EMERGING ISSUES AUSTRALIAN ENERGY AND RESOURCES SECTOR 2021 - MCCULLOUGH ROBERTSON LAWYERS
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EMERGING ISSUES Australian Energy and Resources Sector 2021
On behalf of McCullough Robertson’s Resources and
Renewables Industry Group, we are pleased to bring you
the 2021 edition of Emerging Issues for the Australian
Energy and Resources Industry.
Emerging Issues highlights the legislative and policy developments over
the past 12 months which will significantly affect the Australian Energy 2
and Resources Industry going forward, with a specific focus on the
resource rich states in Australia. 4
We are also delighted to profile our extensive team of experts who 6
continue to be available to provide you with support as required. 8
Please contact either of us or any of our other team members for 11
further information.
14
We hope you find this edition informative.
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Damien Clarke Kate Swain 28
Lead Partner, Resources & Renewables Lead Partner, Resources & Renewables
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49
THE
RESOURCES
SECTOR
1
COVID-19 AND THE RESOURCES SECTOR Despite the surge in demand for gold in 2020,
prices are forecast to fall in 2021 and 2022 as
Looking forward
The beginning of 2021 is already looking far better
hopes for a successful vaccine rollout and global than the beginning of 2020, and there is a sense of
Like all things in 2020, the Australian resources This shift is already happening. In June 2020,
economic recovery are expected to reduce gold optimism amongst the mining and mining services
sector experienced extreme highs and lows. Australia and India announced a Memorandum of
markets’ appeal to institutional and retail investors. sector. Although investment levels are unlikely to
The global pandemic tested companies’ abilities Understanding on critical minerals, which focuses
In December 2020, the Office of the Chief Economist return to their pre-pandemic positions just yet, there
to be flexible and agile, and forced leaders across on strengthening avenues of trade, investment
forecast that ‘the lower US dollar gold price, in are significant opportunities emerging for Australia’s
the sector to shift their strategies and objectives and research and development in critical minerals
combination with forecasts of a strengthening energy and resources sector, with a number of new
for the immediate future and beyond. Overall, the between the two countries. Similar strategic
Australian dollar, is expected to push the Australian projects already in the pipeline.
Australian resources industry reported strong export arrangements with the Republic of Korea and
dollar gold price lower over the outlook period,
earnings in 2020 as a result of rising commodity Japan are also anticipated. The strong focus on As the global and national energy framework
averaging US$1,595 an ounce in 2022’.
prices and Australia’s success at managing the the Australian critical minerals sector will continue continues to develop over the coming years,
impacts of COVID-19 compared to other economies throughout 2021 and for years to come. In light of these movements, there have been a there is expected to be an increased uptake of
around the world. number of acquisitions in the gold sector, one of the renewable initiatives on mine sites, together with
Exploration
most notable being the buyout of Kalgoorlie’s Super other measures aimed at capturing or otherwise
Travel restrictions and social distancing requirements Exploration companies reported record high cash Pit in 2020; where Northern Star and Saracen paid reducing emissions.
caused disruptions to workforces across the balances in 2020, as a result of a strong period of a combined USD$1.5bn (AUD$2.3bn) to return the
economy, including those in the mining and capital raising. BDO Australia reported that the Exploration expenditure is also expected to increase
mine to Australian control.
resources sector. Nonetheless, the resources sector number of companies raising funds for over $10 this year. This forecast is based in part on the level
remained resilient over this challenging period, million increased from 28 in June 2020 quarter, to Western Australian mining company Ramelius of capital raising by gold companies looking to
and undoubtedly played a central role in the 46 in September 2020. Increased funding, however, Resources continued its acquisition spree by reactivate mines or commence exploration and
country’s fight against the economic fallout of the did not always translate into increased spending acquiring 100% of the shares in Spectrum Metals. drilling programs to expand resources. A number of
pandemic. This was partly due to the industry in 2020, meeting resistance caused by economic As anticipated by the market, following this gold projects advanced to the ‘committed’ stage this
qualifying as an ‘essential’ service which exempted uncertainty, fluctuating travel restrictions and limited acquisition Ramelius also moved to add to its year following record high prices, while coal and gas
workers from certain border restrictions, fly-in supply of drilling and other exploration support portfolio the Penny West gold project, which is projects were slower to move on from the
fly-out workers quickly adapting their working services. Companies have also been reluctant to one of the high-grade undeveloped gold assets in feasibility stage.
arrangements to keep operations going, and compromise their cash positions as the fall out from Western Australia.
companies transporting employees via charter the global pandemic continues to trickle down. Even Even though legislative and policy reforms have resulted
rather than commercial flights to site. so, as investor confidence returns, it is expected that in some streamlining of the project approval pathway,
investment expenditure will soon follow. some projects have still experienced challenges with
Iron ore prices rose sharply in 2020 as a result of obtaining the required authorisations to proceed.
growing, stimulus-driven demand in China and Gold rush Uncertainty surrounding global economic conditions
ongoing disruptions to supply from Brazil. On One winner during the Covid-19 crisis was gold and export markets has caused proponents to move
the other hand, metallurgical and thermal coal miners, as 2020 saw gold prices peak at an all away from greenfield projects and turn to expanding
prices were more volatile, reflective of the extreme time high of over US$2,000 per ounce, averaging existing projects instead. We expect this trend to
uncertainty caused by China’s unofficial ban on approximately US$1,780 an ounce across the year. continue throughout 2021.
Australian sourced coal. Normally, Chinese imports
§
The increased demand for gold markets was a direct
of Australian coal grows sharply in the first quarter consequence of COVID-19, driven by its status as
of the year, but whether this trend will hold true for a safe haven asset. A combination of Government
2021 is largely dependent on PRC Government support to investors, a weakening of the US dollars,
policy and trade relations. There is a real risk that and revival of US inflation expectations were other
import restrictions will continue into 2021, causing key drivers of increased prices this year.
Australian exporters to realign their trade partners.
