is 700km² (reg 35).

Overlapping licence applications

• Feasibility licence: Where two applications for feasibility licence cover wholly or partially the same area, and if the Minister considers them to be of “equal merit”, the Minister may invite the applicants to revise their applications and remove the overlap. If there is still overlap following revisions by the applicant, the Minister may invite the applicants to submit financial offers in relation to their applications. The invitation must state that ‘the offer should reflect the value of the project concerned’ and require the applicants to substantiate their ability to pay amounts offered. The invitation ‘may specify other requirements to be addressed in the submission’. Only the holder of a feasibility licence may subsequently apply for a commercial licence in the area of that feasibility licence.
• Research and demonstration licence: Similarly, where two applications for research and demonstration licences cover wholly or partially the same area, the Minister may invite the applicants to revise their applications and remove the overlap. We note that, unlike feasibility licences, there is no requirement that the Minister considers the applications to be of “equal merit” to invite them to revise their applications (reg 65). Where there is an existing licence holder in an area covered by an application, the Registrar may invite the existing licence holder to make a submissions in relation to the grant of a new licence in that area.
• Transmission and infrastructure licence: The Minister may invite the applicants to revise their applications and remove the overlap. Where there is an existing transmission and infrastructure licence in the application area, the Registrar similarly may invite the existing licence holder to make a submission. A transmission and infrastructure licence does not need to be in a declared area and can overlap with any other type of licence.

Offering and granting criteria

• Under section 33 of the OEI Act, the Minister can grant a feasibility licence if the Minister, amongst other things, is satisfied that the licence meets the merit criteria. Section 34 then sets out the merit criteria for feasibility licences to be: the person has technical and financial capability to carry out the proposed project, the project is likely to be viable, the eligible person is suitable to hold the licence, and any further prescribed criteria. The merits criteria are the same for the other types of licences under the OEI Act (ss 44, 53 and 62).
• The Regulations prescribe one additional merit criterion that the Minister must be satisfied of, which is that the project is in the national interest.
• The Regulations build on the merit criteria by explaining what the Minister may consider for the purpose of assessing the application against the merit criteria. The prescribed considerations do not limit the Minister in considering whatever the Minister considers relevant.
• The considerations are extracted in the table below. The Guidelines provide further information on material that may inform the Registrar and Minister's consideration of the merit criteria.

Fees and levies

The regulatory regime is proposed to, over time, comprise full cost recovery. Licence holders will fund the system through:

• Application fees, likely to be different for different types of application;
• Annual licence levy payable to the Registrar, reflecting the different nature of licences. For feasibility and commercial licences, there will be a base fee with a variable component calculated on the total licence area;
• Annual compliance levy payable to the Regulator, again reflecting the different nature of licences and with a base fee + area charge for feasibility and commercial licences; and
• Annual Commonwealth levy, reflecting ongoing costs to the Department of developing and managing the offshore wind industry.

The Offshore Electricity Infrastructure (Regulatory Levies) Regulations 2022 (OEI Levies Regs) were also released for public comment on 22 March 2022. The amounts of the relevant levies are currently marked with placeholders for future inclusion although more substantive analysis of the proposed application fees and levies is set out in the Cost Recovery Statement.

Part 3: Current status of the offshore wind market

Globally, the current 35GW of installed offshore wind capacity is expected to increase to over 100GW by 2025. Europe is leading the offshore wind market, with the UK and Germany being the largest markets. The US also has strong offshore wind targets and is on track to deploy 30GW by 2030. In Asia, China, Taiwan, Japan, South Korea and Vietnam are all also commencing their own deployment programs.

While there are over 10 Australian offshore wind projects currently proposed (most of which are in Commonwealth waters), the Victorian Paper acknowledges that onshore renewables are currently cheaper than offshore wind because they are most established and have different cost drivers. However, the gap is expected to narrow with offshore wind costs expected to reach parity with onshore wind in the 2040s.

There is also a gap between different offshore wind technologies, with floating platforms that are feasible in a wider range of water depths typically having higher costs as compared to fixed-bottom offshore facilities, which are a more mature technology but less conducive to high-water depths. However, the cost curve of floating wind facilities will continue to decrease as Australian government policies and regulations are further developed to support this industry and technology continues to evolve.

Conclusion

The scheduled commencement of the Offshore Electricity Industry Act in June 2022, consultation on the draft Commonwealth Regulations and the release of Australia’s first offshore wind targets are important steps in the development of Australia’s offshore wind regulatory framework.

How HSF can help

HSF has a market leading full service renewable energy team in Australia. We advise proponents with offshore infrastructure projects in Australia, including relating to decommissioning issues with NOPSEMA, and we are perfectly positioned to assist with your participation or investment in offshore electricity infrastructure.

Herbert Smith Freehills will continue to provide updates on the status of the Regulations, as well as any progress on the development of a Victorian legislative regime.

Authors: Heidi Asten, Partner;  Marianna Schneider, Senior Associate; Paige Mortimer, Solicitor; and Sarah-Anne Butler, Solicitor

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