RENEWABLES, ENERGY AND CLIMATE POLICY REGULATION
Penetration of renewable energy
The continued debate around renewable development policy in Australia has seen the Federal Government and the various states and territories move at different speeds into a full embrace of renewable and low emission energy technology.
The Finkel Blueprint
The final report of the independent review into the future security of the National Electricity Market (NEM) led by Dr Alan Finkel AO – the Blueprint for the Future – was released on 9 June 2017. The Council of Australian Governments (COAG) Energy Council comprising Commonwealth, State and Territory Energy Ministers met on 14 July 2017 and agreed a series of actions in response to the Finkel Blueprint. Ministers reaffirmed their priority for secure, reliable and affordable energy for all Australians while reducing emissions. All Finkel Blueprint recommendations were supported by State and Federal governments except for the recommendation for a Clean Energy Target (CET) to replace the Renewable Energy Target (RET) from 2020.
Establishment of the Energy Security Board
Energy Ministers agreed to establish an Energy Security Board (ESB), a new body comprising an independent Chair, Deputy Chair and the heads of the Australian Energy Market Commission (AEMC), Australian Energy Market Operator (AEMO) and the Australian Energy Regulator. The ESB will provide whole-of-system oversight for energy security and reliability of the NEM and will be integral to improving long-term planning. It will report to the Energy Council on a regular basis, including an annual 'Health of the NEM' report, in addition to advising the Energy Council on strategic priorities.
Energy Security Obligations
The introduction of energy security requirements for Transmission Network Service Providers (TNSPs) and generators, and updated standards to ensure generators are sufficiently resilient, will make the system better able to withstand disruptions like generator outages or interconnector failures.
The AEMC will ensure that transmission companies have a minimum level of inertia to ensure the system is better equipped to manage rapid electrical changes in the system.
New generators will have to provide fast frequency response, which will correct electrical changes in the system and is said to be a step towards the establishment of a market for these types of services.
Generator Reliability Obligation
New obligations on generators will bring more dispatchable capacity to the market and minimise the system reliability challenges flowing from an increasing share of intermittent renewable energy generation. Requiring generators to guarantee a level of dispatchable capacity before they enter the market will help ensure enough generation capacity is available to meet demand.
National Energy Guarantee
In late 2017, the Federal Government announced that it would not support the CET and instead proposed a National Energy Guarantee (NEG) which was recommended by the ESB. The NEG is made up of two parts; a reliability guarantee and an emissions guarantee.
The reliability guarantee will require electricity retailers to source part of their energy mix from 'dispatchable energy' such as coal, gas, pumped hydro and battery technology in order to meet any gaps identified in peak demand forecasts by the energy regulators. It is referred to as 'dispatchable' because it is not subject to environmental intermittency risk, such as solar and wind. This will be regionalised.
The emissions guarantee is said to contribute to Australia being able to comply with its international obligations and has been further developed with the release of the Draft Design Consultation Paper (Consultation Paper) by the ESB. The Consultation Paper proposes that responsibility for meeting the NEG obligations will fall on energy retailers and large scale energy users (customers) who must evidence their average emissions intensity per MWh through direct, generation source specific, contracts or otherwise by providing sufficient evidence to substantiate the emissions claimed. The suggestion is that emissions from electricity generation will have to contribute proportionately to Australia's 26% Paris emission reduction target to be reached by 2030.
While the details of the NEG policy are still to be finalised, what we do know is that the driving force behind this move away from the Federal Government's preference for renewable energy to fuel neutrality is the need for consistent and reliable energy to keep the lights on. Post the close of the RET, there will be no apparent Federal subsidies or other tax concessions for any type of energy generation, including renewables.
The prominent place of pumped hydro and battery technology within the listed forms of 'dispatchable energy' suggest that such renewable forms of energy or low emission technology are still favoured by the Federal Government. There was no explicit mention in the policy of new coal-fired powered stations as being part of the energy supply future.
As part of a compromise with the States, the NEG emissions guarantee (designed to achieve the 26% emissions reduction by 2030) is expected to operate in tandem with individual state renewable energy targets.
Australian Capital Territory (ACT)
The ACT has a legislated renewable energy target of 100% by 2020. The most successful initiative to meet this target has been a series of reverse auctions for the allocation of feed-in tariffs which has attracted new, large-scale wind and solar projects. Expanded investment in wind power infrastructure is expected to generate enough electricity to power all Canberra residences by 2020 and the ACT Government is also supporting the roll-out of energy storage to more than 5,000 ACT residences and businesses between 2016 and 2020.