Damien Clarke Kate Swain Liam Davis
Partner Partner Partner
THE RESOURCES SECTOR – EMERGING ISSUES 3
THE RISE OF ALTERNATE FUNDING
FOR RESOURCES PROJECTS
Resources companies in Australia have Prepayment facilities Issues to be aware of ● Overcommitment by project owner – in the
historically drawn their funding from Prepayment facilities (or production-based facilities), While the rise of alternate funding options in the haste to secure funding the project owner
conventional sources; however, as Australia’s whereby the financier (off-taker) purchases the mining industry is positive for cash-strapped miners, can sometimes commit to obligations and
major banks continue to reduce their exposure product in advance and the borrower (project project owners need to be alive to the issues which restrictions that provide the financier with
to the likes of thermal coal (a recent example owner) delivers the product to the off-taker as may arise, including: greater control over the project’s operations
being ANZ ceasing its relationship with the Port repayment, have become a common feature of than ought be the case. Project owners
of Newcastle), Australian miners have had to the mining industry, particularly in connection with ● Regulatory issues – where a financier is foreign, should resist the temptation to commit to
increasingly look elsewhere to secure funding. strategic metals. consideration needs to be given unreasonable obligations and restrictions
to interest withholding tax (WHT) and the by thinking the financier will not insist
Because of this, we are seeing a rise in other funding Prepayment facilities have evolved over the past requirements of the Foreign Investment Review on subsequent compliance even when
sources for resources projects from the likes of non- few years, becoming more flexible to accommodate Board (FIRB) specifically – WHT of 10% is compliance may not have a positive impact
bank financiers through to alternate funding options, individual mining projects. The benefits of these typically payable on interest payments from an on the project’s operations.
such as streaming and royalty arrangements and types of arrangements can include expedited closing Australian project owner to a foreign financier
production-based financing. times and simpler documentation than a traditional unless certain exemptions apply. Furthermore, Alternate financing in its various forms continues,
financing (particularly where the financier is also the granting of security to a foreign financier in by necessity, to increase in popularity in the
All funding options should be considered
a trading partner). In these situations, the project connection with a lending transaction could mining and resources sector, particularly from
carefully in the context of the particular project,
owner may also be able to secure more favourable trigger the requirement to notify FIRB unless overseas sources. We expect this trend to
as different sources of funding will attract varied
terms due to potential profits on the trading side. the financier is in the ordinary business of continue. While alternate funding sources may
asset protection, regulatory, tax and compliance
moneylending and the ‘moneylending generally be more accessible than traditional
treatment. We discuss some of these funding Streaming arrangements sources, it is important that project owners take
sources and associated issues further below. exemption’ applies.
A streaming agreement is essentially a purchase the time to ensure arrangements are
agreement under which the buyer (financier) pays ● Inter-creditor issues – where alternate funding appropriately documented and that adequate
the purchase price in advance to the project owner is utilised in conjunction with senior debt, carve-outs for future activities and future funding
(borrower). The purchase price is paid either as an inter-creditor agreement will need to be options are resolved in
an upfront payment or by a series of instalments negotiated and entered into. In this regard, it this process.
in exchange for the long-term right to acquire a is important for project owners to consider the
§
specified amount or percentage of the streamed scope of security offered to alternate financiers
product (commonly silver or gold). The streamed to minimise issues obtaining senior debt in
product is often a by-product of the project owner’s the future.
main operations, meaning it can be used alongside
● Security – for each of these funding options the
other financing arrangements.
financier will ordinarily require a mortgage to be
Royalty financing registered over the relevant mining tenements. Damien Clarke Emma Murray
Partner Special Counsel
Royalty financing is a form of funding which usually
● Agreement of key terms – all too often we
involves an upfront payment from the royalty holder
encounter transactions where a project owner
(financier) in exchange for the royalty in relation to
has hastily accepted a term sheet, and is
the future revenue of the project being granted
forced to ‘walk back’ or renegotiate terms
by the project owner (borrower). There are different
(causing substantial cost or delay) during the
ways to calculate the royalty, though a common
documentation process. Agreement upfront
approach in this context is a percentage of
to the key terms (including carve-outs for
net revenue.
specific activities and future funding options) is
Like prepayment facilities and streaming essential to a smooth financing outcome.
arrangements, royalty financing can be quicker and
more cost effective than a conventional financing
and can often be subject to restrictive covenants on
the project owner.
THE RESOURCES SECTOR – EMERGING ISSUES 5
THE COAL INSURANCE MARKET Most significantly, Lloyd’s of London (Lloyd’s),
the regulator for approximately 100 syndicate
Next steps for the coal insurance industry
There are a very limited number of insurers willing to
– A RAPIDLY CHANGING LANDSCAPE members that underwrite insurance globally,
recently announced its ‘exit strategy’ from the coal
insure and invest in coal and those still participating
are imposing onerous conditions, including
industry. Lloyd’s outlined an environmental, social significantly higher deductibles.
Local and international insurers are making a Those insurance companies have ceased or limited
and governance (ESG) strategy focused on building
clear shift away from investing in or insuring their support for new coal projects and existing
a sustainable future in its ESG Report 2020 (Report) The situation has become critical for stakeholders
coal operations which has caused it to become coal operations. The strategy also involves
released in December 2020. In that Report Lloyd’s who must start looking at viable alternatives
increasingly difficult to secure insurance for companies whose revenue is tied to coal mining,
outlined that its managing agents will be asked: to the typical insurance offering. That involves
coal mines and other businesses who derive including suppliers and contractors to coal mines.
reengineering insurance programs to combat the
revenue from coal. Some examples include: ● not to provide new insurance cover for limitations imposed by the market. Businesses will
Insurers exiting the market thermal coal-fired power plants, thermal coal also be forced to adopt more stringent strategies
● Liberty Mutual, one of the world’s top six
mines, oil sands or new energy exploration for the management and allocation of risk in their
Insurers have been targeted by activists in their coal insurers, announced it would phase out
activities from 1 January 2022; and contracts, particularly in the potential absence of
campaign against coal, including the campaign coverage and investments for existing coal
lead by ‘The Insure Our Future’ network (originally mines that exceed specific thresholds by 2023; ● not to renew insurance coverages for thermal previously available insurance cover. Despite the exit
Unfriend Coal) (IOF), a global coalition of non and coal-fired power plants, thermal coal mines, from the coal space by insurers, the coal sector will
government organisations and social movements, oil sands or new energy exploration activities be a key part of Australia’s resource sector for some
● AXIS Capital have not provided new insurance time. The development of these viable alternatives for
to make coal and other fossil fuels uninsurable. (and companies with business models which
or facultative reinsurance since 1 January 2020 insurance is therefore in all stakeholders interests.
