Gippsland offshore wind – time to partner up and pay up

Peter Staciwa, Stuart MacGregor, Damien Gardiner, Susan Taylor, Andrew Leece, Katy Warner and Tim Stanton
24 May 2023
Time to read: 4 minutes

Feasibility licence applications are now in for Gippsland offshore wind after many key players partner up to improve chances of success. We outline the next steps for the Minister to decide on licence applications and potential for a financial bid process to come.

Feasibility licence applications to develop offshore wind infrastructure in Victoria's Gippsland area closed on 27 April 2023. Since the application period opened on 23 January 2023, we have seen a flurry of project announcements and partnering between local and international developers with offshore wind credentials to bolster their chances of success. The Offshore Infrastructure Registrar will now assess applications against the merit criteria set out in the OEI Act and Regulations addressing several areas such as technical and financial capability, project viability and sustainability. The Registrar will then submit a recommendation to the Minister for Climate Change and Energy who will decide on feasibility licence offers. The Offshore Infrastructure Regulator (administered by NOPSEMA) will also have a role in due course to assess and approve management plans required for licence holders to construct, install, commission, operate, maintain and decommission offshore renewable energy infrastructure. The Department of Climate Change, Energy, the Environment and Water (DCCEEW) is currently developing regulations to provide further detail on management plans.

Given the fierce competition for feasibility licence approvals in the Gippsland region and the relatively generic merit criteria to be satisfied by the applicants, a competitive financial offer process may ensue to decide between competing applications. Applicants would clearly benefit from further guidance on the next stage of the feasibility licence process, including likely timeline.

Competing developers and overlapping applications

The Gippsland Area spans approximately 15,000km2 and developers can apply for feasibility licences covering an area of up to 700km2. Despite the relatively large size of the Gippsland Area, the risk of overlapping developer applications is extremely high given the number of project announcements to date. Furthermore, we expect competition to be fierce given:

  • applicants will no doubt identify similar areas within the Gippsland Area that have the most competitive Levelized Cost of Energy;
  • the relatively cheap cost to obtain a feasibility licence as compared with other jurisdictions (although, as we outline below, the likelihood of financial offers to ensue challenges this assumption); and
  • the seven-year exclusivity period granted to licence holders and the fact that a developer can only apply to obtain a commercial licence to construct a project if it first obtains a feasibility licence.

The OEI Regulations provide for the following process to assess between overlapping feasibility licence applications.

When does an overlapping application exist?

The Minister may determine an "overlapping application group" exists in circumstances where two or more feasibility licence applications are made for an overlapping area. The Minister will form an overlapping application group when:

  • the applications are of equal merit – due to the qualitative nature of the merit criteria and the fact that most sophisticated developers and consortiums will have both the technical and financial capability to carry out the proposed project, it is difficult to see how the government intends to separate one applicant from another purely in terms of merit. It appears likely that multiple developer applications will meet the merit criteria increasing the likelihood of an overlapping application group determination. If applications are not considered to be of equal merit, the Minister may refuse the application that is of lesser merit;
  • each application overlaps at least one other in the group;
  • the areas sought under the applications form a continuous area; and
  • if not for the overlap(s), a feasibility licence could be offered to each applicant.

How does the Minister decide between overlapping applications of equal merit?

If the Minister determines an overlapping application group exists, the Registrar will notify affected applicants and invite them to revise and resubmit applications to remove the overlap. The notice and invitation must set out, for each other applicant whose application overlaps:

  • the areas of overlap;
  • the name of the other applicant; and
  • the kind of project that the other applicant proposes to carry out.

The notice and invitation may include such other information as the Registrar considers reasonable about the applications and other applications that cover areas adjacent to, or nearby, the area covered by the applicant’s application.

If the overlap is not resolved following resubmission of applications, the Minister may determine that two or more feasibility licence applications form a "financial offer group", kicking off a financial offer process under section 15 of the OEI Regulations.

Financial offers

If the Minister determines that a "financial offer group" exists, the Minister may invite applicants to submit financial offers in relation to their applications, which offer must:

  • include information on how the offers are to be made;
  • specify the day on or before which the offers must be made;
  • require applicants to substantiate their ability to pay the amount offered; and
  • set out the effect of section 16 of the OEI Regulations (in relation to deciding between tied financial offers).

Importantly, it is anticipated that financial offers will be made by secret, single round uncapped bids. Once financial offers have been received, the Minister may only offer to grant a feasibility licence to the applicant that has submitted the highest financial offer out of members in the financial offer group. If two developers make the same financial offer, the Minister may reinvite both applicants to resubmit bids or offer a licence to one developer as the Minister sees fit. Apart from the very unlikely scenario in which two developers make the exact same financial offer, applicants in the same financial offer group will have only one chance to make a financial offer and win the feasibility licence rights. Developers are therefore faced with the exceedingly difficult task of determining the correct amount to bid.

Applicants may look to offshore auction results to gain a sense of scale of the significant sums that bidders may offer to secure licence rights.

The cost of offshore wind licences overseas

The concept of paying for access to the seabed is not uncommon in overseas jurisdictions, especially the United States which operates an auction process to secure offshore lease rights (as compared to the OEI Act financial offer process, the United States runs an on-line auction process that is held in a series of rounds, allowing prospective developers to revise their bid each round). In the United States, the average cost for offshore leases ranges from $500,000 to over $1,700,000 per km2 in lump sum payments. In the United Kingdom, Offshore Wind Leasing Round 4, which saw the rights to develop six offshore wind farms auctioned off, resulted in developers paying a total of £879m per year in "options fees" to Crown Estate for lease rights.

The UK and US jurisdictions indicate a financial offer process could be both extremely lucrative for government and a substantial development cost for the offshore wind industry.

Australian oil and gas

Applicants may also look to parallels in the Australian Oil and Gas sector for guidance on the next phase of the licencing process – where two applications for a petroleum work program bid are of equal merit the decision-maker may invite the applicants to provide more details (work/expenditure details) on their proposals for additional work and expenditure in relation to the overlap. Such invitation will specify the kinds of work/expenditure details that are relevant in determining the grant and any further details provided by the applicant may be taken into account in making the final decision to grant the permit. Applicants would be well placed to have this information to hand in order to differentiate themselves from other applicants.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.