As part of its five part consultation on advancing New Zealand’s Energy Strategy, the Ministry of Business, Innovation and Employment (MBIE) has released its second discussion document on a regulatory framework for offshore renewable energy (Discussion Paper). The first discussion document focused on feasibility permits, while the Discussion Paper focuses on the full development of New Zealand’s offshore renewable energy regime.

In this fourth article in our series, we discuss some of the key points arising from the Discussion Paper.

MBIE will use feedback provided on the Discussion Paper to inform policy decisions and bespoke legislation for New Zealand’s offshore renewable energy regime. MBIE expects the regulatory regime to be in place during 2024.

Simpson Grierson is providing analysis on all five consultation documents, available (when published) on our website, see the links at the bottom of this page.

Submissions on the consultation close on 2 November 2023, with full details and documents available at MBIE’s website.

 

The Discussion Paper at a glance

Offshore renewable energy is a very significant opportunity for New Zealand’s transition to a zero carbon economy, but also has a number of challenges and issues to overcome in order to fulfil its potential. New Zealand has world class offshore wind resources (particularly in the South Taranaki, Waikato and Southland regions), with excellent potential for development due to high wind speeds and shallow water depths with areas suitable for fixed turbines. 

The scale of the proposed projects considered as part of the Discussion Paper, at 500MW to 1GW of generation capacity each, are much larger than any current onshore wind developments. A single offshore wind project, for example, could be equivalent to the total terrestrial wind generation currently in New Zealand, which MBIE report as being 942MW in 2022. 

In the first Emissions Reduction Plan (ERP), the Government committed to an offshore renewables regulatory regime by 2024 (see our previous legal update on the ERP). The Government consulted on the regime between December 2022 and April 2023, with the main focus being on proposed approaches to enabling feasibility studies for offshore projects.

What’s proposed in the Discussion Paper?

The proposed regulatory framework is not a complete regulatory framework for offshore wind. Instead, the framework follows the broader architecture of the Crown Minerals Act 1991 and Resource Management Act 1991. The central proposal is that offshore renewable developers will require a permit to construct and operate offshore energy infrastructure.

The Discussion Paper identifies 42 topics for feedback that range from fundamental issues to matters of detail. MBIE offers preliminary views on these topics, but overall it appears that there is a genuine desire to engage with and seek stakeholder views. 

Feasibility permits

MBIE is considering whether a fixed size limit for feasibility permits is appropriate, or if this should be considered on a case-by-case basis where applicants propose the size limit. This presents a trade-off between certainty for all applicants and flexibility in the permitting regime. In our view, there is a strong case for fixed size limits due to the certainty this will provide for developers who will need to carry out significant pre-feasibility work before submitting permit applications, but there may also be merit in a hybrid approach when the market becomes more mature. Regardless of which approach is adopted, it will be important for the regulator to be able to test whether any particular proposal is feasible and realistic.

The Discussion Paper also considers a new criterion for feasibility permits, in addition to the criteria previously consulted upon, being the impact that projects may have on the electricity system. While we agree that offshore renewable projects have the potential to significantly impact the electricity system given the scale of their generation capacity, impact assessments would need to be carefully prescribed and detailed to ensure comparisons are fairly made. As an example, energy modelling data presented to support competing impact assessments would need to make similar or identical assumptions about future electricity demand (for example, whether Tiwai Point closes) for those assessments to be fairly compared.

Commercial permits

The Discussion Paper considers what criteria should be assessed for commercial permits, and how duplication with the resource consent process can be minimised.

Avoiding duplication with the consent process is identified as an area of focus, and it is an area of particular interest to us. The criteria identified in the Discussion Paper would lead to fairly significant duplication with consent processes. The economic benefits of a project, regionally or nationally, are relevant considerations for consent applications and are covered in detail through the consent process. Those benefits would include energy system benefits. Effects on iwi and hapu, the capability and credibility of the developer, and health and safety records are all features of consent processes (although some of those matters are less directly considered). 

The criteria for commercial permits will have a significant influence on appropriateness and workability of the regime. The technical capability of the operator, the financial viability of the project (to the extent that it provides an assurance that the project will be completed and will deliver the regional or national benefits), transmission, and decommissioning plans appear more suitable as part of assessment criteria for commercial permits. Given the rigorous and public nature of the environmental consenting regime, in our view there is no need for commercial permits to also assess environmental matters or involve public participation.

