Investments in Energy: The Case for Oil and Gas [In a Nutshell]

Joining William Powell and Joseph Murphy of Natural Gas World, Lewis McDonald discusses what the future now looks like in terms of investments in energy, namely oil and gas. Given the burgeoning global population, rising standards of living and climate goals, there has been a serious increase in awareness and concern in global climate change around the world.

The environmental, social and governance (ESG) agenda is now at the top of many companies’ priorities though currently appearing to mainly affect companies in Europe and less so in Asia. Prior to the outbreak of the Covid-19 pandemic, ESG was the major issue being discussed in board rooms. With about 1200 financial institutions, together controlling around $14 trillion, divesting or wanting to divest from fossil fuels, primarily based on consumer demand and consumer sentiment and where the laws and regulation are heading, we have seen rather a chilling effect on investment in the oil and gas sector – and the big question is … where does it all go from here…

 

Lewis McDonald
Lewis McDonald
Partner, Global Head of Energy, London
+44 20 7466 2257

 

 

Future Cities Series: Emissions down in lock-down ⁠– how can we lock-in the climate gains?

We are well into the pandemic and lockdown in many regions, so it is natural to ask the question, “when will this end and when will we return to normal”… The problem is, “normal” was not sustainable, in so many ways. Those of us in the energy industry particularly know that to be true.

This article is part of our Future Cities series where our sector experts examine the most pressing issues facing our cities in the post-Covid era and provide their views and advice on how to prepare for, and adapt to, the long-term legacy of the crisis.

 

The “business as usual” scenario put out by the International Energy Agency in its 2019 World Energy Outlook does not make for happy reading. It had us on a crash course towards over three degrees of temperature increase due to carbon dioxide emissions from fossil fuel consumption. The IEA also has a “sustainable development scenario” which keeps us within the Paris limits of 1.5 degrees. The only problem is that, according to the OECD, we would need to spend €6.3 trillion per year globally in each of the next 10 years for us to get there. To give you a feeling for how much money that is, the total size of the global economy is estimated at around $86 trillion. And so the challenge seems virtually impossible.

But here’s the point. The estimates from the IEA and OECD were based on projected rates of energy demand, which were based on projected behaviours of the world’s population (commuting, urban development, consuming etc). Those projections were made a few months before Covid-19 hit, and saw us increasing our energy demand by 25% between 2019 and 2040.

As my daughters would say, “Dad, those predictions are, like, so ten weeks ago”.

Since Covid-19 forced the “Great lock-down”, our behaviours have changed. For example, we’re now “zooming” to work and business meetings instead of travelling there physically. Online shopping, telemedicine, home delivered food are up… the list goes on. As a result of the accumulated changes in our behaviour, energy demand has plummeted (oil demand sank as low as a 30% reduction globally and daily power demand has been down by at least 15% in France, India, Italy, Spain, the United Kingdom and the US northwest), and taken our emissions down with them. On top of that, the share of renewables in the overall energy mix has risen.

The latest prediction is that global CO2 emissions will drop by 8% this year. In the UK alone, the change in electricity demand patterns has led to an average of 60% of our power now being carbon free (39% renewables and 21% nuclear), and the CO2 intensity of the UK power system has halved to around 100gCO2/kWh. Pollution levels have dropped by around 50% in London, leading to dramatically improved air quality. Similarly, cities from Delhi to Bangkok to Beijing have all seen an unprecedented decline in pollution levels.

Don’t get me wrong, there are many challenges that arise from the changes we are experiencing, and many stakeholders in the energy value chain are suffering. We can’t stay locked down forever, and no one would advocate for that.

But let’s be honest, there are many positive aspects of this lock-down. Many of us have been able to redirect the time spent commuting and travelling from one meeting into another into greater productivity, more personal time, more time with family, a greater community spirit etc. If this trend continues post-lockdown, this will undoubtedly lead to more custom for local businesses, leading to a decentralisation of wealth and more vibrancy in regional cities. The continued presence of Covid-19 in the years ahead may also cause many to re-think their desire to live in mega cities (which have been hit especially hard by the pandemic) and lead to a renaissance of the suburbs. This will have an impact on energy demand distribution, travelling profiles and a new way of looking at energy supply and demand across the country. It will certainly have an impact on the design of cities and other urban centres.

