Michael Vertigan to Chair Energy Security Council

The Gillard Government has appointed Dr Michael Vertigan AC as Chair of the Energy Security Council to advise on measures to ensure the security of energy supply during the transition to a clean energy future.

Dr Vertigan is uniquely qualified to advise on applications for financial assistance by energy market participants given his experience across the energy, financial services and government sectors. He is currently a Director of Aurora Energy Pty Ltd, Chair of diversified financial group MyState Limited, and Chair of the Solar Flagships Council.

He was also previously a Director of Eraring Energy, Chair of the Basslink Development Board, Chair of AGEST Superannuation Fund, Director of ASX Supervisory Review Pty Ltd, and Secretary of the Department of the Treasury and Finance in both Victoria and Tasmania.

The Government announced the establishment of the Council as part of the Clean Energy Future package to advise on support measures to address energy security risks, and the Government has today also released the Charter of the Council that will guide its work. In particular, the Council will assess applications for financial assistance in the form of:

• loans for generators that need to refinance their debt if finance on reasonable commercial terms is not otherwise available, and
• loans or other assistance to seek to address systemic risk to energy security in the event of financial distress on the part of an energy market participant.

The Council will provide advice to the Government about maintaining energy security with the least distortion to markets and consistent with responsible fiscal policy.

While recognising the role of state and territory governments and existing energy market institutions, the Council will also undertake more general functions including contingency planning, assisting with crisis management by providing a forum for co-ordinated action, and considering trends in energy markets which are likely to lead to systemic risks to energy security.

Membership of the Council will also include the Chairs of the Australian Energy Market Commission, the Australian Energy Regulator, the Australian Securities and Investments Commission, as well as and experts from business, public finance, insolvency and the Australian energy market. The Government intends to appoint remaining members of the Council in coming weeks.

The Council is an important part of the Government's plan to transition our economy to a clean energy future with secure energy supply for all Australians.

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Charter of the Energy Security Council

Introduction

1. The Energy Security Council ("the Council") was announced by the Prime Minister on 10 July 2011 in her media release entitled "Transforming Australia's electricity generation sector".

Purpose

2. The Council's purpose is to provide assurance and advice to the Treasurer in the event that systemic risks to energy security^[1] emerge from financial impairment arising from any source, including from the introduction of carbon pricing, notwithstanding the specific measures included in the Clean Energy Package. The aim of this mechanism is to provide assurance that energy supply security will be maintained during the transition to a clean energy future and to help manage any residual energy security concerns.
3. The Council will advise the Treasurer about applications for financial assistance referred to in clause 4 and facilitate co-operation and collaboration between the Australian Energy Regulator, the Australian Energy Market Commission, the Australian Energy Market Operator and the Australian Securities and Investments Commission^[2]. The Council will not have regulatory powers and will not supersede the roles of the relevant agencies.
4. More specifically, the Council:
   • Will assess applications for assistance and provide advice to the Treasurer on whether financial assistance should be provided in response to those applications. In brief, the categories of applications are for:
     1. loans for generator owners which need to refinance their debt if finance on reasonable commercial terms is not otherwise available in the circumstances referred to below; and
     2. loans or other assistance to seek to address systemic risk to energy security in light of the financial distress of an energy market participant.
   • Has more general functions including:
     • in relation to contingency planning,
     • assisting with crisis management by providing a forum for coordinated action, and
     • considering trends in energy markets which are likely to lead to systemic risks to energy security.

   These functions are explained in more detail in clauses 14 to 24 below.