If, as the Discussion Paper suggests, commercial permits would be obtained after the consent phase, there is an opportunity to rationalise the criteria for a commercial permit to reduce the duplication. Or alternatively, a commercial permit could be obtained before resource consents, and the granting of any resource consent process could treat the granting of a commercial permit as confirmation of the matters covered by the permit. From a consenting perspective, this is our preference but it would equally be workable for the process to take place in tandem.

The Discussion Paper considers how to manage a situation where multiple applications are made for commercial permits, but there is only grid capacity for a single project. Ideally, investment in the grid (and other) infrastructure will keep pace with demand for connections (as discussed in our legal update on MBIE’s consultation on Measures for Transition to an Expanded and Highly Renewable Electricity System). However, there could be situations where a choice of project or projects will need to be made. The Discussion Paper essentially proposes either a developer-led “first-in-first served” option or alternatively an ability for the regulator to compare projects side-by-side. Given the scale of offshore projects, there could be a role for the regulator to compare projects at the commercial permit stage, but the comparison and decision-making process would need to be objective and fair. This would be challenging for developers who at that stage would have allocated very significant levels of investment, with the risk that their project might not be favourably compared at the commercial permit stage. Alternatively, commercial permits could be granted on a developer-led basis and grid capacity then determined by Government-initiated contract for difference auctions (ie where developers bid for the minimum guaranteed electricity price that they would require from the Government for their projects, with the lowest price being successful). Those auctions would be a separate, commercially focussed bid process that is unrelated to technical competencies of respective developers which are considered at the commercial permit stage. 

Economic Models

In the Discussion Paper, MBIE asks if the Government should support, or extract revenue from, offshore renewables. There are many existing models globally that can be used as comparative guides when assessing what may work in the New Zealand context, but all of these models essentially balance revenue support mechanisms and revenue gathering mechanisms. One key consideration is whether and to what extent there is interdependency between these two mechanisms. This is a particularly significant policy decision for the regime. 

The scale of offshore projects (with investments likely to be in the billions) means that long term certainty of revenue will be essential for both debt and equity investors to commit the necessary investment capital. This could in itself provide sufficient justification for revenue support by government, given the very significant potential economic benefits of these projects being developed. Long term certainty of revenue is a key “bankability” concern of lenders looking to invest in offshore wind projects (and renewable energy projects more generally). The core element of all revenue support mechanisms used internationally is for the government to provide certainty to prospective lenders of the cashflow / revenue that will be available to support the project. “Line-of sight” of income is also likely to be necessary for investment decisions in supporting infrastructure, such as ports and transmission infrastructure. 

Similarly, given the strategic importance of additional renewable generation it could be argued that a revenue extraction (ie royalty) regime for offshore renewables might not be appropriate in circumstances where offshore projects are likely to require economic support in order to be commercially viable (as noted above). Any revenue extraction required to be paid by project participants would be an additional project cost, which would likely need to be passed on to consumers through higher electricity prices. 

In our view, the Government should provide some form of revenue stabilisation regime to accelerate offshore renewable projects. This could take the form of a Government-initiated auction for contracts for difference, or other government support measures adopted overseas, to ensure a stable project revenue stream that lenders and developers can rely upon. See also our legal update on MBIE’s issues paper, Measures for Transition to an Expanded and Highly Renewable Electricity System (link above and below). 

Maori rights, interests and involvement

The Discussion Paper considers how iwi and hapū can be involved in decision-making for permits, as well as how economic opportunities for Maori can be created from offshore projects (including potential revenue flow mechanisms). The questions for feedback are particularly open-ended, and the Discussion Paper indicates that further direct engagement with iwi and hapū is ongoing. It is also acknowledged by Government that there is complexity in identifying which iwi and hapū have interests in particular development areas. Importantly, the Discussion Paper notes that it is intended for iwi and hapu to be able to participate in all stages of the permitting process (discussed above).

We support global recognition of the need for a just energy transition, which will need to include participation by Maori in many and varying ways that include cultural, environmental, community and commercial aspects of the renewable energy transition. 