In December 2019, IOF reported that at least 35
for new thermal coal plants and companies
derive at least 30% of their revenues from §
insurers with assets of more than $10 billion have those plants, mines and activities) after 1
that generate 30% of revenue from thermal
adopted some form of coal divestment policy in a January 2030.
coal mining, or produce 30% of their power
growing trend of the insurance market’s response to This ‘signal’ from Lloyds has already seen this year a
from coal from 1 January 2020.
the management of environmental sustainability. greater unexpected rush by syndicates to leave the
coal sector, so the expectation is the escape from
coal by insurers will be faster.
Locally, all Australian insurers have announced
a move away from the coal mining industry.
Brad Russell Stephen White James Lynagh Steve Peters
Partner Partner Senior Associate Director, Allegiant IRS
THE RESOURCES SECTOR – EMERGING ISSUES 7
THE CRITICAL IMPORTANCE OF CRITICAL ● In October 2020, a prospectus of critical
mineral projects in Australia was distributed
● The Queensland minerals sector was bolstered
with investment and new initiatives announced
MINERALS by the Federal Government as a strategy to
attract investment in the sector by showcasing
in 2020, including:
- approximately $500 million over five
over 200 investment projects nationwide.
Each year the Annual Survey of Mining A national approach years to boost mineral freight exports
The investment projects identified in that
Companies (conducted by the Canadian The following is a snapshot of some of the industry on the Mount Isa Line through ongoing
prospectus included processing plants for the
based Fraser Institute) identifies the top initiatives undertaken Australia in 2020. maintenance and track improvements,
development of critical minerals including rare
ranked jurisdictions in the world for mining discounted freight charges and support
● In January 2020, Australia launched its earths.
investment based on factors such as the for a new container terminal at the port of
relevant Government policies ability to provide centralised Critical Minerals Facilitation Office Townsville;
● In addition to these Federal initiatives,
a stable regulatory environment and geological (CMFO) with ambition to drive a whole-
there has been ongoing development of - finalising arrangements with industry
attractiveness for minerals and metals. In the of-sector and national approach to unlock
initiatives in Queensland, such as: the junior for creation of a $100 million Resources
latest results from the Annual Survey of Mining Australia’s critical minerals potential. The
exploration scheme; the Strategic Blueprint for Community Infrastructure Fund (RCIF),
Companies (2020), Australia continued its history of CMFO is a step towards implementing the
Queensland’s North West Minerals Province, delivered over three years towards
strong performance with Western Australia being Australian Critical Minerals Strategy, which
which accounts for 75% of Queensland’s projects to improve economic and
ranked 4th in the world while South Australia was 7th, aims to promote investment in Australia’s
base metal and minerals; and Queensland’s social infrastructure across Queensland’s
Queensland 16th, the Northern Territory 19th, New critical minerals sector by providing
Unite and Recover Economic Recovery resources communities including the
South Wales 27th, Victoria 56th and Tasmania 63rd. incentives for innovation to lower costs,
Plan (Recovery Plan), which has continued North West Minerals Province. The RCIF
increase competitiveness, develop Australia’s
to headline development initiatives and will supplement existing planned State
‘Critical minerals’ are described differently across downstream processing capabilities and to
investment in the past year. community infrastructure, in addition to
jurisdictions, but are generally understood to refer connect critical minerals projects with
to mineral and metal elements which are critical to key infrastructure development, all in an effort
the development of future technologies. Examples to make Australia a world leader in the
of these technologies include batteries for energy exploration, extraction, production and
storage, renewable energy equipment, low-emission processing of critical minerals.
power sources, defence equipment and weapons,
electric vehicles, consumer devices, products for the ● Also in 2020 Australia became a founding
medical sector and for scientific research. partner of the international Energy Resource
Governance Initiative (ERGI) along with
‘Critical minerals’ are described differently across Botswana, Canada, Peru and the United
jurisdictions, but are generally understood to refer States. The ERGI seeks to promote and share
to mineral and metal elements which are critical to diversified, sustainable and ethical resource
the development of future technologies. Examples supply chains to meet growing global demand
of these technologies include batteries for energy for energy resources and, in particular,
storage, renewable energy equipment, low-emission critical minerals. As a practical means of
power sources, defence equipment and weapons, disseminating best practices, ERGI developed
electric vehicles, consumer devices, products for the a toolkit which provides practical guidance on
medical sector and for scientific research. resource management, project development,
production and stewardship. Cooperation
As Federal and State Governments, private
between the United States and Australian
companies and international economies move
Governments over the past 18 months has
toward reducing carbon emissions and investing in
fostered ideal conditions to position Australian
new energy generation and storage technologies,
minerals as part of the solution to the world’s
it is expected that demand for critical minerals
supply chain needs, including by fostering
will increase to exceed existing global production,
investment in new projects to meet the world’s
resulting in supply shortages. Consequently,
processing requirements.
Governments and industries across the world are
seeking to drive investment in critical minerals
exploration and secure predictable alternate supply
chains in safe and stable jurisdictions like Australia.
THE RESOURCES SECTOR – EMERGING ISSUES 9
the investment by resource companies Key takeaways
and is aimed at supporting resource We anticipate that the industry initiatives and funding
communities to assist their recovery from announced by the Federal and State Governments in
the COVID-19 pandemic; 2020 will have a positive impact on the Fraser Institute
- as part of Queensland’s Recovery Plan: international rankings for investment attractiveness in
survey results for the coming years. Critical minerals
□ an additional $10 million funding
are an essential ‘enabler’ for the transition to a clean
to upscale the Collaborative
energy future and Australia is well positioned to
Exploration Initiative and support
benefit from the increase in demand that this transfer
exploration activity for new
is expected to generate.
economy minerals for emerging
technologies and products; However, the sector does face some challenges.