So, instead of spending all of those trillions each year on decarbonising our ever-expanding energy system, perhaps we’d be better-off redirecting some of this money towards the infrastructure and technologies which support the continuation of the behaviours which lower energy demand (from superfast fibre optic broadband, VR meeting technology, dedicated bicycle lanes, drone deliveries etc. etc. to innovations that have not even been considered yet). Given all of the potential benefits that we have witnessed during this pandemic, this now seems like an inevitable direction of travel and one which may help to redress some of the existing imbalance in our society.

Key Contacts

If you have any questions, or would like to know how this might affect your business, phone, or email these key contacts.

Lewis McDonald
Lewis McDonald
Partner, Global Head of Energy
+44 207 466 2257

 

Going through energy transition – fewer constraints and more private investments are needed

If we look at the last few months, the energy markets have been hit by two crises. The first one, the most obvious, due to a slump in demand as a result of the lock-down and the halt in transportation (think, for example, of civil aviation being essentially stopped). This crisis was compounded with the war on crude oil prices that unleashed between Saudi Arabia and Russia earlier in the year.

Collapse in prices

The combination of these events led to a collapse in prices at unprecedented levels and speed. Investors’ disaffection with the oil sector also went hand-in-hand with the collapse in prices. This brings to mind the letter Larry D. Fink, Blackrock’s CEO, wrote to investors right on the heels of a similar position statement from the EIB indicating a progressive phase-out of investment and financing in the fossil fuel sector.

This not only because the sector’s profitability has considerably decreased, but also because oil & gas have proven like never before that they are subject to strong politically-minded influence and disturbance. 60% of the world’s oil production originates from countries where exports of oil products constitute 50% of overall exports.

Energy transition

Not only that, but energy transition also casts a shadow on fossil fuels. We’re experiencing what could be defined as ‘oil Darwinism’: the weakest companies with the highest production costs risk disappearing—it is calculated that if the current distress landscape persists, 70% of businesses producing non-conventional gas in the USA could go out of business—whereas Oil Majors will survive but at the price of lower profitability.

Even by virtue of such an unfavourable current juncture, energy transition marked by decarbonisation, decentralisation, digitalisation, is finding a renewed boost and new sponsors.

The downturn is accelerating energy transition mainly for three reasons. First of all, there’s a political motivation. At present there is strong political support for decarbonisation. The need for a Green Deal has been the flagship of the European Commission President von der Leyen, also reiterated over the course of the last few weeks as one of the pillars on which the relaunch of our European economy will rest.

Capital flow

The second reason is economic in nature: on most of the globe’s surface energy production from renewable sources has by now turned out to be cheaper and, as we know, money, like water, goes the easy way. At this time, if we think of the success of initiatives such as green bonds, financing associated with sustainability indexes or, conversely, discontinued financing for fossil fuels, it appears evident that a great flow of capital will be reserved for renewables, which can now compete on a level playing field with fossil fuels (the so-called market parity).

A further push towards energy transition has sociological roots, considering the eurhythmy of renewables with prevailing paradigms at this point in time. We’ve moved on from a world of efficiency towards a world of resilience, and renewables are extremely resilient because, for instance, they do not depend from the political or oligopolistic decisions of whoever owns them. A second paradigm lies in the transition from globalisation to self-sufficiency and renewables enable us to have a – so to speak – ‘home-grown’ production.

The third paradigm is widespread risk aversion and desire for security that are intrinsic qualities of renewable energy production. One last reason pushing towards sustainability: the health-care emergency has widened social, cultural, and political differences by creating new rifts. In a world of great divisions, decarbonisation is one of the few categories that finds (almost) everyone in agreement.

Resources of the future

From an economic standpoint, photovoltaic solar energy can certainly be a resource for the future of Italy. The construction of “utility scale” plants in the most irradiated areas, maybe not short-term, but rather over the medium term, might give investors great satisfaction. Limits to development by now only lie at a regulatory level: unfortunately to date the construction of large PV plants aimed at reaching the goals of the European Green Deal is opposed by some local authorities and especially by the Cultural Heritage Departments.

Hopefully, at a juncture where the Italian economy specifically needs private investments, this difficulty can finally be overcome.

Even energy efficiency and the tax concessions associated with it may constitute an interesting opportunity for operators and investors. In terms of energy efficiency, today Italy is already one of the most advanced countries in the world. However, the road ahead is still long: suffice to think of the need to radically improve the energy performance of public buildings. In this case, too, well-established international practices could be applied (think for example of ‘energy performance contracts’) which allow for energy efficiency works to be entirely financed by private investors.

