In 2019, the Coalition of Australian Governments published a national hydrogen strategy (National Strategy) to set a path to build Australia’s hydrogen industry, accelerate commercialisation, reduce technical uncertainties and build up domestic supply chains and production. The National Strategy also flagged tax reforms in saying that, as hydrogen production and use grows, appropriate taxation, excises, fees or levies could help ensure that the community shares in the economic benefits from a developing hydrogen industry. In this article, two years on from the publication of the National Strategy, we consider what government monetisation of clean energy might look like in the near future and the potential implications for industry.

The need for decarbonised energy solutions 

The need for practical clean energy solutions is increasingly pressing as we navigate climate change and the COVID-19 pandemic. Decarbonised energy sources, such as green hydrogen, offer an appealing solution to the myriad of problems associated with the energy transition. Investment enthusiasm is at an all-time high, not least due to growing societal and investor pressure for companies to be socially and environmentally responsible. 

However, a transition away from traditional energy sources may mark a transition away from traditional revenue streams for government. For example, in the 2020 financial year alone, WA’s government recorded $9.3 billion in resources royalties. In WA, like in most jurisdictions, royalties represent the cost to the explorer of taking and selling the State’s natural non-renewable resources.  With solar and wind, the resources are renewable and so the theoretical justification for an explorer paying for something which is otherwise free and renewable is missing.

The clean energy and decarbonisation transition may therefore lead to a decrease in revenue from these traditional resources. While the social and environmental benefits of clean energy are an important policy consideration for governments, the flagging of tax reforms in the National Strategy indicates that government has identified a need to monetise clean energy and it is foreseeable that the case for reform will only become stronger as the clean energy revolution becomes an economic reality. 

Little has been published by the Federal and State governments on this issue and, in this respect, we suggest industry should be at the forefront of driving change. State monetisation of clean energy is also a pressing concern for industry as practical obstacles arise in its absence, such as the difficulty in completing feasibility studies without a known financial outcome for government. As the leaders in this space, it is important that commercial producers are leading the conversation on monetising the clean energy space so that future policies are practical and viable.

In this two-part article, we consider the potential approaches that may be taken to monetise clean energy in a resources-based economy. To this end, we consider avenues relating to monetisation of the sale, or production of clean resources themselves, and which of these are most likely to be the subject of reform.

Bespoke ways to monetise clean energy and decarbonisation initiatives 

‘Sandboxing’ 

As the pace of the clean energy transition inevitably outpaces regulatory reform, agreements between proponents and governments may provide a method for government to enable clean energy projects to proceed through concept or early stage to commercialisation. In certain circumstances, these have been referred to as a regulatory ‘sandbox’ so that key project objectives can be achieved in a relaxed regulatory environment with appropriate safeguards in place. 

Historically, the government has turned to State agreements, contractual agreements between the State and a project proponent that are ratified by parliament, to support emerging resource industries. Previously a common feature in the WA resources industry, their popularity has since declined in favour of the ‘laws of the land’ applying in their usual way in relevant circumstances. Though new State agreements are unlikely to resurface prominently in WA, government support for a nascent hydrogen industry may be found in bespoke ‘sandbox’ or other project specific arrangements entered into between government and proponents of the most viable hydrogen projects.  Could such arrangements offer innovative benefits to the government apart from any legislated royalty or tax rate?

From an international perspective, concession agreements provide governments with custom monetisation and are utilised in Europe.  In essence, these are private agreements between a government and a specific company for the grant of rights, land or property.  For instance, land owned by a government is granted, via a concession agreement, to an energy company to build and operate a plant (such as a green hydrogen plant or renewable asset); the relevant concession agreement may provide for payments from the company to the government, as a form of fee or compensation. We also do not anticipate that concession agreements will become a feature of the Australian corporate landscape; however, the existence of concession agreements internationally, and the historical significance of State agreements in WA, indicates that project specific arrangements may form a feature of the clean energy project landscape in WA.  The question is therefore whether these arrangements could form the basis of the monetisation of clean energy projects.

In our view, private arrangements between governments and proponents of large scale hydrogen projects in Australia are more likely to provide the transitional support and flexibility to facilitate the clean energy revolution while the industry and relevant legislation takes shape and matures.  However, overall it is unlikely that such agreements will provide the mechanism for deriving government revenue, given unresolved questions as to the source of the government’s legislative power to monetise renewable projects.  Part 2 of this article will consider a possible avenue for government to establish such a power.

