In brief 11 min read
On 21 April 2021, the PNG Parliament passed the National Energy Authority Act 2020 (NEA Act) and the Electricity Industry (Amendment) Act 2020 (Amending Act) (together the Acts).
The Acts will both commence operation in accordance with notices published in the National Gazettes. Once the Acts commence operation, they will provide for the establishment of the National Energy Authority (the Authority), which will be responsible for the regulation of the electricity supply industry in PNG, including the technical and economic regulation of the industry.
In this Insight we examine the changes made and assess their likely impact on the energy industry.
The changes to be made by these Acts appear to be directed towards the activities of independent power producers, particularly the holders of generation licences.
Once the Acts come into operation:
- the Authority will assume the economic regulatory functions of the Independent Consumer and Competition Commission (the ICCC), although the split in roles is not entirely clear;
- Licences issued under the Electricity Industry Act (Ch. 78) (EI Act) and the Independent Consumer and Competition Commission Act 2002 (ICCC Act) are preserved under the NEA Act, although there do not appear to be any grandfathering clauses;
- the Authority will have the ability to charge levies and fees, including levies on generation licences;
- the Authority will also have the power to 'take over' the operations of the power producers where there is a breach of licence conditions;
- new National Content provisions will apply to licensees; and
- the Authority will have the power and responsibility to obtain, and regulate the use of, gas provided by gas producers, in satisfaction of domestic market obligations.
The EI Act, together with the ICCC Act, regulates the generation, sale and supply of electricity.
The Electricity Supply Industry is defined as the industry involved in the generation, transmission, distribution, supply and sale of electricity or other operations of a prescribed kind. The Electricity Supply Industry in PNG is a regulated industry.
Under the ICCC Act, the relevant Minister has the power to declare an entity a 'regulated entity' where that entity is capable of providing goods or services in a regulated industry.
The Minister may also declare any goods or services supplied, or capable of being supplied, by a regulated entity to be regulated goods or regulated services. The following services have therefore been declared as 'regulated services':
- the supply and sale of electricity;
- excluded services; and
- scheduled services.
The relevant Minister may issue a regulatory contract applying to a regulated entity in relation to the supply of regulated goods and regulated services and related matters as specified in the regulatory contract for a term of up to 10 years. The Minister may only exercise this power one time in relation to a regulated entity. The ICCC has the job of reviewing and issuing further regulatory contracts with a regulated entity.
PNG Power Limited has been declared a regulated entity and, as such, has a regulatory contract in place with the ICCC for the provision of electricity in PNG.
It is an offence under the EI Act for a person or firm to carry out operations in the electricity supply industry without a licence.
The operations in the electricity supply industry for which a licence is required include:
- the generation of electricity;
- the operation of a transmission network;
- the operation of a distribution network; and
- the retailing of electricity.
The ICCC is currently the regulator of the electricity industry in PNG and applications may be made to it for the issuance of any of the above licences.
Codes and rules
The ICCC may make codes or rules relating to the conduct or operations of a participant in a regulated industry. To that end, the ICCC has issued:
- The Electricity Code;
- The Third Party Access Code; and
- The Grid Code.
What will change?
Upon commencement of the Acts, licencing and regulation of the electricity supply industry for independent power producers is expected to change, although the process for issuance of regulatory contracts will remain the same.
Technical and economic regulation of the electricity supply industry as it relates to independent power producers, including energy planning, price surveillance and tariff setting is also expected to change, and new national content obligations will apply in respect of new power projects.
The NEA Act was passed to regulate the energy industry through the establishment of the Authority. It appears that the Authority will take up functions from the ICCC, the Energy Wing of the former Department of Petroleum and Energy and some of the technical and safety powers of the ICCC, which we understand are currently undertaken by PNG Power Limited.
Key responsibilities of the Authority will include:
- recommending electricity and energy regulations, codes and guidelines;
- reviewing and implementing the National Energy Policy 2017-2027;
- implementing the National Electrification Roll-Out Plan.
- regulating regulated industries, including the electricity supply industry;
- fixing standard terms and conditions for the sale or supply of electricity, including the service of making connections to a transmission or distribution network by the electricity undertaker;
- establishing a tariff system for the electricity and energy supply industry;
- receiving and administering the domestic market obligation gas under the Act; and
- issuing and monitoring licences of electricity entities and undertakers.
The Deputy Secretary responsible for the Energy Wing of the former Department of Petroleum and Energy will act as the Interim Managing Director until the appointment of a Managing Director under the new Act. Also, employees from the Energy Wing of the former Petroleum Department will be deemed to be employees of the Authority when the Act comes into force.