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 0068 1370

Commercial Court interprets indemnity clause in SPA to exclude damage which occurred pre-execution

The Commercial Court recently dismissed a claim to recover the cost of repairs to two offshore transmission cables linking the Gwynt Y Môr offshore wind farm in North Wales with the National Grid, which the claimant had sought to recover under an indemnity for “Pre-Completion Damage” in a business sale agreement: Gwynt Y Môr OFTO PLC v Gwynt Y Môr Offshore Wind Farm Ltd [2020] EWHC 850 (Comm).

Although the indemnity did not expressly state that “Pre-Completion Damage” was limited to damage occurring after the agreement was signed, the court found that this was the clear interpretation of the clause based on a textual analysis including the tense used. On the facts, the cables had failed as a result of ongoing corrosion, and no relevant “damage”, for the purposes of the indemnity, had occurred between signing and completion.

As well as giving a useful illustration of how the courts will approach the interpretation of an indemnity in a business sale agreement, the decision reinforces that careful consideration is required when drafting indemnities to ensure that there is absolute certainty in what the indemnity is intended to cover. In particular, there should be no room for doubt as to whether an indemnity is intended to cover the pre-signing period, the period between signing and completion, or both.

Background

The claimant agreed to acquire four subsea export cables from the defendants pursuant to a sale and purchase agreement (the SPA) which was signed on 11 February 2015 and completed on 17 February 2015.

Less than two weeks after completion, one of the cables failed. Later that year, in September, a second cable failed. The cause of the failure was found to be damage to part of the polyethylene sheath during the manufacturing or assembly process, which had allowed water to corrode the cables for months or years prior to their failure.

The claimant undertook repairs to the cables at a cost of £15 million. It sought to recover those costs from the defendants, claiming under the following indemnity in the SPA:

“If any of the Assets are destroyed or damaged prior to Completion (Pre-Completion Damage), then, following Completion, the [defendants] shall indemnify the [claimant] against the full cost of reinstatement of any Assets affected by Pre-Completion Damage” (“the Indemnity”).

The clause also included a procedure under which the claimant, on becoming aware  of any Pre-Completion Damage, had to notify the defendants of it, grant them access to examine the damage, and given them the opportunity to either make good the damage or permit the claimant to replace the asset in question (“the Procedure”).

The defendants denied the claim, contending that:

  • the Indemnity, properly construed, applied only if the cables were damaged between the signing of the SPA and Completion;
  • ongoing corrosion (and the consequential failure of the two cables) did not amount to damage within the terms of the Indemnity, or if it did it occurred before the execution of the SPA (or in the case of the failure of the cables, after Completion); and
  • in any event, the claimant had failed to comply with the Procedure, which was a condition of claiming under the Indemnity.

The defendants further contended that, if the Indemnity as drafted did extend to damage to the cables prior to execution of the SPA, the SPA should be rectified to amend the Indemnity to refer explicitly to the period between signing and completion.

Decision

The Commercial Court (Phillips LJ) dismissed the claim.

“Prior to Completion”

The court found that the wording of the Indemnity, viewed in the broader context of the SPA, supported the defendants’ case that the Indemnity related only to the period between signing and completion.

It was common ground that the SPA was to be interpreted in accordance with the well-recognised principles set out in recent Supreme Court decisions, including Wood v Capita Insurance Services Ltd [2017] UKSC 24 (considered here). In that case the court emphasised that interpretation is a unitary exercise, involving both a textual and a contextual analysis, and the weight to be given to each will be affected by the nature, formality and quality of the drafting of the contract.

The claimant submitted that the SPA should be interpreted principally by a textual analysis, as it was “a detailed and complex contract negotiated over several years with professional assistance”, and that limited regard should be had to the background or “factual matrix”. However, the judge commented that provisions in such contracts can nevertheless lack clarity. It is still necessary to consider the background as known to both parties at the time of contracting, while recognising that the text of the contract has particular and potentially decisive weight in relation to a contract such as the SPA.

Starting with a textual analysis of the Indemnity, the judge accepted that the phrase “prior to Completion” was not combined with an expressly identified starting point. However, it was necessary to consider the sentence as a whole, and in particular the tense used, in determining the timeframe of the Indemnity. The Indemnity stated “if any of the Assets are destroyed or damaged prior to Completion“, as opposed to “if any of the Assets have been destroyed or damaged…“. On its face, that wording did not include the period prior to signing of the SPA.

