Unravelling decommissioning liabilities and security obligations for renewable energy infrastructure assets

Decommissioning of infrastructure is a fundamental stage of any renewable energy project. In reality, the operational life of a wind or solar farm can be anywhere from 30 to 60 years, and potentially decades longer for intensive hydroelectric assets. After this time, the renewable energy developer is generally bound to decommission the infrastructure and restore the land back to its original condition or into a state that is appropriate for a future land use.

Decommissioning plans are now increasingly required by planning approval conditions and are commonly prepared in accordance with lease agreements for wind, hydroelectric, and solar projects. This presents complexities for developers and landholders requiring early consideration of their position on the decommissioning of assets, well before the infrastructure is even approved or constructed.

Emerging guidelines

In January 2023, the Australian Energy and Infrastructure Commissioner (AEIC) released a guideline recommending matters to be addressed in lease agreements for renewable energy infrastructure. In June 2023, the Queensland Farmers Federation also published a Landholder Toolkit for Renewable Energy ensuring farmers are informed of these important issues.

With respect to decommissioning obligations, both documents recommend that landholders:

• endorse decommissioning plans;
• be provided with detailed estimates of decommissioning costs; and
• secure decommissioning obligations by way of a bank guarantee, bond or trust funds.

At this stage, despite there being no legislative requirement for decommissioning bonds to be held by the States and Territories, we are seeing landholders increasingly seeking evidence that the developer has budgeted for decommissioning activity and that funds be set aside for this purpose. These expectations should be set out clearly within the lease documents between the landholder and the developers.

So what will it cost, exactly?

Reported budgeting costs to fully decommission and rehabilitate a renewables project in Australia widely vary. In January 2023, the AEIC indicated that current projections under some published decommissioning plans specify costs between AUD400,000 and AUD600,000 to safely decommission one wind turbine. More moderate estimates consider salvage and resale value of the turbines.

Budgeting for decommissioning costs can be complex for a few reasons:

• Rapidly evolving renewable technologies make it difficult to predict what specific technology or equipment will be in use in the future, making it challenging to accurately estimate costs.
• Asset-specific attributes also require consideration – each wind turbine, solar panel, or energy storage systems having diverse designs, materials and lifespans which will have their own decommissioning techniques, disposal methods and associated costs for consideration.
• The regulatory framework governing remediation and waste management is a developing landscape and may impose additional standards, leading to increased costs compared to the current environment.
• Financial projections over a long period of time need to consider inflation and cost escalation.

Quantifying these costs is an ongoing process that must be incorporated into the planning frameworks towards the end of a project’s life. From the developer’s perspective, it is essential to regularly review and update decommissioning budget estimates based on the latest industry knowledge, evaluating against potential risks and uncertainties, and seek expert advice for realistic financial planning.

How is this currently being addressed?

In the interim, we have seen many proponents of renewable energy projects disclose their approved decommissioning plans to landholders within leasehold documents for transparency.

With landholders becoming more familiar with the intricacies involved in renewable energy projects, it is commonplace for landholders to seek financial assurance for decommissioning, typically equal to the estimated decommissioning cost, less resale value. This can take the form of a bank guarantee, cash deposit into an escrow investment account, or parent company guarantee in favour of the landholder.

It has been argued that developers should provide funding security for the decommissioning activities earlier (even as early as the start of operations) to reduce landholders’ risks. While it is important for landholders to not be burdened with the cost of restoring the land and dealing with assets over which they have no authority or ownership, there are several issues with this approach from the developer’s perspective:

• financial burden and opportunity cost: fronting up a decommissioning bond poses as an efficient inefficient financial burden for the developer who could better apply those funds for other operational expenses or development activities;
• coverage of manufacturer and supplier warranties: generally, warranties for turbines are commonly provided for a period of 5-10 years with extended warranty options for an additional premium. Solar panels warranties span even longer at 10-25 five years. During this period, the risk of exposure to decommissioning costs is low since those costs will often be covered by the relevant supplier. Of course, this means that the provision of bonding or other security for those same decommissioning costs would provide, in effect, an inefficient duplication in providing landholders protection against exposure to decommissioning risk; and
• depreciation: if we consider the potential for the infrastructure to be resold after disassembly (either for reuse or scrap), the value of the assets would fetch a higher price at the beginning of the project as opposed to the end.

