Offshore Wind: What you need to know when applying for an offshore electricity infrastructure license

What you need to know

• In our previous energy alerts (here and here), we reported on the Offshore Electricity Infrastructure Act 2021 (OEI Act) and Offshore Electricity Infrastructure (Regulatory Levies) Act 2021 (OEI Levies Act), which commenced on 2 June 2022. 
• On 2 November 2022, the Offshore Electricity Infrastructure Regulations 2022 (OEI Regulations) and Offshore Electricity Infrastructure (Regulatory Levies) Regulations 2022 (OEI Levies Regulations) commenced. The OEI Regulations set out the detailed arrangements of the OEI framework and are crucial to operationalizing Australia's offshore wind regulatory regime.
• Public consultation on the first proposed declared area off the coast of Gippsland, Victoria, closed on 7 October 2022 (see our previous energy alert for further information). It is anticipated that the Minister will declare this area under the OEI Act in late 2022, following which, the Minister will invite eligible persons to apply for feasibility licenses.
• On 1 October 2022, the Victorian Government released its first Implementation Statement, which provides initial guidance regarding the government's plans for establishing an offshore wind industry and builds on the government's Offshore Wind Policy Directions Paper.
• In this alert we focus on key considerations for a license application, how the application process will work and applicable fees and levies for license holders. Whilst this alert covers all license types, it is more focused on feasibility licenses. 

What you need to do

• Understand the licensing process and merit criteria that must be met to obtain an OEI feasibility license. Consider making relevant preparations to submit a feasibility license application, including giving thought to competition law risks associated with submitting revised applications in coordination with other parties.
• Look out for draft regulations for management plans, work health and safety, financial security, safety and protection zones expected to be released in 2023.
• Reach out to us if you have any specific questions regarding your potential project, investment or opportunity for offshore electricity.

Background 

The OEI Act establishes a framework for regulating offshore electricity infrastructure in the Commonwealth offshore area. The OEI Regulations set out the key operational arrangements of the OEI framework, including the licensing scheme and the application of fees and levies.  

The OEI Levies Act prescribes an OEI levy that license holders must pay. The OEI Levies Regulations establish the amounts of the OEI levies payable by license holders. 

The draft Guidelines for OEI Licensing Scheme (Draft Guidelines) were released earlier this year. The final guidelines will be released on the Department of Climate Change, Energy, the Environment and Water's (the Department) website in the coming weeks. The finalized guidelines will provide non-binding guidance to the practice of the Offshore Infrastructure Registrar, National Offshore Petroleum Titles Administrator (NOPTA). The final Guidelines are expected to provide key practical guidance relevant for making a feasibility license application.

The OEI framework is intended to be cost-neutral, with the application of fees and levies on developers covering the costs of regulation (per the Department's Cost Recovery Implementation Statement (CRIS)).

The OEI Act provides for four kinds of licenses that may be granted to eligible persons (as set out in the below table).

What are the key considerations for a license application?

The granting of feasibility licenses is a competitive process as it will confer exclusive rights within the feasibility license area, with applications assessed against merit criteria. 

The granting of T&I and R&D licenses are not competitive processes, as T&I and R&D licenses may be granted in the same license area as other license types (and vice versa). 

Eligible person

Only “eligible persons” can apply to hold a license – being a body corporate that has a registered office in Australia, or a statutory corporation under Australian law.  

An eligible person may apply for more than one feasibility license in any particular declared area, including in an adjoining configuration. However, each license application will be considered individually, such that each application would need to contain a “standalone” project that would be viable on its own merits.

We understand that license applications will have to be made, and licenses held, by a single corporate entity. This is different from the offshore petroleum regime on which the OEI Act is based and will create challenges for prospective developers otherwise seeking to develop projects through a unincorporated joint venture structure. 

Merit criteria 

An application must address the following merit criteria:

• technical and financial capability that the applicant has, is likely to have, or is likely to be able to arrange to have, to carry out a proposed project under a license;
• the likely viability of the proposed project; 
• suitability of the applicant to hold the license; and
• whether the proposed project is in the national interest. 

When assessing whether an applicant has satisfied each of the merit criteria, the Minister has broad discretion, such that they are not bound by the above matters and may consider "any other matters" they consider relevant for each of the merit criteria. 

How each of the merit criteria will be assessed will differ depending on the license type and what particular matters the Minister considers to be most relevant in any particular case. For example, considerations such as commercial return may be crucial for feasibility or commercial license applications, whereas these matters would be less relevant for the other license types. Similarly, under the national interest test, in assessing the project's impact on and contribution to the Australian economy and local communities, future or projected impacts or contributions may be sufficient for a project at the feasibility stage, whereas a project being assessed at the commercial stage may be required to show evidence of actual impacts or contributions. 

NOPTA will assess whether the merit criteria have been met for the license, and provide advice to the Minister, who will then determine if each criteria has been satisfied.

The Draft Guidelines provide some guidance as to how an applicant may satisfy the requirements of each merit criteria, although this guidance is subject to the finalized guidelines being released.

Technical and financial capability 

In being satisfied of the applicant's technical and financial capability, the Minister may consider:

• the technical advice that is or will be available to the applicant;
• financial resources that are or will be available to the applicant;
• the applicant's ability to carry out the operations and works that will be authorized under the license; and
• the applicant's ability to discharge the obligations in relation to the license that will be imposed by the OEI Act and Regulations.