New South Wales (NSW)
Australia's three largest solar plants are located in NSW at Nyngan, Moree and Broken Hill. The State also hosts the Snowy Mountains Hydropower Scheme, Australia's largest ever engineering project, which is currently the subject of a proposed major expansion, as announced by the Federal Government in March 2017.
In recent years the NSW Government has successfully sold transmission company TransGrid for $10.3 billion (2015), a 50.4% stake in Sydney power distributor AusGrid for $16.19 billion (2016), and a 50.4% interest in electricity infrastructure company Endeavour Energy for $7.6 billion (2017) to consortiums of investors, with Endeavour Energy subsequently committing to building NSW's largest grid-connected battery to date. Although the NSW Government base their policies towards meeting the national RET, it released a draft paper late in 2016 outlining a goal of net zero carbon emissions by 2050, assisted by considerable spending to stimulate the transition towards renewable energy.
Northern Territory (NT)
The NT is isolated from both of Australia's largest energy markets, the NEM and the Wholesale Electricity Market. However, there are 5,242 domestic solar photovoltaic (PV) systems in NT, generating 25MW of capacity. The Territory Labor Party has announced a renewable energy target of 50% by 2030 releasing its 'Roadmap to Renewables Report' before Parliament in November 2017.
In June 2017, the Queensland Government announced the $1.16 billion Powering Queensland Plan (Plan) outlining the Government's strategy to deliver long-term electricity supply and transition to a clean energy economy.
The Plan outlined a number of initiatives, including reaffirming Queensland's commitment to a 50% renewable energy target by 2030 and facilitating a reverse auction for up to 400MW of renewable capacity which commenced in late 2017. In addition to the above initiatives, the Queensland Government has, in conjunction with the Australian Renewable Energy Agency (ARENA), committed to support up to 150MW of large-scale solar power generation under the Solar 150 investment program, providing added incentive for renewable energy investment. The State-owned electricity retailer Ergon Energy also received more than 2,000MW worth of applications under its recent tender for 150MW of renewable energy capacity. Further, Queensland has seen a strong uptake of small-scale, rooftop solar PV, with over 1,500MW installed (the highest in Australia). This is expected to continue to grow towards providing one-third of the NEM's total generation capacity by 2035-36.
In March 2017, the Queensland Government issued $750 million in certified and independently verified green bonds to investors to help fund clean energy projects such as renewable energy generation.
South Australia (SA)
Following a change of government in March 2018, SA's energy policy is in a state of flux. The new Liberal Government has proposed to abandoned the renewable energy target of 50% by 2025 and instead focus on supporting a national approach such as the NEG. According to the Australian Energy Market Operator (AEMO), 48% of SA's power came from renewable energy in 2016.
Over 25% of households have installed solar PV capacity, with the installation rate in some suburbs as high as 65%. Wind generation is also particularly strong, representing 34% of the State's electricity requirements in 2015. The former SA Government's Low Carbon Investment Plan set a net zero emissions target for 2050, seeking to make Adelaide the world's first carbon neutral city by 2025.
The former SA Government announced on 14 March 2017 that it would implement a $550 million energy plan, which would include the establishment of a $150 million Renewable Technology Fund to store renewable energy and add stability to supply. The first project funded was the grid-connected Tesla battery, providing the State with 100MW of storage.
Where these initiatives stand following the change of government remains unclear, however the new SA Government has proposed a $100 million home battery storage subsidy scheme alongside an additional $50 million for development of new grid scale storage technologies.
Tasmania generates more renewable energy than any other State. Tasmania successfully generated more than 90% of its energy from renewable sources in 2017. ARENA is leading a feasibility study into the upgrade and expansion of the Tasmanian hydro network, including the possibility of up to 2,500MW of pumped hydro storage.
The Victorian Government has legislated a minimum renewable energy generation target of 25% by 2020 and 40% by 2025. These targets are supported by a competitive reverse auction scheme, which aims to bring on 1,500MW of new renewable energy generation by 2020 and up to 5,400MW by 2025. The first reverse auction scheme was conducted in 2017, requesting bids for up to 550MW of large scale, technology neutral renewable energy, and up to 100MW of large scale solar-specific renewable energy. Between February and March 2016, the Victorian Government tendered for at least 100MW of renewable energy projects, looking to invest approximately $200 million. New legislation also allows solar companies to install solar power systems in rental properties, providing cheaper power for tenants at no cost to landlords. These proposals have addressed some of the shortcomings in Victoria's renewable energy policy, which had previously lagged behind other States despite excellent wind and solar resources. To assist with this, in mid-2016, the Victorian Government issued approximately $300 million in green bonds to help fund environmentally friendly projects.