□ a commitment to deliver Like most of the resource sector in Australia, the
Queensland’s Resources Industry critical minerals industry needs access to capital,
Development Plan which will focus and historically that capital has been secured from
on setting targets for industry foreign investment. Recent decisions by FIRB makes
growth, encouraging exploration it clear that foreign investment in critical minerals is
through future rounds of the a sensitive issue. In 2020, two proposed investments
existing Collaborative Exploration by Chinese companies in Australia’s critical
GAS SECTOR UPDATE
Initiative, and exploring minerals sector were unofficially blocked, causing
opportunities to continue the applicants to withdraw their FIRB applications.
Extensive FIRB reforms introduced earlier this year
advanced processing of resources
in Queensland; and have also identified critical minerals as a national Australian Gas Sector Developments
security issue, ensuring stricter oversight of foreign
□ $14.8 million to continue investment going forward. The concern for industry Federal and State Governments alike have ● avoiding supply shortfalls in the gas market
investigating the feasibility of the is that the imposition of tougher restrictions on clearly identified the oil and gas industry as by entering into new agreements with the
CopperString 2.0 project, foreign investment into critical minerals will reduce a critical enabler of Australia’s economy post three east coast LNG exporters that will also
a 1,100 kilometre high-voltage access to capital even to the point that the stated COVID-19. This is positive news for stakeholders in strengthen price commitments; and
transmission line to connect the objectives of the Government of driving investment the space. However, the growth and development of
● exploring options for a prospective gas
North West Minerals Province with in critical minerals will be adversely affected in a the oil and gas industry faces certain hurdles.
reservation scheme to ensure Australian
the national energy market which
material way. § Federal Government gas users get the energy they need at a
will deliver lower energy costs for
The Australian Government’s 2020-21 Budget reasonable price.
the industry.
reaffirmed the importance of increasing investment
The Federal Government also confirmed that it
in the oil and gas industry – making energy
will support the gas transport network, including
affordable for manufacturers and supporting jobs
through the development of a National Gas
as part of Australia’s economic recovery from
Infrastructure Plan which will identify priority
COVID-19.
pipelines and other critical infrastructure where the
Some of the specific steps for Australia’s gas-led Federal Government will step in if the private sector
Damien Clarke Kate Swain Liam Davis Claire Meiklejohn recovery identified in the Budget include: does not invest. It also intends to reform pipeline
Partner Partner Partner Senior Associate regulations to promote clarity and build a secondary
● setting new gas supply targets with States and pipeline capacity to promote competition.
Territories and enforcing potential ‘use it or
lose it’ requirements;
● unlocking five key gas basins beginning with
the Beetaloo Basin in the Northern Territory
and the North Bowen and Galilee Basins in
Queensland;
THE RESOURCES SECTOR – EMERGING ISSUES 11
Queensland New South Wales
With the North Bowen and Galilee Basins being Building on these pre-and-post COVID-19 Consistent with the position of the Australian While attention in the gas sector is often focused on
identified as areas for investment by the Federal developments, it is clear that the Queensland Government and alongside Queensland, the New Queensland, New South Wales and Victoria, States
Government, Queensland is poised to play a vital Government considers the industry a vital part South Wales Government has stated that it will like Western Australian and South Australia continue
role in Australia’s post COVID-19 economic recovery. of the State’s energy and resources future. In its prioritise gas as a post COVID-19 economic to be hubs for investment. The South Australian oil
2020-21 Budget, the Queensland Government recovery tool. and gas sector has seen an increase in exploration
The oil and gas industry has long been a focus of
committed funds to a concept study for a new 500 and production particularly in the Cooper and
the Queensland Government. In response to supply The most prominent gas project in New South
kilometre gas pipeline to connect gas reserves in Otway basins.
shortages and high gas prices, commencing March Wales, Santos’ Narrabri Gas Project, received
the Bowen Basin to the east coast domestic market
2018 the Queensland Government released land for Federal Government approval in November 2020 All the while Western Australia’s development,
and overseas customers. If progressed, the pipeline
gas development subject to an Australian market following receipt of State approval earlier that year. production and export of conventional gas and LNG
could create more than 1,000 construction jobs
supply condition (Supply Condition). The Supply In granting the approval, the New South Wales remains strong. 2020 saw the long fabled trans-
and open up gas production in the Bowen Basin,
Condition requires that: Independent Planning Commission (Commission) Australia gas pipeline discussed. This $5 billion dollar
bringing even more jobs to the region.
found that opening up the gas supply would enable West to East pipeline has often been discussed as a
● the holder of the tenure must supply gas lower emissions power generation when compared solution to East Coast gas prices, but the logistical,
produced under the tenure to the Australian to coal plants. The Commission also found that regulatory and long-term financial viability of the
market; and construction of the gas field would be consistent project continues to impact any serious discussion.
with Australia’s commitment to international climate Outlook
● any contract or other arrangements for the
treaties and New South Wales’ deal with the Federal
supply of the gas must include a condition The future development of the oil and gas industry
Government to deliver 70 petajoules of new gas
that the gas must not be further supplied has its obstacles (as evidenced by the recent appeal
supply in return for $3 billion in infrastructure
other than to the Australian market. lodged against the Narrabri Gas Project). However,
funding. Commencement of the Narrabri Gas Project
Market research indicates that stakeholders broadly will be dependent on the outcome of the Land and with active Federal and State support, we expect the
accept the Supply Condition and purchasers are Environment Court appeal initiated by local farmers industry to be the recipient of renewed investment
experiencing improvements in gas supply to the east on climate change grounds. and growth in the post-COVID-19 era. §
coast gas market.