That interpretation was reinforced by the other provisions of the SPA. Warranties (given at signing) referred to the time prior to signing, therefore necessitating the Indemnity specifically to cover the period between signing and completion – when the claimant was obliged to purchase the assets, but did not have title. Indeed, the court found that the existence of a warranty covering the same matters as the Indemnity in question was a powerful indicator that the Indemnity did not extend beyond the period between signing of the SPA and completion.

The claimant has based its claim on the wording of the SPA, and as the court had not accepted its arguments, it was not strictly necessary to consider the defendants’ arguments based on the factual matrix. However, it did so briefly, concluding that none assisted in interpretation of the SPA in the current case.

“Destroyed or damaged”

Having found that damage prior to signing would not be covered by the Indemnity, the court considered the corrosion which may have occurred between signing and completion, but found that this did not constitute ”damage” within the wording of the Indemnity.

Examples of the interpretation of ”damage” from construction and insurance case law were found only to offer general guidance. The term had to be interpreted in the specific context in which it was used in the SPA. The court rejected the defendants’ submission that the clause applied only to entirely new damage, or damage caused by an external event. However, it found that the Indemnity, as drafted, required the damage “to be patent, in the sense of being readily observable or discoverable”, and to have adversely affected the performance of the cables. There was no reason to believe that corrosion during the six days between signing and completion was in itself sufficient to impair the value or usefulness of either cable.Compliance with the Procedure

The court held that a failure to follow the Procedure would not have precluded a claim under the Indemnity because: (i) the Procedure was not drafted as a condition precedent to a claim, which was not surprising as circumstances might arise such that it would not be possible or practical to follow the Procedure before incurring costs on urgent repair work that should be recoverable under the Indemnity; and (ii) in any event, the claimant was not aware that the failure of the cables was (on its case) due to Pre-Completion Damage until the work had been carried out and it had incurred the relevant costs.

Rectification

Given the court had found in favour of the defendants, it was not necessary to consider the counterclaim for rectification . However, the court concluded that, if its interpretation of the Indemnity was wrong, the Developer would in any event have been entitled to an order for rectification to reflect the intention of the parties at the time of contracting.

Sarah Teasdale
Sarah Teasdale
Associate, London
+44 20 7466 7617

A SPECIAL, GLOBAL, EDITION OF THE EUROPEAN ENERGY HANDBOOK

We are delighted to present an update to our European Energy Handbook.

The European Energy Handbook usually reports on regulatory, legal and market developments in the European energy sector. However, these are not usual times as the COVID-19 pandemic is creating significant health, social and economic challenges worldwide, forcing governments and businesses to critically assess the impact on their people, operations and governance.

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EUROPEAN ENERGY HANDBOOK 2019 – 2020

WELCOME TO THE 2019-2020 EDITION OF THE EUROPEAN ENERGY HANDBOOK!

Now in its eleventh edition, the European Energy Handbook 2019 – 2020 provides an in-depth survey of current issues in the energy sector in 42 European jurisdictions.

In addition to contributions for the European Union, Belgium, France, Germany, Ireland, Italy, Russia, Spain, and the United Kingdom from our own offices, this year we have contributions from Schoenherr (Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Moldova, Montenegro, Romania, Serbia, the Slovak Republic and Slovenia), Loloçi & Associates (Albania), Kromann Reumert (Denmark), Ellex Raidla (Estonia), Roschier (Finland and Sweden), Kyriakides Georgopoulos (Greece), BBA//Fjeldco (Iceland), Meitar Liquornik Geva Leshem Tal Law Offices (Israel), Kinstellar (Kazakhstan), Cobalt (Latvia and Lithuania), Arendt & Medernach (Luxembourg), Zammit Pace Advocates (Malta), Houthoff (the Netherlands), Karanovic & Partners (North Macedonia), Arntzen de Besche Advokatfirma AS (Norway), WKB Wierciński, Kwieciński, Baehr (Poland), Campos Ferreira, Sá Carneiro & Associados (Portugal), Homburger (Switzerland), Kolcuoğlu Demirkan Koçaklı (Turkey), and Avellum (Ukraine).