Viability of the project

In being satisfied of the proposed project's likely viability, the Minister may consider the project's complexity, route-to-market and estimated commercial return to the license holder.  

Suitability of the applicant

In being satisfied of the applicant's suitability to hold a license, the Minister may consider the proponent's past performance in offshore infrastructure projects, or other large infrastructure projects, in Australia and internationally, past financial performance and corporate governance structure. It is currently unclear whether applicants would need to demonstrate broader offshore wind experience at the equity or parent level to meet the suitability test. In practice, applicants could demonstrate this by partnering with a recognized offshore project developer with previous experience. 

National interest 

In being satisfied that a proposed project for a license is in the national interest, the Minister may consider: 

• the project's impact and contribution to the Australian economy and local communities, including in relation to regional development, job creation, Australian industries and the use of Australian goods and services;
• national security;
• whether the project is likely to be delivered within a reasonable time;
• whether the project is likely to make efficient use of the license area; and
• any conflicts that may arise with other users or uses in the license area (as well as any measures proposed to mitigate such conflicts). For example, the Draft Guidelines suggest defense could be another use in the license area, which may be mitigated through a proximity agreement. 

How does the license application process work?

Invitation to apply

Once the Minister proposes to declare an area, it must provide at least 60 days' notice before declaring the area and consider any submissions made in response.  

Once the area is declared, the Minister may invite applicants to apply for a feasibility license in respect of all or part of the declared area. 

Applications for licenses

A license application must:

• be in the manner and form published on NOPTA's website;
• be accompanied with the relevant application fee (which is $300,000 for feasibility, R&D and T&I licenses and $350,000 for commercial licenses);
• include a description of the proposed project and license area; and
• include any other information or documents required by the approved form, and for feasibility licenses, any other information or documents required by the Minister's invitation to apply.

For an application for a commercial license, it must be accompanied by evidence that the Regulator, National Offshore petroleum Safety and Environment Management Authority (NOPSEMA), has approved a management plan for the commercial license.

Overlapping applications

The OEI Regulations set out rules for determining overlapping applications for licenses, which include notifying, and inviting submissions, from existing license holders and inviting overlapping applicants to revise and resubmit their applications to remove the overlap. 

Where proposed feasibility license areas overlap there are more detailed processes, which first require the Minster to determine if a group of two or more overlapping applicants are equally meritorious such that they form an "overlapping application group". If the Minister makes this determination, NOPTA must give notice to these applicants and invite them to revise and resubmit their applications to remove the overlap. We foresee this process creating incentives for private arrangements to be entered into between overlapping applicants. However, care needs to be taken to ensure that these arrangements comply with competition law, including the strict prohibitions against cartel conduct because the fact NOPTA gives notice to the applicants does not provide them with any exemption from competition law. If the proposed feasibility license areas are still overlapping following any resubmission process, this may involve the submission and consideration of competing financial offers for the feasibility license.

Cartel conduct risk

The Competition and Consumer Act 2010 (Cth) prohibits competitors making or giving effect to an agreement that has the purpose of:

• allocating between themselves the geographical areas in which goods or services are acquired by any or all of the parties;
• ensuring that in response to the request for bids, one of the parties will not proceed with its bid;
• ensuring that in response to the request for bids, a material component of each party's bid is worked out in accordance with the agreement between the competitors; or
• preventing, restricting or limiting the acquisition of goods or services from persons by any or all of the parties.

The OEI Regulations contemplate the possibility of overlapping applicants cooperating in order to resolve any overlaps privately and resubmit their bids.  However, any agreement with an overlapping applicant about whether or not they will proceed with their application, and the terms of the application, gives rise to cartel conduct risks.  Cartel conduct is strictly prohibited, unless a valid exemption applies, and is subject to substantial civil and criminal penalties (of up to $50 million, or 30% of the adjusted turnover of the company during the breach period per contravention, plus criminal penalties for individuals involved).  It is important that applicants obtain legal advice to ensure they comply.

Offering and granting license process

Before granting a license to an applicant, the Minister must first provide a written offer specifying the area, term, and conditions.  

If the offer is accepted by the applicant in the manner and within the time period specified, the license will be granted to the applicant.

What levies are payable for a license?

License holders will need to pay the following three annual levies: 

• annual license levy; 
• annual compliance levy; and 
• annual Commonwealth levy.  

The levies payable by feasibility license holders are as follows:

• annual license levy - $120,000 + $1,000 per 10 km² of license area over 100 km²;
• annual compliance levy - $100,000 + $5,000 per 10 km² of license area over 100 km²; and
• annual Commonwealth levy -  $513,342.

The annual license and compliance levies include a fixed base rate up to and including 100 km² and an additional levy calculated on a per square kilometer basis above the base area (i.e. 100 km²) which reflects the increased cost of administration for larger license areas. 

For levies imposed on other license types see the OEI Levies Regulations.

Levies are imposed at the start of a license period, with the full amount payable even if the license holder does not intend to hold the license for the whole period. 

Levies may be adjusted and/or refunded on a pro-rata basis in circumstances  such as cancellation of a license. 

Authors: Jeff Lynn, Partner; Cassandra Wee, Partner; Kate Phillips, Partner; Alyssa Phillips, Partner; Justin Jones, Partner; Sophie Osborn, Counsel; Joshua Hetzel, Lawyer; Alice Jiang, Lawyer; Jonathan Chew, Lawyer; Andrew Bennett, Lawyer; Alicia Gormly, Lawyer.