The New South Wales Government also plans to
The Queensland Government has also recently investigate the designation of the Narrabri area as a
implemented a new volume-based petroleum ‘Special Activation Precinct’ to facilitate the delivery
royalty regime. The regime has been implemented of streamlined planning approvals and the delivery
in response to producers’ concerns about the of enabling infrastructure to the area. This is intended
complicated and burdensome nature of the previous to support strategic business clustering for energy– Aaron Dahl Meg Morgan
royalty regime. The volume-based model links intensive industries and other manufacturing sectors Partner Senior Associate
the royalty payable to the volume of petroleum close to commercial quantities of affordable gas.
produced, an average sales price and a ‘sliding The Mullaley Gas and Pipeline Accord has since
scale’ percentage multiplier based on the class of lodged judicial review proceedings in the New South
petroleum produced. Producers have welcomed Wales Land and Environment Court against Santos,
the change on the basis that it provides greater alleging the Commission incorrectly ruled that gas
certainty than the previous regime which relied on is a low emission energy source that will deliver
a complicated net-back process. environmental benefits compared to coal fired power
and that it failed to consider the environmental
impacts of a pipeline, which will be built by a third
party to supply gas from Narrabri to its customers.
The matter will progress through the courts this year.
THE RESOURCES SECTOR – EMERGING ISSUES 13
MINE SITE ADOPTION OF RENEWABLE
INITIATIVES
The global focus on renewable energy projects by copper miner, Oz Minerals, to progress to the
has continued to gain momentum over the next stage of studies to power its proposed West
last 12 months and so, too, has the uptake of Musgrave Project with a hybrid fossil fuel-solar-wind-
renewable energy initiatives by the mining sector. battery solution, potentially making it one of the
largest fully off-grid, renewable powered mines in
The investment landscape is changing
the world.
The case for mining companies to invest in
renewable energy remains compelling. Governments Pumped hydro
around the world are enacting legislation designed In January 2021, Centennial Coal received funding
to bring their economies in line with the goals from ARENA to perform a series of technical studies
of the Paris Agreement (which targets net-zero and trials for the potential deployment of a 600 MW
emissions by 2050), meaning companies across all pumped hydro energy storage (PHES) system using
industries will have to adapt to these new rules and underground coal mining voids.
regulations if they wish to remain compliant in their
areas of operation. In addition to regulatory drivers, ARENA considers the Centennial Pumped Hydro
technological advances are continuing to reduce the Energy Storage Project to be an affirmation of the
utility of large-scale PHES to ‘firm-up’ intermittent
cost of developing renewable energy projects and
renewable generation and to address grid security
stakeholder requirements are driving an increasing
and reliability issues, which have accompanied
corporate appetite to ‘go green’.
the accelerating rollout of renewables onto the
These factors are contributing to an acceleration of distribution network. AEMO’s Integrated System
investment in renewable energy projects. Plan 2020 indicates the NEM will require 6-19 GW of
storage by 2035. Our recent article From mine site to pumped hydro:
Microgrids
There is increasing appetite by miners to implement Furthermore, when compared to traditional PHES, commercial considerations for mine owners and
the development of PHES on former mine sites has project proponents* explores the benefits and
renewable energy supply solutions for their
the potential to result in significant cost reductions unique challenges that former mine sites encounter
operations.
driven by the lower cost of civil construction works with PHES projects.
In mid-2020, EDL Energy completed the delivery of (due to the pre-existing lower reservoir and existing Related to these developments, Hydro Tasmania,
a 56 MW ‘hybrid’ microgrid project at South African underground shafts), as well as typically being Macquarie Group and Shell have just struck an
mining company Gold Fields’ Agnew Gold Mine in co-located with existing transmission infrastructure. innovative deal under which Hydro Tasmania sells
Western Australia. The microgrid is comprised of five
A number of other PHES developments on former the rights to power stored in its PHES system during
wind turbines capable of delivering 18 MW of power,
mine sites have been proposed or are already in the the highest-priced parts of the day. The first-of-
a 10,000-panel solar farm contributing 4 MW, a 13
development stage. In this regard, Genex Power has its-kind deal heralds the development of a new
MW/4 MWh battery energy storage system and a
recently started preliminary work on the 250 MW financial product, which is expected to be popular
16 MW gas engine power station. The Australian
PHES component of its Renewable Energy Hub at with electricity retailers seeking to hedge against
Renewable Energy Agency (ARENA) supported the
Kidston, in North Queensland. escalating price risk. This is anticipated to spur
project with a capital contribution of $13.5 million
the development of PHES projects, including on
and the renewables component of the project is
mine sites.
expected to provide up to 70% of the mine’s energy
requirements. The project is recognised as Australia’s
largest renewables microgrid and the first in-country
to utilise wind generation at scale on a mine site.
Hot on the heels of the Agnew project, a number of
other mine microgrids have been developed or are
in the pipeline. These include recent announcements
* http://bit.ly/2Oxo00o
THE RESOURCES SECTOR – EMERGING ISSUES 15Malabar’s Solar Project
Our client, Malabar Resources, obtained planning
approval in September 2020 from the New South
The
Wales Government for the development of a 25 MW
solar farm on rehabilitated mine land. The solar
farm will be constructed on open cut mine voids
Energy
that have been backfilled after the completion of
mining activities.
The solar farm is well positioned in close proximity
Sector
to existing infrastructure and will connect to the
network via either an existing substation located
on the Maxwell Infrastructure site, or via the
construction of a new transmission.
With an annual energy generation of 60 GWh,
the Maxwell Solar Farm will have the capacity
to power about 10,000 New South Wales
homes – nearly all the homes in the surrounding
towns of Muswellbrook and Singleton. §
Kate Swain Strati Pantges Andrew Bukowski
Partner Special Counsel Senior Associate
THE RESOURCES SECTOR – EMERGING ISSUES 17CHANGING AUSTRALIAN ENERGY POLICY
Energy has been a fraught policy area across all emission technologies front and centre in their Current Commonwealth Government Energy Policy
levels of Government in Australia since 2007, recovery plans. Reinforcing the difficulty this area
when then Prime Minister Kevin Rudd referred of policy faces in Australia, however, the Federal In May 2020, the Federal Government released In September 2020, Prime Minister Scott Morrison
to climate change as a moral imperative. There Government has also placed a greater focus on the long awaited Technology Investment Roadmap announced that Australia would have a gas-lead
have been multiple attempts to address energy the need for transitional energy sources such as (Roadmap) as its centrepiece in renewable energy recovery from the COVID-19 induced economic
policy on a national scale, all of which have failed to gas, pumped hydro, hydrogen developments and and climate change policy. The Roadmap is intended downturn. This would involve the Federal
provide what investors and market participants are biofuels to facilitate the advent of a zero carbon to identify areas of innovation that can help address Government supporting increased infrastructure,
crying out for: certainty. economy by 2050. the duelling challenges of high power prices, grid unlocking new basins and reducing regulation. To
stability, regional unemployment and climate this end, the Prime Minister also announced that to
Although the Federal Government has suggested change through investment in emerging low support growth in Australia’s manufacturing sector,
2050 to be the target for a zero carbon society, emissions technologies. the Federal Government-owned Snowy Hydro
the policy detail behind that suggestion is yet to company would build a gas generator in the Hunter
be published. Consequently, this policy void has Subsequently, in September 2020, Energy Minister
Valley if the electricity sector failed to meet the
been filled by various State Governments, with most Angus Taylor released the Federal Government’s first
energy shortfall left by the scheduled closure of the
setting net-zero emission targets by 2050. Although Low Emissions Technology Statement (as required
coal-fired Liddell power plant in New South Wales.