This year’s edition focuses on recent legal and commercial developments in each jurisdiction, and covers issues such as the Energy Union, the adoption of the latest package of EU energy legislation, and the ‘Clean Energy for All Europeans’ bundle of directives and regulations updating the EU’s energy policy framework to facilitate the decarbonisation of the sector and the transition towards cleaner energy.

Climate change, the energy transition and associated challenges are strong themes in nearly all of the contributions of this edition – as each jurisdiction aims to meet its EU renewable energy obligations by 2020 and beyond. Other topics in this edition include the increasingly important role of electricity storage, new nuclear projects, the progress of privatisations, new gas and electricity interconnectors, the emergence of subsidy-free renewable energy projects in a number of jurisdictions as well as the growing role of electric vehicles, the need for charging infrastructure, and their impact on electricity grids.  At the time of writing, the exact shape of Brexit is as yet unclear. Wider political implications for the UK and the EU aside, Brexit will also have an impact on the energy sector, as it puts into question the continued coupling of the British (and, indirectly, the Irish) electricity markets to the EU energy markets, and the current electricity and gas trading arrangements between Great Britain and the EU.

If you would like to obtain a full copy of the guide or a specific chapter, please fill out the form.

EEH 2019-2020 DOWNLOAD FORM

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612

 

ACT RENEWABLE ENERGY REVERSE AUCTION

Following on from the four reverse auctions held between 2012 to 2016, the ACT Government has announced a new renewable energy reverse auction (the Reverse Auction) to “safeguard the delivery of sourcing 100% renewable electricity by 2020 from within the ACT or across the National Electricity Market”.

On 8 November 2019, the Minister for Climate Change (the Minister) determined that up to 250 MW of the ACT Large-scale Feed-in Tariff Scheme would be made available through a competitive process. The successful proponent(s) will be awarded with a 10 or 14 year Feed-in Tariff (FiT) entitlement to provide up to 100 megawatts (MW) of wind equivalent capacity (WEC).

The Request for Proposal (RFP) is being driven by the ACT Environment, Planning and Sustainable Development Directorate (the Directorate).

DEADLINE

Proponents will be able to enter their bids to the Advisory Panel from 15 November 2019 and the Reverse Auction will remain open until 4:00pm (AEDT) on 7 February 2020.

On 10 February 2020, proponents will be able to rebid a lower FiT price to increase the likelihood of their bid being accepted. This period will end at the discretion of the ACT Government once no further significant rebidding is anticipated. To enable proponents to make an informed decision as to whether they wish to rebid, the ACT Government will publish pricing guidelines.

It is anticipated that the successful proponents will be announced in May or June 2020.

WHO IS ELIGIBLE?

The Reverse Auction is open to any renewable generation type (i.e. solar, wind, hydro, wave or geothermal). For a proposal to be considered, the proponent must:

  1. have a generation capacity of no less than 20 MW of WEC and no more than 100 MW of FiT supported WEC;
  2. have a generating system that is connected to the interconnected national electricity system;
  3. provide the ACT Government with the large-scale generation certificates generated by the generating system for a period of 10 or 14 years following a Grant of Entitlement;
  4. deliver 0.1 MW (100 kW), 0.2 MWh (200 kWh) of grid connected battery storage for each MW of WEC delivered by their FiT supported generator;
  5. submit a new (greenfields) generation proposal only;
  6. if successful, make a financial contribution (an Industry Development Contribution) of $83,000 per MW of WEC for a 10 year FiT entitlement period and $116,000 per MW for a 14 year FiT entitlement period to support the ACT renewable energy industry; and
  7. contribute and engage with the ACT’s local renewable energy industry and be assessed on their local community engagement plan.

At least two proponents will be accepted for this project and any combination of generation may be accepted to deliver up to 200 MW of WEC (which equates to 250 MW of solar PV) over the course of a year (i.e. 100MW of wind 125MW of solar PV).

The Reverse Auction is not open to proponents who have commenced installation of renewable energy equipment (i.e. installing wind turbines) or proponents who have taken steps in preparation for construction (i.e. excavation in preparation to construct a wind turbine).

BATTERY COMPONENT

Successful bidders will be required to deliver 100 Kw / 200KwH of grid connected battery per MW of WEC of their FiT supported generator. The battery must be constructed in the ACT and be in-front-of-the-meter with no FiT offered for the battery’s output. Bidders are encouraged to consider battery storage arrangements that deliver benefits to the ACT grid and local stakeholders. The battery and generator may have different completion dates and each will be assessed separately under the delivery risk criteria (as described below).