Interaction with Environmental Consenting

The Discussion Paper does not suggest any changes to the consenting regime for offshore renewable projects. In our view, the questions for feedback on interaction between offshore regulation and environmental consenting largely skirt around the edges of the real issues for large offshore projects. 

One area of concern is the absence of a proposal to provide a national framework that guides and supports resource and marine consent decisions for offshore renewables. The Ministry for the Environment (MfE) recently consulted on proposed changes to strengthen the policy support for renewable energy, particularly wind and solar, to enable New Zealand to meet its energy targets. Offshore renewables were expressly excluded from that consultation. 

MfE’s starting point was that the current national direction (namely, the National Policy Statement for Renewable Electricity Generation 2011) is insufficient to support New Zealand’s transition. We entirely agree with this position, however there is currently no national policy direction for any offshore activities. National policy direction on renewable energy is just as important in an offshore environment as it is on land. However, neither MfE nor MBIE have included a proposal on that topic in their respective consultation materials this year.

Consent processes for offshore projects are incredibly complex and challenging due to the environment and comparative difficulty in obtaining scientific information to an equivalent level that is available on land. National guidance has a critical role to play in guiding those processes, both in terms of identifying New Zealand’s policy priorities, and guiding decision-makers in relation to the adequacy of information in an offshore environment and acceptable effects. 

A recent example of the difficulty in obtaining consents in a marine environment, without policy support, is the Fast-track consenting Panel’s decision to decline Ngāi Tahu Seafood Limited’s application for offshore salmon farms near Rakiura | Stewart Island (the Hananui Aquaculture Project). We hope that MBIE and MfE will turn their minds to this issue as the regulatory framework is developed.

Enabling transmission infrastructure

The Discussion Paper notes that offshore renewable energy development will require significant investment in new transmission infrastructure. This includes the cables, substations and connections that are required both onshore and offshore. The key question raised in the Discussion Paper is how this investment should be allocated between the parties to an offshore renewable energy project.

One of the main challenges is timing, with onshore interconnection assets being subject to a regulatory regime that is not currently conducive to pro-active, forward-looking investment in new infrastructure. However, this is exactly what is needed for offshore renewable projects, as very significant generation increases will need interconnection assets to be available when the project completes.

First mover disadvantage is also a key concern for transmission infrastructure and the challenge of appropriate cost allocations. A renewable energy zone concept could be particularly useful for offshore renewable energy projects, and we keenly await further policy direction on this aspect of the electricity system. See also our legal update on MBIE’s issues paper, Measures for Transition to an Expanded and Highly Renewable Electricity System (link above and below). 

Decommissioning

The Discussion Paper poses the question of when and what should be provided by Government to ensure decommissioning of offshore renewable projects eventually occurs.  

The Discussion Paper suggests that decommissioning could be assessed as early as the feasibility permit stage, however this seems inherently premature because the precise extent of the resource and form of project would not be known at that stage. In our view, any assessment of decommissioning costs should take place at the commercial permit stage. 

A topic of considerable interest to potential developers will be the proposed decommissioning plan and financial security requirements.  Estimating decommissioning costs, which may not be incurred for 40 years, and then creating an appropriate security arrangement is likely to be particularly challenging. It is assumed that the costs of the Tui oil field decommissioning, which landed with the Government and specifically MBIE following the operator’s insolvency, are key considerations (while not specifically mentioned in the Discussion Paper). We note that trailing liability for former owners of offshore renewable projects will also be a challenging hurdle for developers to address, if implemented, and we expect there will be a particular focus on this aspect in submissions.

Submissions

MBIE is currently developing the offshore wind regulatory regime, which is due for release by the end of 2024. Responses that are submitted to the questions in the Discussion Paper will be considered by MBIE as part of that process.

Submissions on the consultation close on 2 November 2023, with full details and documents available at MBIE’s website.

If you wish to discuss any of the issues or opportunities arising from the Discussion Paper, or would like assistance in developing submissions, please contact any of our experts.

 

Simpson Grierson Energy System Consultation Series:

MBIE consults on New Zealand's Energy system #1: Gas Transition Plan Issues Paper

MBIE consults on New Zealand’s energy system #2: Interim Hydrogen Roadmap

MBIE consults on New Zealand’s energy system #3: Measures for Transition to an Expanded and Highly Renewable Electricity System

MBIE consults on New Zealand's energy system #5: Base ban on gas fired baseload generation