lacking national coordination, as control of energy by the Roadmap). This statement set out the
policy in Australia rests with the States and Territories identified areas of priority, which will be the blueprint This proposed intervention by the Federal
and not with the Federal Government, these policy to which $18 billion worth of Federal investment will Government was met with criticism on a number
announcements have given clear indications to the be applied. The five technologies identified as a of fronts, first and foremost by the Australian Energy
market that renewable energy is a key component priority were: Market Operator (AEMO), which asserted that there
of the broader energy framework in Australia. would be no interim reliability shortfall after the
1. hydrogen;
closure of the Liddell power station, given the
The State-level focus on renewable energy has been 2. carbon capture and storage; number of planned energy projects in the pipeline.
spurred on by the global pandemic, with several Other stakeholders have also warned that
States putting renewable energy development, 3. soil carbon; Government-backed infrastructure in the gas sector
decarbonisation, green hydrogen, and other low could result in stranded assets due to the move
4. energy storage options; and
away from fossil fuels towards renewables, and that
5. ‘low-carbon’ steel and aluminium production. the Government should leave these decisions to
the market.
The Federal Government will utilise the Australian
Renewable Energy Agency, the Clean Energy Therefore, while the Federal Government’s approach
Finance Corporation (CEFC) and the Clean Energy in specific areas for development, primarily
Regulator to support these priority areas. technology and gas has been welcomed in some
quarters, it does not offer the immediate certainty
Technologies such as solar, wind and indeed coal that is required for renewable energy investors to
were not included in the priority list as they were make informed investment decisions today.
identified as ‘mature technologies’, and not requiring
government assistance. Another priority set by the Federal Government was
recently announced by the Energy Security Board,
The Roadmap is not a market mechanism, as the Federal body dedicated to devising interim
advocated for by a number of interest groups, measures to stabilising the NEM’s grid and reliability
and will not see, at least initially, any direct impact of supply. The Board has recently announced that it
on emissions, power prices or gird stability. But this will be issuing principles of reform for the NEM
Government support of emerging technologies which will be its last act. This is likely to have
could see new industries grow and thrive in profoundly positive consequences for future
the future. projects.
THE ENERGY SECTOR – EMERGING ISSUES 19Key State Government Energy Policy Queensland New South Wales
For better or for worse, the responsibility for Queensland’s renewable energy policy is being led The New South Wales Government also announced
spurring the development of renewable energy by State-owned generator CleanCo. Established in a plan to establish five new Renewable Energy
projects has fallen to the States. With the exception 2018, CleanCo inherited existing State-owned low- Zones (REZ) in the Central West Orana, New
of Tasmania, all other States and Territories have carbon energy assets, including Barron Gorge Hydro England, South-West, Hunter-Central Coast and
committed to renewable energy targets, including Power Station, Swanbank E Power Station, Kareeya Illawarra regions. As part of these initiatives, the
net-zero emissions by 2050 (mirroring similar and Koombooloomba Hydro Power Stations and State has already promised $40.6 million and $78.9
commitments by some of the largest economies Wivenhoe Pumped Storage Hydro Power Station. million respectively for the planning, coordination,
in the world and trading partners of Australia, At the time of its inception, CleanCo had a mandate transmission and storage needed to support the
including South Korea, Japan and China). to facilitate the development of 1,000 MW of Central West Orana and New England regions.
renewable energy, reduce power prices and support
Parts of the Electricity Infrastructure Investment
State or territory Renewable energy commitment Carbon commitment regional job creation.
Act 2020 (NSW (Renewables Act) commenced
New South Wales NSW has achieved its 2020 target 35% reduction in greenhouse CleanCo has since been involved in a number on 9 December 2020 which provide for the
and not announced a new renewable gas emissions on 2005 levels by of new renewable energy projects, including establishment of a NSW Renewable Energy Sector
energy commitment target 2030 developing the 102 MW Karara Wind Farm and enter Board, identification of renewable energy zones
into offtake arrangements with MacIntyre Wind Farm and process for the planning and prioritisation of
Net-zero emissions by 2050 and Western Downs Green Power Hub, which has network infrastructure projects. The remainder of
Northern Territory seen CleanCo achieve some early ‘wins’ in its aim the Renewables Act will come into force by 1 July
50% renewable energy by 2030 Net-zero emissions by 2050
to support renewable energy developments 2021 and will see the adoption of NSW Energy
South Australia 100% net renewable energy production Net-zero emissions by 2050 and place downward pressure on power prices. Security Targets.
by 2030 The State-owned generators’ mission is likely to
In January 2020, the New South Wales and Federal
be further assisted by the newly elected Labor
Tasmania Governments signed a $2 billion ‘landmark’ deal,
100% renewable energy by 2022 Commitment to establish a Government reviewing its other energy and climate
requiring both Governments to invest in clean
net-zero emissions target by change policies.