The battery needs to be owned by the single legal entity making the proposal, however the proponent may contract a separate company to build, operate and/or receive the revenue from the battery. The proponent cannot transfer ownership of the battery until both the battery and generator are complete.

EVALUATION OF PROPOSALS

Proponents will have their proposals reviewed by an Advisory Panel that is informed by expert analysis undertaken by technical and financial consultants. The Secretariat of the Directorate will facilitate the process. Upon receiving a recommendation from the Advisory Panel and the Directorate, the Minister will decide which proposal is considered to be ”value for money” when assessed against the evaluation criteria.

Unlike previous auctions, proponents will be assessed against “the degree of integration with the ACT renewable energy ecosystem”. This criterion will be assessed on:

  • opening or expanding ACT offices;
  • the use of ACT supply chains; and
  • collaboration with ACT industry and tertiary institutions, data sharing and other opportunities.

Proponents will be evaluated against a range of criteria and weightings as described below.

Evaluation Weighting Key Factors
Financial Assessment 65% Assessment will be based upon the amount of financial support required through the requested FiT. Proposals with lower FiT prices will be favourably considered.
Delivery Risk 20% Proposals that are at an advanced stage of preparation and low completion risk will be favoured. The Development Approval and financing of each proposal are expected to be at an advanced stage.
Local Community Engagement 7.5% The Territory has a strong interest in promoting community engagement by renewable energy industries to deliver positive outcomes and community benefits.
ACT Industry Engagement 7.5% Proponents are required to demonstrate how their proposals and businesses will engage with the ACT renewable energy industry e.g. deliver benefits to local businesses and stimulate productive research partnerships.

COMMUNITY SUPPORT AND ENGAGEMENT

The ACT Government has emphasised the importance of promoting community engagement processes and outcomes for proponents. To deliver their proposals, proponents should consider:

  1. the Clean Energy Council’s ‘Community Engagement Guidelines for the Australian wind industry’; and
  2. the Australian Renewable Energy Agency’s ‘Establishing the social licence to operate large-scale solar facilities in Australia: insights from social research for industry’.

NEXT STEPS

The Reverse Auction opened for bids on 15 November 2019. Complete auction documentation, including a request for proposal and a draft deed of FiT entitlement, is now available.

Proponents can register for more information about the Reverse Auction and relevant document by emailing energypolicy@act.gov.au.

HERBERT SMITH FREEHILLS CAN ASSIST

Herbert Smith Freehills’ market-leading renewables team has acted for successful bidders or their financiers on each of the previous four reverse auction processes in the ACT.

For further information or assistance in navigating the RFP process contact Herbert Smith Freehills.

**Note: the information contained in this article is derived directly from the RFP documentation as amended and released on 26 November 2019 by the ACT Government. The reader is encouraged to consult the RFP documentation to supplement the information contained within this summary.**

Gerard Pike
Gerard Pike
Partner, Melbourne
+61 3 9288 1974
David Ryan
David Ryan
Head of Infrastructure (Australia), Sydney
+61 2 9225 5349
Peter Davis
Peter Davis
Partner, Sydney
+61 2 9225 5354
Alison Dodd
Alison Dodd
Partner, Melbourne
+61 3 9288 1870

 

A LEADERSHIP ROLE FOR SUPER FUNDS IN SOLVING AUSTRALIA’S ENERGY TRILEMMA?

On 29 June 2019, Industry Super Australia (ISA) released its Modernising Electricity Sectors Discussion Paper (the Paper)1 which seeks to assist super funds in understanding and navigating the regulatory uncertainty in investing in the Australian electricity sector. More specifically, it aims “to provide decision-makers and other long-term investors with a framework for thinking through lumpy investment decisions” in the electricity sector.

The release of this Paper is particularly timely given that, in June of this year, IFM Investors and a number of Australia’s largest industry super funds, such as Australian Super, First State Super and CBUS, joined over 450 international investors in signing a letter to the ‘governments of the world’ demanding urgent action to limit average global temperature rise in accordance with their Paris Agreement obligations. The backing of this letter evidences the growing mandate of Australian super funds to participate in a global movement towards low emissions economies in order to meet the expectations of, and obligations to, their increasingly climate-aware members.