Certification and Guarantee of Origin

Another approach to the potential monetisation of clean energy is certification schemes, under which governments may impose fees for certifying a given aspect of clean energy resources or production.   

The Department of Industry, Science, Energy and Resources recently released a discussion paper for its hydrogen certification scheme (Greenwashing is the surface level compliance for the sake of environmental marketability.  It is an emerging issue in the race to implement green strategy.  For example, the consumption of water in some forms of hydrogen production is not necessarily environmentally friendly, and there may be other emissions involved in production.) The Smart Energy Council has also announced a scheme with founding partners including the Victorian, Queensland, Western Australian and ACT governments and Norwegian giant Yara, and the NSW government has announced a pilot renewable gas certification scheme. Industry has also launched private schemes such as service provider GreenPower, and the NSW Hunter Valley project teaming up with Enosi Energy. There is also pressure on the Federal government to formally legislate international hydrogen safety standards.

Certification schemes are beneficial to companies as consumers tend to view them as a value-add that guarantees the product they are purchasing. While it may not be the green saviour of consolidated revenue, certification may at least provide a new income stream that also encourages wider economic benefit. Although this approach is not exclusive to Western Australia, it is highly relevant given the number of proposed hydrogen projects in the State and the national impact of a certification scheme more generally.

An effective and national green certification scheme that goes beyond hydrogen can help prevent ‘greenwashing’¹ and ensure a robust national brand based on a sound environmental process. Australia is in a unique position to capitalise on its global reputation for high quality energy and resource production, arguably making this one of the most mutually beneficial monetisation channels. Certification schemes can implement safety standards and ensure net-zero emissions, whilst adding economic and environmental benefits. Such a value proposition may lead to the monetisation of a national certification scheme.

Industry should enter this space early so that any scheme that is implemented is not obstructive to productivity. While schemes alone may not directly provide significant revenue, the indirect economic benefits of a robust domestic and export industry will bring its own revenue.

Property rights and royalties

Mineral royalties (where the State charges a fee for the exploitation of State minerals by the holder of a mining lease) is a familiar concept in the resources sector. No wonder, as it is an easy concept to grasp: the mineral resource is not renewable, limited in quantity, and remains the property of the State until mined. Clean energy resources such as solar and wind, in theory, have none of these qualities, which complicates the application of existing royalties to emerging decarbonised resources. Below we consider ways in which the State may consider employing existing or new frameworks to monetise clean energy, and the associated difficulties.

Existing mineral royalties are generally charged either as a flat rate based on the amount produced, or with an additional ‘ad valorem’ adjustment that takes account of a given mineral’s value and sale price. There may be difficulties in applying such a regime to renewables where lowering production costs remains one of the most significant barriers to commercialisation of clean energy production.

Petroleum royalties are slightly more diverse. Wellhead royalties are charged based on the gross value of resource extracted, less certain presale production costs. There is also the Petroleum Resource Rent Tax (PRRT) which is a profit-based tax. A royalty based on profit may be less onerous for first-moving producers but may also discourage further industry uptake.

Two features are apparent in both mineral and petroleum royalties. Firstly, the type of costs that producers are permitted to deduct for the purposes of calculating a royalty or tax rate are dictated by the government. This provides the basis and a precedent for legislative flexibility to account for the changing and yet to be discovered costs of clean energy production. A combination of a profit-based tax with selective deductions may be a form of royalty suitable for emerging resources.

The second common feature is that, in Western Australia at least, the State’s property rights in all minerals are the basis for existing royalty schemes under the Mining Act 1978 (WA). This poses the most significant difficulty in adapting existing royalties to new resources in which the State has no property rights. The State may look to production inputs that do have existing property rights. For example, the water required for green hydrogen production may be the subject of further or augmented taxes and royalties. However, it is questionable whether such an approach will provide a sufficient economic replacement for declining resources being phased out.

We also caution against the assumption that a lack of property rights in a given ‘thing’ entirely prevents the State from legislating with respect to that ‘thing’. For example, in 2013 the WA Liberal government introduced the Petroleum and Geothermal Energy Legislation Amendment Act 2013 (WA) which created previously non-existent property rights in the storage and retention of greenhouse gases. This amendment puts industry on alert that, if necessary, the State may take unexpected or unprecedented paths to monetisation, especially where the forms of resource production are also unprecedented. Further, it begs the question as to what limit there is to the government’s entitlement to monetise natural resources.