200% renewable energy by 2040 technology and energy efficiency (and these are
2050
(export orientated The year 2020 also saw a number of not the same). Under the agreement:
announcements by the Queensland State
Queensland 50% renewable energy by 2030 Net-zero emissions by 2050 ● New South Wales will provide an additional 70
Government in support of green hydrogen
petajoules of gas for the east coast market
Victoria development, including the provision of a $25
25% renewable energy by 2020 Net-zero emissions by 2050 each year;
million funding package to a new partnership
40% renewable energy by 2025 between CS Energy and Japanese corporation IHI ● the Federal Government will fund New South
Corporation which has launched a feasibility study Wales emission reduction initiatives and
50% renewable energy by 2030 into establishing a renewable hydrogen plant next underwrite the delivery of new interconnectors
Western Australia to CS Energy’s coal power station at Kogan Creek. and renewable energy projects; New South
No target Net-zero emissions by 2050
With the State now having a dedicated minister for Wales will receive $960 million in Federal
The path being used by each State is different, hydrogen development, it is likely this will be an area funding to upgrade the energy grid and invest
and driven by their existing key of significant policy focus for Queensland. in emissions reductions initiatives; and
industries and resources (including
● barriers to coal supply at the Mount Piper
suitable development zones). But
Power Station will be removed.
for renewable energy investors, State Governments
are providing a level of certainty that has been
lacking to date. Three states which are taking
three very different approaches to energy policy
are Queensland, New South Wales, and Western
Australia.
THE ENERGY SECTOR – EMERGING ISSUES 21Western Australia
In April 2020, the Western Australian State
What’s next for Australia’s INDUSTRY ACTIVITY: A SNAPSHOT OF
energy policy?
Government released the Distributed Energy
Resource (DER) Roadmap, a five-year plan to, not With the growing international commitment to
WHAT’S BEEN AND WHAT’S COMING
only support renewable energy, but also address net-zero emissions, it is unlikely the Australian As a result of COVID-19 induced state border Secondary M&A market
increasing grid stability issues, a consequence of Federal Government can continue indefinitely with closures, lockdowns, international travel bans 2021 has seen a number of large-scale renewable
the widespread uptake of rooftop solar across the its current ‘micro’ approach and there are increasing and supply chain interruptions, renewable energy projects and portfolios come to the market:
Western Australian grid. signs from within the Government that some type of energy projects suffered delays and setbacks. Fotowatio Renewable Ventures announced a partial
‘micro’ target will be set. However, these issues do not seem to have sell down of its 500 MW Australian solar portfolio;
The DER Roadmap is intended to assist with dampened the enthusiasm for new developments,
With as many as nine different approaches to energy New Energy Solar announced it is exiting the market
integration of distributed energy resources, such with new projects – in particular, battery projects,
policy across Australia, the private sector will need to by placing its 165 MW portfolio up for sale; and
as including solar panels and smaller scale battery continuing to be announced as Australia moves
shoulder a significant part of the burden in ‘leading’ BlackRock announced its 90% interest in the 60 MW
storage. The focus on grid stability is a key issue into its post-COVID-19 recovery phase. We have
Australia’s energy transition. The recent wave of Hayman Solar Farm; and a 180 MW Daydream Solar
for Western Australia due to the State not being a also observed a significant uptick in secondary sale
announcements of proposed battery storage Far is currently for sale – just to name a few.
member of the National Electricity Market (NEM). processors in respect of developed assets.
Unlike other members of the NEM, Western Australia developments, in conjunction with renewable energy There appear to be a number of different drivers
cannot rely on other states such as Queensland, generation projects, suggests the private sector is Project delays for these sales, among which is developers’ pre-
which has a relatively young coal generator fleet, to willing to take on this role, at least for now. Greenfield developments continue to experience scheduled strategy to exit the Australian renewables
provide grid stabilisation services. grid connection delays placing pressure on market. In any case, these sale processes offer an
Regardless, unless underlying issues such as grid
project schedules and, in turn, construction and opportunity for infrastructure investment funds,
connection delays, curtailment risk and the overall
development arrangements. The ageing nature of superannuation funds and pension funds to pick up
complexity of Australia’s electricity regulation are
the grid, as well as the sheer number of projects long-term, income generating assets which align
addressed, this proactive private sector push will
seeking connection, has AEMO facing a backlog of with demand from some consumers for investments
continue to be unnecessarily challenged in a way
connection requests. The latest connection figures in renewable and green energy.
which would impose limitations on achieving an
released by AEMO, demonstrate that many projects
optimal outcome.
which have been in train for several years are only
Despite the challenges, the market consensus now being connected.
seems to be that renewable energy is viable as
This situation is not helped by outdated rules which
a cost effective energy source. Combining that
were not designed to accommodate a large number
consensus with the rapidly reducing price of
of dispersed generators. For example, where a solar
battery storage technology, another of the chief
farm developer is towards the end of their modelling
criticisms of renewable energy – intermittency –
Like Queensland, Western Australia has its phase, and a new solar farm is announced in the
is becoming less relevant, making the sector ripe
focus firmly set on being Australia’s hydrogen vicinity, the modelling of the developer will become
for continued investment. §
powerhouse. The Western Australia Renewable outdated, taking them back to square one. Although
Hydrogen Roadmap, released in November the regulator is aware of these issues, there are few
2020, identifies 26 initiatives (focussed on the concrete steps being taken to address them and this
production and export of green hydrogen) the issue continues to cause delays in development and
State Government is supporting through the issue is further impacting Australia as a destination for
of grants. As the primary exporter of Australia’s iron investment in renewable projects.
ore, the State Government sees Western Australia
already positioned to put itself at the forefront of
green steel production and supply.