In a number of cases it is a far more appropriate allocation of risk to require a decommissioning bond towards the tail-end of the lease term, or through a staged instalment process, cognisant of declining value of the infrastructure to be decommissioned.

Decommissioning costs should be as accurate as possible and assessed at the time the decommissioning bond is to be provided. Our experience has been that the developers would provide an initial assessment of the amount required a few months before the decommissioning bond is handed over, usually on an independent valuation basis and considering the salvage and resale value of the materials. If necessary, there should then be a mechanism for the landholder to contest this amount via the dispute resolution process within the documents.

Nevertheless, the developer should still be responsible for fulfilling their decommissioning obligations. Alternative mechanisms such as reliance on insurance policies, remediation rent, reserve funds, or periodic assessments, can be used to ensure compliance with decommissioning requirements.

Decommissioning obligations in legislation

Australia

To date, no State or Territory Government has introduced legislation requiring renewable energy proponents to provide a security bond to cover the future decommissioning costs of a project. This contrasts with specific legislation that applies to the mining industry, requiring mining companies to provide governments with a financial assurance which reflects a mine’s rehabilitation liability.

While there is no specific statutory obligation to provide security to a State or Territory Government, local council or a landholder, most council authorities still have broad powers to impose planning approval conditions requiring decommissioning works to be undertaken and a financial assurance to be provided to meet the cost of these decommissioning obligations.

Irrespective of commitments imposed on a developer under planning approval conditions or lease arrangements, there is a growing trend in Australia for waste and resource recovery legislation to mandate the recycling on decommission components.

Internationally

The renewable energy industry is more advanced overseas and consequently international markets have taken more proactive steps to protect the respective Government’s from the cost of decommissioning and waste created by the renewables industry.

In the United Kingdom, the Energy Act 2004 (UK) contains the decommissioning scheme for offshore wind and marine energy installations. The legislation gives extensive powers to the Secretary of State to request information from developers at the approval stage of renewable projects. The statutory regime strengthens the obligations on parent companies associated with offshore renewable projects with a focus on securing decommissioning funding beyond insolvency of the developer.

Italy is the home of some of the greatest per capita solar energy generation in the world. Sensibly, the Italian government has introduced specific legislative obligations for the decommissioning of solar projects. Legislative Decree No. 49 of 14 March 2014 sets out the decommissioning obligations for solar projects, specifically, the disposal of electrical waste and electronic equipment*. The developers of solar assets are obliged to provide the local region where the renewable project is located, with a first demand bank guarantee for the removal and rehabilitation of the site at the end of the contract term.

Where to from here?

Going forward, we anticipate that greater scrutiny will be placed on decommissioning security for renewables projects from their inception. This may result in legislative reform requiring decommissioning security to be provided by the developer directly to a third party authority, similar to the mining industry.

Renewable energy developers should anticipate being either required or encouraged by instruments of legislation, or as part of their general environmental duty, to provide a decommissioning bond during the project life. Already, there are calls within the NSW Upper House for the State to consider rehabilitation bonds for solar farms. We can already see this being reflected in the offshore market where the Offshore Electricity Infrastructure framework requires licence holders to provide financial security to cover decommissioning and other costs.

Decommissioning bonds are expected to reflect the amount it would cost a third party to decommission all infrastructure and rehabilitate the land should the licence holder fail to meet its decommissioning obligations either in contract, pursuant to the development approval, or under a future legislative instrument. Incorporating transitional provisions into current agreements is a strategy being pursued by some developers already. For example, developers should consider building into their landholder agreements the requirement for the private bond to be waived where a bond will need to be held by the government.

We expect to see an increased public and private pressure for renewable energy developers and landholders to manage their pathway towards decommissioning in a more sustainable way. This planning will become more important at the front-end of the renewable energy project and be driven by both landholders and overarching legislative obligations, as the feasibility and practicality of potentially significant financial conditions continues to be balanced.

This is an article from our 2024 Edition of Emerging Issues for the Australian Energy and Resources Industry. To read more from this publication, click here.