5. While the Council will advise the Treasurer, it will be for the Treasurer, following consultation with the Minister for Resources and Energy, to decide whether any loan or other financial assistance will be provided in response to the categories of application referred to above, and the terms and conditions that are to apply to any assistance.
6. Any recommendations for government action under this charter will seek the best outcome at the least cost to the taxpayer and with the least distortion to markets. It is desirable that, in the case of Category A applications, all existing management and all existing investors (including lenders and equity holders) in the business be exposed to incentives to find a commercial solution to the situation.
7. It is expected that market participants will approach the Government with their financial difficulties in a timely fashion (before they are in severe financial distress). In addition, the Council is expected to respond as expeditiously as possible when issues for their consideration arise.
8. One objective of the introduction of a price on carbon is to transform the energy sector. This means that some generators will cease to operate earlier than without this reform. It is not the role of the Council to recommend Category B support for unviable generators unless it forms the view that temporary assistance is necessary to address systemic risk to energy security. The mechanism should ensure that incentives to reduce emissions, including through the timely closure of emissions intensive generation, are maintained.
9. The Council and any possible actions are transitional in nature.

Membership

10. The Council's membership will include the Chairs of the Australian Energy Market Commission, the Australian Energy Regulator and the Australian Securities and Investments Commission, and experts from the fields of business, public finance, insolvency and the Australian energy market.
11. Members of the Council will be part-time and meet as required. However, in the establishment phase of the Council, regular scheduled meetings are likely to be necessary.
12. The Chair will be appointed by the Treasurer from amongst the members. Members will be appointed for three years, and may be reappointed. However, the ongoing need for the Council will be the subject of a review – see clause 36.
13. Where there is an Acting Chair of the Australian Energy Market Commission, the Australian Energy Regulator or the Australian Securities and Investments Commission, then that person is a member of the Council and is taken to be the Chair of their respective organisation for the purposes of this Charter.

Functions - applications

Category A

14. In response to applications for a loan in relation to refinancing, the Council will advise the Treasurer in a timely manner on whether the loan should be provided, and the terms and conditions of the loan (including the interest rate) but may only recommend the provision of a loan if it is satisfied that:
    • it has considered an assessment of the relevant entity's financial situation and all relevant evidence in support of the applicant's claims;
    • finance from the commercial market is not available on reasonable terms^[3] and the applicant is therefore unable to refinance its debt;
    • the relevant generator has an emissions intensity that exceeds 0.80 tCO2-e/MWh^[4]; and
    • the applicant has demonstrated that it can repay the loan and interest on the terms proposed.
15. The Council will have a discretion to, among other things:
    • determine whether the assessment of the relevant entity's financial situation which has been provided is sufficiently detailed and of a sufficient standard; and
    • ask the applicant to arrange an assessment by an independent, professional source.
16. Before making a recommendation to the Treasurer, the Council must seek the views of the Australian Energy Market Operator or the Independent Market Operator of Western Australia (if applicable) about the likelihood of systemic risk to energy security if the Commonwealth does not assist the applicant.
17. In making a recommendation about an application for a loan in response to a Category A application, the Council must indicate whether it is of the view that there is a significant possibility that, if the Commonwealth does not assist the applicant, the situation will lead to a systemic risk to energy security, whether in the short term or in the longer term. This is not a prerequisite or test before a loan for refinancing will be considered but is one of a number of relevant matters for the Treasurer to consider.
18. Such loans will only be available during the three years commencing on the date that the carbon price legislation is passed. However, the Government is expected to undertake further consultation with industry as required to inform whether action is necessary to address concerns arising prior to this date. Applications received prior to this date may be considered by the Council.
19. If it recommends a loan in response to a Category A application, the Council must recommend:
    • an interest rate that is at a premium above a benchmark industry rate, set with regard to the credit risk of the applicant, the security offered and other relevant factors;
    • the other terms and conditions, including the period over which the loan is to be made, (not more favourable than would be offered commercially) on which it considers that the loan should be made; and
    • entry, management and exit strategies as appropriate.