Kate Swain John Kettle Dominic McGann Andrew Bukowski
Partner Partner Partner Senior Associate
THE ENERGY SECTOR – EMERGING ISSUES 23Battery project announcements
The fourth quarter of 2020, and first quarter of
Power purchase agreements
Last year also saw a continued uptake of green
CLIMATE CHANGE REPORTING
2021, saw a raft of announcements regarding large Power Purchase Agreements (PPAs) entered into
Investors and regulators are showing ASIC’s view
scale battery projects. In January 2021, renewable by large corporates seeking to reduce their energy
increasing interest in understanding how ASIC has released revised versions of Regulatory
energy company Neoen announced plans to build costs and increase their consumption of renewable
companies are addressing climate risk. Whilst Guides 247 and 228 requiring directors of listed
the ‘Great Western Battery’, a project made up of energy to address shareholder concerns. BHP
Australian legislation does not expressly require companies to consider, manage and disclose all
500 MW of generation with up to 500 MWh battery recently announced a PPA with Risen Energy.
companies to report on climate risk, regulatory climate risks (outlined below) in their annual reports.
capacity. Origin Energy also announced in January The deal involves the supply by Risen Energy’s 132
guidance and legal opinion shows that directors In addition to this, ASIC has indicated that, in some
2021 that it plans to construct a 700 MWh capacity MW Meridian Solar Farm in Western Australia of
of Australian companies do have obligations to cases, climate change risk and opportunity will be
battery at its coal-fired power plant in Eraring. enough electricity to power half of BHPs Nickel West
consider and disclose climate-related financial risks. relevant to disclose for companies seeking to raise
Kwinana refinery. This 10 year PPA is an example of The ASX Corporate Governance Council, ASIC,
The rapidly dropping price of battery storage funds under a prospectus. ASIC has been surveying
an increasing push by the mining sector to adopt APRA, AASB and AuSB have each issued guidance
and State and Federal Government focus on climate change-related disclosure practices by
energy solutions that meet a variety of stakeholder on the importance of considering climate risks and,
grid stability and energy storage have seen these selected ASX 300 companies since 2019 to ensure
requirements. Other entities like Shell, Macquarie in some cases, disclosing climate risks in financial
projects become more appealing. Although these compliance with the new reporting requirements.
University, various Local Governments and reporting. Barristers Noel Hutley SC and Sebastian
projects are all in the early planning stages, their The Regulator plans to adopt a consultative
Government entities (like CSIRO) enter into PPAs Hartford Davison also published a legal opinion in
development is a positive sign for an ever approach moving forward and will continue
with renewable energy generators in 2020. 2016 advising that directors have a duty to manage
growing industry. monitoring the adoption of climate reporting.
The renewable energy sector in Australia is a and consider climate risk under section 180(1) of Enforcement action may be taken where serious
dynamic and diverse one that is continuing to grow the Corporations Act 2001 (Cth), and that directors disclosure failures exist.
and attract significant amounts of investment. of listed companies must disclose material climate-
Australia’s position as a leader in battling the related risks in the companies annual reports.
COVID-19 pandemic has made this even more
apparent. With significant amounts of capital in
circulation as a result of central banks’ COVID-19
response, it is likely the Australian renewable energy
sector will continue to attract investment. §
Kate Swain John Kettle Andrew Bukowski
Partner Partner Senior Associate
THE ENERGY SECTOR – EMERGING ISSUES 25Expectations Climate change litigation What’s next?
The framework published by the Task Force on In addition to the voluntary TCFD framework, The last decade has seen increasing challenges The number of Australian companies reporting on
Climate-related Financial Disclosures (TCFD) is the National Greenhouse and Energy Reporting to projects and planning decisions, focussing on climate risk is increasing. A study by KPMG indicates
recommended by regulators, including ASIC and the Schemes (NGERS) requires certain entities to report greenhouse gas impacts and the resultant effect on that the percentage of ASX 100 companies that
ASX Corporate Governance Council, as the standard annually on Scope 1 and Scope 2 greenhouse gas climate change, at both a State and Federal level. follow the recommendations of the TCFD increased
companies should use for considering and disclosing emissions. Scope 1 emissions directly result from Most recently, challenges have included: from 16 percent in 2017 to 58 percent in 2020. Given
material climate risks. The main climate-related risks facility activity, Scope 2 emissions are indirectly the increasingly strict regulatory requirements, it is
● Federal Court proceedings brought by the
that the TCFD recommends companies consider released from energy commodity consumption likely that climate risk reporting will soon become
member of a superannuation fund against
are physical risks (including acute and chronic risk) and Scope 3 emissions are other indirect emissions. common practice. §
the fund, who alleged he was not properly
associated with disruption to business activities from While the NGERS does not require reporting of
informed about the financial risk to his
climate change and transition risks (including policy Scope 3 emissions, we note that some entities
superannuation as a result of climate change,
and legal, technology, market and reputation risk) have continued doing this on a voluntary basis
in breach of the Corporations Act 2001. That
associated with the transition to a lower–carbon (e.g. Origin Energy).
proceeding was settled, with part of the
economy. Some examples of these risks include:
Shareholder activism and climate change settlement that the fund would be carbon
● acute risk – hurricanes, fire or floods disrupting litigation neutral by 2050;
production and manufacturing; Climate change activist groups, such as Market
● a challenge brought by a group of bush fire
Forces, have begun buying shares in prominent
● chronic risk – changing rain patterns or rising survivors against the New South Wales
resource companies in order to table special
temperatures impacting production; Environmental Protection Agency (EPA),
resolutions for climate-related purposes. For
alleging the EPA has failed to comply with its
● policy and legal risk – government policy example, Market Forces has consistently made
obligations under the Protection of the
changes to efficiency standards or resource applications for special resolutions with Santos to
Environment Administration Act 1991 (NSW)
use (particularly in relation to the approval of the effect that the company should end its oil and
with respect to climate change; and
new coal mines); gas operations. While many of these applications
have been rejected by Santos, a number of the ● objections made against the development of
● technology risk – increased research and similar styled resolution applications have been a coal project in the Galilee Basin which are
development costs to fund technology and made to other public companies and have been being heard in the Queensland Land Court,
innovation aimed at improving product energy tabled for mention at their annual meetings. including objections alleging the proposed
efficiency to satisfy consumer preferences;
approval of the project would infringe human
● market risk – reduced consumer demand for rights by its contribution to climate change.
products that are not low carbon or energy
It is expected that these types of challenges will
efficient; and
continue in the coming years as we strive towards
● reputation risk – investors withdrawing from achieving a sensible balance between economic and
companies that are not responding to social needs on the one hand and managing the
climate change. impact on climate on the other.
Dominic McGann Peter Stokes Gabriella Ritchie Andrew Bukowski
Partner Partner Senior Associate Senior Associate
THE ENERGY SECTOR – EMERGING ISSUES 27You can also read