The Report has attracted substantial media attention, and has been heavily criticised by, among others, the Electrical Trades Union which labelled the Paper a ‘disgrace’ for including nuclear in the potential universe of energy generation options.2 Whilst the Paper does include nuclear in the universe of generation options, and notes that it is difficult to see how Australia can make the required low emissions transition without some nuclear, the Paper makes no recommendation for the adoption of nuclear technology nor any other technology for that matter.

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A NATIONAL HYDROGEN STRATEGY: SHAPING POSSIBILITIES FOR AUSTRALIA’S HYDROGEN ECONOMY

Hydrogen is a hot topic in the global energy sector – and Australia could be a key player in the emerging international market.1

SETTING THE AGENDA: THE AUSTRALIAN HYDROGEN LANDSCAPE

A recent report commissioned by the Australian Renewable Energy Agency (ARENA) examined the hydrogen export opportunities for Australia, estimating that by 2040 global demand could be valued at between $2.6 billion and $13.4 billion.2 The Australian hydrogen industry could have an associated domestic economic contribution of over $4 billion by 2040, as well as opportunities for over 7,000 full-time equivalent jobs.3

OPPORTUNITIES FOR AUSTRALIA

The development of a ‘hydrogen economy’ is attractive in a resource-rich country like Australia. Whether for domestic or export consumption, this potentially low emissions energy alternative could leverage Australia’s existing international competitive advantages.

At a snapshot, hydrogen may present an opportunity for Australia in the following ways:

  • Hydrogen production: maximise cheap electricity to produce hydrogen, with a focus on ‘green hydrogen’, with the ‘levelised cost of hydrogen’ produced by electrolysis expected to range between $2.29-$3.10/kg by 2025.4
  • Energy system optimisation: capitalise on existing infrastructure by using hydrogen manufacture to provide grid services to the electricity network and also integrating supply to the gas network, where trials blending hydrogen and gas are already underway.
  • End use innovation: commercialise diverse ‘end use’ applications for commercial, industrial and residential users, including hydrogen fuel cell vehicles, heating and power, with hydrogen in transport expected to accelerate over the next 10 years.5
  • Social license to operate: developing global best practice for managing environmental impacts, safe handling and community acceptance of hydrogen.

These opportunities are considered below.

Photo of Hydrogen Roadmap STATE GOVERNMENT MOMENTUM

Australian governments are currently investigating the role of hydrogen in Australia’s energy transformation to a lower emissions economy – this includes consideration of the legal and policy landscapes required to grow the ‘hydrogen economy’. Various state governments have released policies and ‘roadmaps’ to encourage investment in hydrogen, including VictoriaQueenslandWestern Australia and South Australia.

A NATIONAL HYDROGEN STRATEGY

On 1 July 2019 the ‘Hydrogen Working Group’, established by the Council of Australian Governments’ (COAG) Energy Council and chaired by Chief Scientist Alan Finkel AO released a series of issue papers for public consultation in the next stage of developing a National Hydrogen Strategy (Issue Papers).

The purpose of the Issue Papers is to consider key issues in the development of policies and action in identified hydrogen opportunities. In this Legal Briefing we provide a brief overview of barriers and government initiatives identified in the Issue Papers.

The Hydrogen Working Group will release the draft National Hydrogen Strategy for public consultation in September 2019 and will present the final strategy to COAG Ministers in late 2019.

HYDROGEN PRODUCTION: DEVELOPING SCALE, INVESTMENT AND EXPORT

This section reviews the following Issue Papers: Hydrogen at scale; Attracting hydrogen investment; and Developing a hydrogen export industry.

Barriers to scaling hydrogen production:

  • Capital – attracting sufficient capital (domestic and international, equity and debt)
  • Technology – the limited commercialisation of certain technologies and need for upgrades to existing infrastructure
  • Supply chain – high costs along the supply chain (particularly for green hydrogen) and skill gaps to transition workers in targeted growth areas.

Potential government initiatives to encourage hydrogen production at scale:

  • Supporting commercialisation of key technologies i.e. incentives to reduce costs of production and transport
  • Maintaining policy certainty i.e. advocating for harmonisation of international standards to reduce technical barriers to trade
  • Enabling investment i.e. establishing bilateral agreements with key hydrogen consumers and trade partners.

Key legal issues for hydrogen production may include planning pathways for hydrogen infrastructure and commercial offtake and supply arrangements (domestic or export) to facilitate finance and investment.