Western Australia (WA)
Australia's first large-scale solar PV project was established near Geraldton, in 2012, by Verve Energy with a 10MW capacity.
The Government-owned retailer Synergy has also tendered for approximately 500,000MWh of Large-Scale Generation Certificates to help it meet its obligations under the RET. WA does not have its own State based target and is currently committed to the national RET. However, the current WA Labor Government has reconfirmed its commitment to developing renewable energy initiatives. This includes a promise to provide $30 million in funding to support the establishment of a solar farm in Collie and a $19.5 million pledge for a wave power project in the Albany region.
GAS EXPLORATION AND DEVELOPMENT
Victoria's Alternative Gas Plan
At the COAG meeting on 14 July 2017 the Victorian Government made it clear that its bans and moratoria on gas exploration and development will remain in place. The Victorian Government instead released its alternative proposals for gas market "reform". The Resources Legislation Amendment (Fracking Ban) Bill 2016 which passed through the Victorian Parliament in 2017:
- permanently bans all onshore unconventional gas exploration and development, including hydraulic fracturing ('fracking') and coal seam gas, and
- extends the moratorium on conventional onshore gas exploration and development to 30 June 2020.
The extension to the moratorium will supposedly allow the Government to carry out a comprehensive program of geo-scientific research to look closer at Victoria's prospectivity, and the potential risks, benefits and impacts of onshore conventional gas and development.
Having declined to be part of the solution for improving East Coast gas supply, on 14 July 2017 the Victorian Government then unveiled its plans to explore the development of an LNG import terminal in Victoria. Victoria won't be producing on-shore gas in the state in the foreseeable future, but it seems happy for others to develop their gas resources and for Victoria to then import that gas.
The Victorian government also proposed an alternative to the Australian Domestic Gas Security Mechanism, involving a cap on the total allowable gas that major companies can export in order to protect domestic needs. Under the Victorian model, all gas exporters would be captured, not just those which are not net contributors to domestic gas supply.
NT Government to decide future of unconventional gas industry
The final report of the independent Scientific Inquiry into Hydraulic Fracturing of onshore unconventional reservoirs in the NT, released on 27 March 2018 (Final Report), provided 135 recommendations and specified timing for implementation to mitigate the identified risks associated with any onshore shale gas development in the NT to acceptable levels.
With the release of the Final Report, Justice Pepper who chaired the Inquiry, stated that the NT Government needed to implement all of the 135 recommendations presented in the Final Report and if this is not done, there can be no certainty that the risks associated with any onshore shale gas development in the Territory can be mitigated to acceptable levels.
The Final Report did not recommend whether or not the NT Government should lift the moratorium as this was outside the scope of the Inquiry. The recommendations are grouped into those needing to be implemented prior to further exploration approvals being granted and the others needing to be implemented before production approvals are granted.
On 17 April 2018, he NT Chief Minister announced that the NT Government has accepted all 135 recommendations and that unconventional gas exploration could resume once strict new regulation of the industry is put in place during 2018. Work on a detailed implementation plan for the 135 recommendations is now underway and will be published by July 2018.
Release of acreage in Queensland for domestic gas supply
The Queensland Government has continued to roll out a program of releasing gas acreage for competitive (non-cash) tendering where gas produced from that acreage must be supplied into the Australian gas market. These tenders have been a result of concerns by regulators and large gas users of a shortage of gas supply for domestic use in the East Coast gas market.
Senex Energy was the successful bidder in the first tender in 2018. The company has now been granted a petroleum lease for the production of gas and expects to be supplying gas into the domestic gas market by 2019.
Since Senex won its tender, two other Australian producers, Central Petroleum and Armour Energy, have won a further tender to explore for gas exclusively for the Australian market. The two local producers will explore a total of almost 400 ha just north of the townships of Miles and Surat in south-west Queensland.
Tenders have also recently been called for three further areas of potential conventional gas supply into the domestic market.
Commonwealth's Gas Acceleration Program
The Commonwealth Government has announced the winning bids for funding of $6 million per project under the Commonwealth's Gas Acceleration Program (GAP), first announced in May 2017. The GAP is designed to deliver new gas to the east coast gas market within three years. The GAP was designed to complement State Government efforts to facilitate gas supply development for the domestic market.
