More FIRB Hurdles for Renewable Energy Developers

This article is part of our New Energy Insights focusing on M&A perspectives from our Energy, Infrastructure and Resources team. Stay tuned for regular updates and commentary on topical issues across the sector.

The Australian Government recently reported that there are over $7.5 billion in potential investment opportunities in renewable energy and hydrogen generation in Australia.1 The regulation of investment by foreign individuals and entities in Australia, including in the energy sector, is regulated by the Treasurer of the Commonwealth (through the Foreign Investment Review Board (FIRB)) under a framework governed by the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (the b).

In this Insight, we:

  • identify recent changes to the Foreign Investment Regime which have significant implications for renewable energy project developers; and
  • highlight that, despite the recent reversing of the previous $0 monetary screening thresholds for all transactions, the $0 thresholds continue to hang over the New Energy sector via the new national security actions which were introduced in January 2021.

These changes shift FIRB considerations from a compliance obligation to a key transaction and business issue. It is now even more important for foreign owned renewable energy project developers and investors to:

  • consider the current FIRB requirements as early as possible in any proposed transaction; and
  • reset their development methods to anticipate and navigate the changing FIRB landscape.

The FIRB game has changed, and developers need to adapt business strategy to comply – otherwise put at risk millions spent on project development.

The end of “land banking”?

In July 2021, FIRB released Guidance Note 4 regarding significant changes to the application of the Foreign Investment Regime to renewable energy developments, including imposing conditions requiring construction to commence within five years and prohibiting the disposal of the land until construction is complete.

This is a significant change to prior government policy and presents several challenges to foreign renewable energy project developers, particularly those that intend to seek third party investment in the projects they develop.

Does the Foreign Investment Regime apply?

The Foreign Investment Regime will apply to most renewable energy projects and businesses. However, determining if applies or not is a critical first step (and one that is sometimes incorrectly assumed).

In summary, investments by foreign persons in Australian entities, businesses or land will be captured by Australia’s foreign investment framework if the investment is a notifiable action, a notifiable national security action, a significant action, or a reviewable national security action (which is referred to as the ‘call-in power’). If an investment or action does not fall within one of these categories, then it is not subject to the regime.

There are important differences between these categories, including that:

  • notifiable actions and notifiable national security actions require mandatory approval before undertaking the investment or transaction, whereas significant actions and reviewable national security actions do not require approval. However, FIRB can review the transaction later and, if the action is found to contravene the national interest or national security (as applicable), then FIRB can unwind the transaction; and
  • notifiable actions and significant actions are based on a broad national interest test, whereas notifiable national security actions and reviewable national security actions are tested against a narrower national security test.

Land Development Conditions (21 July 2021)

Guidance Note 4, which was updated in July 2021, makes it clear that the Treasurer will now generally seek to ensure that agricultural land and vacant commercial land, acquired for the purpose of operating a wind or solar farm, is put to productive use within a reasonable timeframe and ‘land banking’ does not occur. If an application to FIRB for such an investment is approved, it will generally be approved subject to the following conditions:

  • a wind or solar farm being developed on the land;
  • continuous construction of the proposed development commencing within five years of completing the purchase of the land; and
  • the land not being sold, transferred, or otherwise disposed of, prior to the development being completed.

However, the Treasurer can impose any condition(s) that are considered necessary to protect the national interest. ‘National interest’ is viewed through the lens of the broad, seemingly limitless national interest test which considers factors such as the impact on the economy, competition, tax, the investor’s character and national security. Helpfully, FIRB has indicated that it will endeavour to ensure that any conditions that it imposes strike a balance between enabling commercial objectives to be realised while ensuring that the land is put to productive use.

Zero thresholds gone, but not for “national security”

On 29 March 2020, the Federal Government introduced a temporary $0 monetary screening threshold that applied to all transactions in response to the coronavirus outbreak (Zero Thresholds). Effective from 1 January 2021, the Zero Thresholds were reversed (subject to certain exceptions).2

However, at the same time as reinstating the previous monetary thresholds, sweeping changes were made to the Foreign Investment Regime which included the introduction of national security actions. There is now a blanket $0 monetary screening threshold that applies to any investment that constitutes a notifiable national security action or a reviewable national security action. This means that any investment that falls within one of those categories will be captured by the Foreign Investment Regime.

What is a notifiable national security action?

A notifiable national security action is one of the following actions:

Category Comment
Starting a ‘national security business’ Renewable energy projects will most likely be national security businesses.

A ‘National Security Business’ is a business which if disrupted or carried out in a particular way may cause a national security risk. Generally, this involves a ‘critical infrastructure asset’ which covers assets in the electricity sector, telecommunications, defence or a foreign/national intelligence community. The ‘National Security Business’ must be publicly known or known to the public upon the making of reasonable inquiries.

Acquiring a direct interest (usually 10%+) in a ‘national security business’ or in an entity that carries on a ‘national security business’
Acquiring an interest in ‘national security land’ National security land is generally land which is owned or occupied by defence, including buildings and structures. It also includes defence prohibited areas and land in which an agency in the national intelligence community has an interest if the existence of the interest is publicly known or could be known upon the making of reasonable inquiries. The Australian Government is undertaking further work to clarify the definitions of ‘National Security Business ‘and ‘National Security Land’.

What is a reviewable national security action?

A reviewable national security action is one expected to give a foreign person potential influence and rights of an entity or business or the right to occupy land. In general terms, it captures investments where an interest of more than 10% is being acquired which is not otherwise caught by one of the other categories. There are approximately nine scenarios where this arises and, in practice, the outcome of this category is to give the Treasurer a default ability to review investments in sensitive sectors that may pose national security concerns, such as New Energy.

A person is not required to notify the Treasurer before taking a reviewable national security action. However, the Treasurer can exercise its ‘call-in’ power for up to 10 years after the transaction which allows the Treasurer to make orders where the action is contrary to national security. This ‘call-in’ power can be extinguished by voluntarily applying for FIRB approval, in which case the transaction cannot proceed until that approval has been obtained or the statutory timeframe for making a decision has otherwise lapsed.

Mandatory or voluntary notification?

There are various mandatory and voluntary notifications to consider in the New Energy sector. FIRB’s  Guidance Note 8 explains how FIRB will look to exercise its powers under the national security actions. In the New Energy sector, FIRB has provided guidance that the following investments will either trigger a mandatory requirement to notify FIRB or will be on their radar for exercising the call-in power, in which case they encourage voluntary notification:

Mandatory Notification Voluntary Notification
A foreign person must seek foreign investment approval prior to starting a business, or acquiring a direct interest in an entity that owns or operates a:

  • network, system or interconnector for the transmission or distribution of electricity to ultimately service at least 100,000 customers; or
  • an electricity generation station that is critical to ensuring the security and reliability of electricity networks or electricity systems (this includes synchronous generators above relevant jurisdictional capacity thresholds and generators contracted to provide system restart services).

The relevant capacity thresholds are New South Wales (1,400 megawatts (MW)), Victoria (1,200MW), Queensland (1,300MW), Western Australia (600MW); South Australia (600MW), Tasmania (700MW) and the Northern Territory (300MW).

Foreign persons proposing to invest in a business or entity that owns or operates an electricity generation station (including storage) with a generation capacity of at least 50MW (and which is not covered by the mandatory notification requirements) are encouraged to seek foreign investment approval.

Foreign persons proposing to invest in an energy retailer (gas or electricity) where the foreign person would subsequently hold interests in energy retailers with more than 100,000 customers are also encouraged to seek foreign investment approval.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.