ENERGY SYSTEM OPTIMISATION: HYDROGEN FOR GAS AND ELECTRICITY NETWORKS

This section reviews the following Issues Papers: Hydrogen in the gas network; and Hydrogen to support electricity systems.

Barriers to energy system optimisation:

  • Integration – improving compatibility with existing gas and electricity network infrastructure
  • Pilot projects – increasing practical demonstration projects in the market (i.e. hydrogen blending with gas)
  • Market acceptance – addressing customer acceptance and affordability of new end-use hydrogen technologies (i.e. heating systems)

Potential government initiatives to encourage energy system optimisation:

  • Coordination of infrastructure i.e. appropriately locating hydrogen facilities to meet network needs
  • Supporting test projects i.e. funding for pilot projects
  • Facilitation of exports i.e. linking hydrogen exports and the domestic and electricity, gas and transport sectors

Key legal issues for energy system optimisation may include regulatory parameters for hydrogen under existing regulatory frameworks for gas and electricity and regulatory requirements for the safe handling and transportation of hydrogen exports.

END USE INNOVATION: HYDROGEN FOR TRANSPORT AND INDUSTRIAL USERS

This section reviews the following Issues Papers: Hydrogen for transport; and Hydrogen for industrial users

Barriers to end use innovation:

  • High costs – expensive infrastructure for hydrogen fuel cell electric vehicles (FCEV) and industrial applications
  • Low technology deployment – limited accessibility of cleaner industrial alternatives (i.e. clean fuel, chemical feedstock and industrial heat)

Potential government initiatives to encourage end use innovation:

  • Government purchasing i.e. fleet purchasing of FCEVs
  • Industry transition i.e. regulation of safety standards and support to transition skill training to deploy the hydrogen sector

Key legal issues for end use innovation may include planning pathways and regulatory licensing for hydrogen infrastructure in transport or industrial facility retrofitting.

SOCIAL LICENSE TO OPERATE: GUARANTEES OF ORIGIN AND COMMUNITY CONCERNS IN THE DEVELOPMENT OF HYDROGEN

This section reviews the following Issues Papers: Hydrogen for transport; and Hydrogen for industrial users.

Barriers to a social license to operate:

  • Carbon emissions – need to focus on ‘green’ hydrogen rather than fossil fuel based to reduce carbon emissions
  • Resource use – increased water consumption and land use

Potential government initiatives to a social license to operate:

  • Community consultation i.e. stakeholder engagement through planning process
  • Guarantees of origin i.e. ensuring that an Australian scheme is uniform with international standards

Key legal issues for a social license to operate may include the regulation and harmonisation of standards for performance, safety and manufacturing of new equipment and technologies.

ENDNOTES

  1. ACIL Allen, Opportunities for Australia from Hydrogen Exports, August 2018.
  2. ARENA report.
  3. ACIL Allen, Opportunities for Australia from Hydrogen Exports, August 2018.
  4. ACIL Allen, Opportunities for Australia from Hydrogen Exports, August 2018, p 30.
  5. Hydrogen Council (2017), Hydrogen scaling up, a sustainable pathway for the global energy transition. p 26-27.
Alison Dodd
Alison Dodd
Partner, Melbourne
+61 3 9288 1870
David Ryan
David Ryan
Head of Infrastructure (Australia), Sydney
+61 2 9225 5349
Nick Baker
Nick Baker
Head of Energy, Australia, Melbourne
+61 3 9288 1297
Natalie McDowell
Natalie McDowell
Senior Associate, Sydney
+61 2 9225 5306

 

DEVELOPING GREEN HYDROGEN PROJECTS

In the lead up to this year’s federal election, both of Australia’s major political parties have released announcements regarding the establishment of an Australian hydrogen industry.

A key focus of these announcements is the commitment to investing in ‘green’ hydrogen technologies, which through a process known as electrolysis, uses electricity generated from renewable sources to produce zero-emissions hydrogen by splitting water molecules into hydrogen and oxygen.

The recent attention on green hydrogen technologies follows the earlier publication of reports by several key Australian bodies, including by CSIRO and ARENA, which highlight the potential for Australia to establish a world-leading green hydrogen industry – to be fuelled by Australia’s abundant renewable energy resource, and which could meet the growing demand for hydrogen exports to countries such as Japan and South Korea.

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