Category B

20. In response to applications for assistance, the Council will advise the Treasurer in a timely manner of possible actions to address the risk to energy security and may only recommend financial assistance if it is satisfied that:
    • it has received and considered a detailed, high quality assessment of the relevant entity's financial situation (ideally from an independent source) and all relevant evidence in support of the applicant's claims;
    • there is a significant possibility that, if the Commonwealth does not assist the applicant, the situation will lead to a systemic risk to energy security, whether in the short term or in the longer term;
    • the operation of an energy market, the relevant agencies and/or regulatory mechanisms, such as the reserve trader mechanism and directions powers, are unlikely to be effective in mitigating the threat; and
    • relevant parties have taken all reasonable steps to avoid risks to energy supply arising, including steps to mitigate such risks.
21. Before making a recommendation to the Treasurer, the Council must seek the views of the Australian Energy Market Operator or the Independent Market Operator of Western Australia (if applicable) about the likelihood of risk to energy security if the Commonwealth does not assist the applicant.
22. The Council may consider a range of assistance mechanisms which could include, but is not limited to, government loans (either on commercial terms or concessional terms) or other assistance options including loan guarantees and equity injections.
23. If it recommends assistance in response to a Category B application, the Council should:
    • describe the need for, quantum and specific form of assistance and other terms and conditions that should be placed on it including the interest rates and/or fees payable to the Government for the assistance;
    • identify entry, management and exit strategies as appropriate; and
    • if the financial assistance relates to a generator, ensure that the assistance does not result in a power station being in operation significantly beyond the date it was expected to close under a carbon price, unless this is necessary to address systemic risk to energy security.

Functions – other

24. The Council is expected to work with the relevant agencies to:
    • provide assurance that  contingency planning has been or is being undertaken by those agencies, including:
      • considering actual or potential systemic threats to energy security that may arise from financial impairment; and
      • investigating possible mechanisms and ensuring the existence of appropriate processes and co-ordination arrangements for responding to these risks;
    • participate in that contingency planning to the extent that it relates to the functions of the Energy Security Council and undertake its own planning as appropriate for, for example, handling applications for assistance;
    • assist with crisis management by providing a forum as necessary (including the views of the relevant states and territories) for coordinated action in the event of a real threat to energy security, which involves or is likely to involve an application for assistance;
    • consider important issues and trends in the energy market that are likely to lead to risks in energy security drawing, where appropriate, from existing work of the relevant agencies and through consultation with the Standing Council on Energy and Resources;
    • and advise the Treasurer about significant relevant issues which are encountered in the course of this work.

Process

25. Category A applications can be made by eligible coal-fired generators to the Energy Security Council (for decision by the Treasurer).
26. Category B applications are expected to be made by the energy market participant in financial difficulties or its external administrator to the Energy Security Council (for decision by the Treasurer).
27. In both cases, the Council will seek information from applicants as necessary to formulate its advice to the Treasurer. The Council may recommend to the Treasurer that a request for assistance be rejected if, in the Council's view, the applicant fails to provide adequate information.
28. Any information provided in confidence in an application or subsequent correspondence will be treated as commercial in confidence and stored securely by the Commonwealth. Information may be shared on a confidential basis with the relevant Commonwealth, State/Territory departments and agencies (including relevant agencies), to the extent necessary for the performance of the functions of the Council, or relevant department or agency in accordance with the purposes envisaged in this charter. All documents held by the Commonwealth will be subject to the Freedom of Information Act 1982 and any other applicable laws.
29. The Council will establish its own procedure for handling applications and meeting schedule, subject to the ordinary processes of the Australian Government. It may publish guidance notes for information.
30. The Council may provide interim advice to the Treasurer and the Treasurer may seek interim advice. In addition, the Treasurer may ask the Council to provide its advice by a specified date.