The four winning tenders were judged as those most likely to be able to deliver gas into the domestic market by 2020. Three of the winning tenders (Armour Energy, Westside Corporation and Tri-star Petroleum) were for accelerated drilling programs in Queensland's Surat and Bowen Basins and a fourth project put forward by Beach Energy for a new gas processing facility. The Commonwealth's grants totalling $24 million will leverage a further $45 million in company investment.
Federal Government's proposed LNG export restrictions and Australia's liability under international trade law
Foreign investors can be subject to the risk of government action such as legislative and other regulatory changes that diminish the value of an investment. Existing foreign investors may have recourse to certain bilateral investment treaties (BIT) or free trade agreements (FTA) if this situation arises. For potential foreign investors, these risks can be protected against by intelligent structuring of an investment so as to gain the protection of a BIT or FTA.
What is the Australian Domestic Gas Security Mechanism (ADGSM)?
On 27 June 2017, the federal government introduced a framework for export restrictions on gas companies that draw more LNG from the domestic market than they put in to ensure sufficient supply domestically. The regulations giving effect to the ADGSM came into effect on 1 July 2017.
The government created the ADGSM by amending the Customs (Prohibited Exports) Regulations 1958 (Cth), which are made pursuant to the Customs Act 1901 (Cth). A new division was inserted to enable the Resources Minister to mandate LNG export restrictions in his or her discretion.
Key characteristics of the ADGSM include:
- It will only operate for five years. The government sees the ADGSM as a temporary measure to put downward pressure on gas retail prices in Australia and restore certainty to the market, particularly for gas fired electricity production.
- Export controls can only be triggered where the Resources Minister formally determines, on the basis of his or her reasonable belief, that there would not be sufficient supply of natural gas available for the Australian domestic gas market over a forthcoming calendar year.
- In addition, the Resources Minister must provide at least 30 days' notice to the public before making such a decision.
- When export controls are invoked, an LNG exporter must seek permission to export from the Resources Minister. Such permission will be made on a condition mandating the annual upper limit on the volume of LNG that can be exported.
What international obligations may Australia breach?
Australia owes a myriad of trade-related obligations under multilateral and bilateral treaties. These may be enforced by other nations or, in circumstances where investment treaties provide for investor-state dispute settlement (ISDS), by foreign investors themselves.
Australia may expose itself to international legal claims if the ADGSM is unjustifiably prejudicial to the interests of Australia's trade partners or to foreign investors. Broadly speaking, it is unlikely that Australia will breach its obligations as the ADGSM seeks to strike a balance between achieving supply security while, in the government's words, abiding by the 'requirements of a globally integrated and highly competitive export industry'. The ADGSM therefore seeks to ensure it is appropriately tailored to solving domestic supply shortfalls by:
- existing temporarily, and
- mandating that export controls can only be triggered where the Resources Minister formally determines that he or she has reasonable grounds for believing that there would not be sufficient supply of gas available for the domestic market over a forthcoming calendar year.
While (b) may be a "mouthful", it is carefully worded by the government so as to provide a minimum assurance to industry that export restrictions will not be mandated whimsically, while simultaneously protecting the Resources Minister with a comfortable level of legal discretion.
How would Australian companies go about challenging decisions by the Resources Minister?
Obligations owed by Australia under bilateral and regional trade treaties are only owed to foreign countries and applicable foreign investors. Australian companies adversely affected by a future decision of the Resources Minister under the ADGSM might, however, have recourse to administrative law remedies. Administrative law is the body of domestic law regulating government decision making.
The ADGSM does not provide for merits review of the Resources Minister's decisions. Decisions would, however, be judicially reviewable. In other words, the court cannot "stand in the shoes" of the Resources Minister and decide whether his or her decision under the ADGSM was the "correct or preferable" decision made. The court will be limited to assessing the legality of the decision i.e. whether it was made in accordance with the ADGSM.
At this stage it seems that the purpose and proposed design of the ADGSM make it unlikely that Australia will breach any of its international trade obligations either under GATT or under the numerous BITs and FTAs to which Australia is a party. Much may depend on how the Resources Minister implements the ADGSM on a case by case basis. The government should tread carefully in ensuring the ADGSM secures a legitimate public aim without unduly inflicting prejudice on foreign investors. Foreign investors adversely affected by the introduction of the ADGSM should consider what BITs and FTAs are currently in place between the investor's nation of origin and Australia, and seek advice regarding applicable protections, including those canvassed above, which might be available to them. Foreign investors looking to invest in Australia, particularly in the resources sector, should consider how their investment is to be structured to obtain the benefit of protections afforded by BITs and FTAs.
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