Royalties are a familiar commercial and regulatory concept which might be seen to provide certainty and consistency. We also note the 2015 WA Royalty Review’s recommendation that royalties are not fixed ad hoc in State agreements, but more uniformly under legislation. This may not sit well with sandboxing agreements the State might need to rely on in the early stages of the transition. It is difficult to see a path for the imposition of royalties into clean energy that is not fraught with difficulty or danger.

Rent

Another well-accepted form of monetisation is rent.  Large fixed infrastructure assets, such as power plants, will typically be constructed on leasehold land (insofar as the operator does not own the land itself) in order to obtain secure and exclusive occupation rights.  Such leases will be subject to rent payments. 

Given that approximately 92% of Western Australia is Crown land, with only 8% constituting freehold land, we expect most clean energy projects will require a lease of Crown land and therefore be subject to rent or similar fees.  The determination of the value of the rent will depend on valuation principles and in certain circumstances such valuation may be linked to the revenue that may be derived from the economic benefit associated with the use of the leased land. 

Yara, one of the world’s largest fertiliser producers, holds a lease in the Pilbara on which it aims to produce ‘green’ fertilizer that would be subject to rent requirements payable to the government. In our experience, rental payments that are determined by reference to the economic benefit associated with the use of the leased land (as opposed to nominal or relatively low value rents) are not widespread or uniform, therefore in the absence of ‘market rent’ review clauses applying the transition or grandfathering of existing industry as part of any reform of rents for the hydrogen industry may present a challenge.

As we have explained in another article Greener Pastures – Pastoral lease and other legal reforms flagged for WA’s renewable or green hydrogen industry, security of land tenure is one of the top issues facing potential hydrogen producers in WA.  We understand that the government of Western Australia is considering potential land tenure reform laws to implement a mechanism for existing tenure to be converted into tenure suitable for green hydrogen production, inclusive of renewable energy sites.  If a new form of hydrogen-specific tenure is introduced, reforms that relate to rent may provide a lead indicator of the government’s thinking about monetising the value of Crown land in clean energy projects.

A snapshot of developing hydrogen projects throughout Western Australia, including numerous potential projects currently being investigated.  Yara’s project on the coast of northern Western Australia is shown here.

Taxes and tariffs

The introduction of taxes and tariffs on clean energy – though currently the subject of considerable backlash – is inevitable: taxes are fundamental to government revenue generation.  With the focus currently on encouraging widespread uptake of clean energy, governments have been careful not to push the issue of taxation of clean energy sources, storage and production too far. Further, as we noted in part 1 of this article, economic benefit is not the only consideration for governments when implementing taxes. The actual or perceived social or environmental value of clean energy may provide sufficient wider benefits to society in lieu of taxation to compensate to some degree for lost revenue. However, with the increasing development of clean energy projects and corresponding production, we expect governments may seek to tap into this source of income.

In Australia, discussions around taxes and tariffs relating to clean energy are starting to emerge, with the Australian government signalling possible future changes to taxation of, for instance, hydrogen, should certain uptake indicators be achieved over the medium term. The Federal government also envisages strong hydrogen export in the medium term, in which case it might consider export tariffs as a means of revenue raising. 

Interestingly, some types of clean energy projects, such as wind farm assets, are already taxed at the normal company tax rate in Australia. This contrasts with other countries, such as The Netherlands, where the normal company tax rate is qualified by subsidy grants and special allowances for environmentally friendly and sustainable energy assets.

In the shorter term, during the transition towards a ‘greener’ future, and as governments temporarily lose revenue from their traditional sources, governments may consider taxing so-called ‘negative environmental externalities’.  For instance, in the electric vehicle space, governments may choose to tax other types of negative environmental effects beyond carbon emissions. These may include the distance travelled by an electric vehicle, the rate of traffic congestion (essentially the time travelled), as well as wear and tear to roads.

Conclusion

In Australia, the focus remains largely on encouraging investment into the clean energy space. The Federal and State governments are taking action to spur on the decarbonisation movement in Australia but, to date, there are few definitive commitments to reduce current rates of carbon activity or introduce decarbonisation targets by changing regulation or legislation. However, the market has seen the stirrings of what could begin a regulatory revolution.

It is clear the clean energy space is especially fast-moving. We expect that when monetisation does eventually occur, the pace of change will be no exception to the rapid pace that the clean energy and decarbonisation transition is already setting. Accordingly, it is important that, when companies are dealing with projects, agreements or land tenure, they factor in the risks of potential changes under which monetisation of the clean energy industry may occur and position themselves to drive conversations and agendas in order to optimise commercial outcomes.

This article is up to date as at 27 August 2021