Relationship with existing rules and other bodies; consultation

31. The rules for the operation of the National Electricity Market (NEM) and the South West Interconnected System (SWIS) provide for procedures to manage major electricity reliability and security of supply issues. As far as practicable, those procedures should be allowed to operate to deal with major electricity reliability and security of supply issues. The States/Territories also have emergency powers and these should be allowed to operate as far as practicable.
32. The role of this Council is to complement and not supersede the existing NEM and SWIS powers and agencies. These agencies include:
    • the Australian Energy Market Commission;
    • the Australian Energy Regulator;
    • the Australian Energy Market Operator;
    • State and Territory agencies such as the Independent Market Operator in Western Australia; and
    • the Australian Securities and Investments Commission.
33. The Council will consult with:
    • the Chief Executive Officer and Managing Director of the Australian Energy Market Operator or the Independent Market Operator in Western Australia (as appropriate);
    • relevant Commonwealth and State/Territory agencies.
      • The cooperation of State/Territory agencies would be needed to achieve the planning and crisis management proposed, including where the Commonwealth is providing assistance.
      • The Council's advice will recognise the States' and Territories' role in energy security and existing emergency response mechanisms.
34. The Council may also consult other relevant bodies, such as the Australian Financial Markets Association and the Australian Securities Exchange.

Information requirements and working arrangements with relevant agencies

35. Further to the information sought from applicants under the measures detailed above, a priority for the Council upon its establishment will be to assess the information it requires and the extent to which relevant agencies are equipped to provide it, and (if there is an information gap) to suggest ways this information can be obtained. The Council will also establish appropriate working arrangements (possibly including memoranda of understanding) with relevant agencies.

Review

36. The ongoing need for the Council will be assessed in a review to be completed no later than 1 July 2014. This review will have regard to, among other things, the outcome of the AEMC Major Events Review and progress towards transitioning to a low carbon electricity sector.

Secretariat; consultants

37. Secretariat functions will be provided by Treasury officers, with the option of engaging secondees from relevant departments, agencies and/or regulatory bodies.
38. Treasury, on behalf of the Council, may also engage external consultants.

Media engagement and confidentiality

39. The Chair is the only spokesman for the Council, unless the Chair delegates the responsibility to other members.
40. Under the terms of the signed confidentiality acknowledgement, members are required to respect the confidential nature of the information provided in the course of being a member of the Council. The Chairs of the Australian Energy Market Commission, the Australian Securities and Investments Commission and the Australian Energy Regulator may disclose information within their organisation, subject to having arrangements for the disclosure and use of that information established to the satisfaction of the Chair of the Energy Security Council.
41. Council members are required to exercise discretion and not represent the Council or disclose any Council matters to another person without the prior approval of the Chair.
42. The Treasurer will be responsible for communicating to the public, if appropriate, the advice received from the Council and the decision made in response to that advice.

Conflicts of interest

43. A Council member who has a material personal interest in any matter before the Council must disclose that interest to the Council and absent themselves from any consideration of the matter (including the making of a decision), unless otherwise determined by the Chair (or, if the Chair has the interest, the other members of the Council).

Other matters

44. The Council will report annually to the Treasurer on its operations.

Contact details:

Energy Security Council Secretariat
c/- Infrastructure, Competition and Consumer Division
Department of the Treasury
Langton Crescent
PARKES ACT 2600
Telephone: (02) 6263 2111
Email: ESCsecretariat@treasury.gov.au

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[1] The term 'energy' is used in this document to refer to electricity. The term 'energy security' is used in this document to refer to uninterrupted physical availability of energy (subject to normal scheduled outages and allowances for unscheduled outages). The effect of financial distress of a participant in the energy spot or derivatives markets may constitute a threat to energy security. The term 'systemic risk' is used to refer to significant risks with implications for the electricity system, whether the risk to energy security is immediate (eg the failure of a significant generator connected to the grid) or through a 'knock-on' effect. An assessment of systemic risk will need to take account of the use of financial instruments by electricity market participants.

[2] Referred to as the relevant agencies.

[3] What are 'reasonable terms' needs to be assessed as at the time of consideration of the relevant application. It would take into account the credit risk of the applicant, the security offered and other relevant factors. The mechanism is not intended to substitute for private sector financing if that is available, even if it is at a price that the generator finds unattractive.

[4] The emissions intensity is to be calculated on an 'as generated' basis over the period 1 July 2008 to 30 June 2010.