Similar to the existing definition under the EI Act, under the NEA Act the electricity supply industry means the industry involved in the generation, transmission, distribution, supply and sale of electricity or other operations of a prescribed kind.
It will be an offence under the NEA Act for a person or firm to carry out operations in the electricity supply industry without a licence.
A licence may be granted subject to extensive licence conditions as contained in the NEA Act and it will also be an offence for a person to carry out operations in contravention of its licence. Persons found guilty of either offence will be liable to a fine of up to K10 million.
The Authority may take over part or all of the electricity undertakers operations where the Electricity undertakers licence is suspended because of a breach of a condition of the licence or a provision of the Act and where the Authority considers it necessary to do so to ensure the adequate supply of electricity to customers. While the ICCC already has the ability to take over an electricity undertaker's operations, the licencing conditions and therefore the potential for breach, are not as broad as provided in the NEA Act and discussed further below.
It appears that previous licences issued by the ICCC under the EI Act will be preserved under NEA Act, although there do not appear to be any grandfathering clauses or savings or transitional provisions.
The NEA Act instead provides that the rights granted to licensees by the ICCC before commencement of the NEA Act will be protected in the following manner:
- the provisions of the NEA Act and anything done pursuant to it will not limit the rights of a holder of a licence issued or granted pursuant to the ICCC Act; and
- an existing licence issued or granted under the ICCC Act may be renewed, but a license shall not be issued or granted based on a new application under that Act conferring the same rights as a license issued or granted under the NEA Act.
The above provisions do not make reference to licences granted under the EI Act, nevertheless, we assume the intention of the above provisions is to preserve the licences and rights of current licensees holding those licenses issued by the ICCC under the EI Act. This view is supported in the second reading speech of the National Energy Authority Bill, as it then was (the Second Reading Speech), which was read out by the Honourable Saki Soloma, the current Minister for Energy and Rural Infrastructure (the Minister). The Minister noted in the Second Reading Speech that current licence holders would need to seek extension of their licences under the new licensing system when their licences expire.
The NEA Act provides that regulations may contain provisions of a saving or transitional nature consequent on the enactment of the NEA Act, and if the regulations grant an exemption from the requirement to hold a license under Part III, Division 1, the regulations may require a person exempted from the requirement to be treated as an electricity undertaker for the purposes of specified provisions of the NEA Act.
Ordinarily we would expect such transitional provisions to be contained within the Act itself and there is no indication of the timing for the making of the above-mentioned regulations.
Fees, levies and charges
Licence fees have been revised and annual fees of between K10,000 and K500,000 will now apply depending on the installed capacity of the holder of the generation licence.
In addition to the above fees, the holder of a generation licence must also pay, on a quarterly basis, a levy for administration of the NEA Act computed at K0.009 per kilowatt hour (kWh) of energy generated and transmitted.
The Authority may require a person by notice to pay the above fee.
The Authority may also require a person to pay any other administration fee, levy or charge required by the NEA Act or prescribed by regulation within a specified time.
Under the new National Content provision of the NEA Act, licensees are required to (among other things):
- conduct proper landowner identification studies;
- pay direct royalties of up to 5% based on gross annual revenue to landowners having land rights within a one-kilometre radius of the project facilities; and
- make available an equity benefit option of up to 20% which may be acquired by the government (national, provincial and local level) and landowners in the following proportions:
- National Government – 10%
- Provincial and Local level Government – 5%
- Landowners – 5%
Furthermore, licences issued under the NEA Act will be granted subject to the following additional conditions:
- Employment, training and localisation - to provide employment, training and localisation for Papua New Guineans, and priority to be given to local people affected by the project;
- Business development - to provide business development opportunities for Papua New Guineans, and priority to be given to local people affected by the project, where opportunities may be in the form of sub-contracts, security services, catering services, transport services, camp construction, building maintenance contracts, office supplies and food supplies; and
- Community development - to provide community development assistance to local people affected by the project, including community roads, bridges, schools, scholarships for local students, power supply connections to villages and charging subsidised rates.
The NEA Act does not expressly state that the National Content obligations and other licencing requirements under the NEA Act will only apply to new Licences issued under the NEA Act. However, we have assumed that as previous licences issued by the ICCC under the EI Act will be preserved under NEA Act, such licences will not be subject to the new National Content obligations. This view is further supported by statements made by the Minister in the Second Reading Speech where the Minister said he would start organising national content forums for new projects before commencement of construction.
It is also not clear how these new requirements may affect tenements obtained by mining and oil and gas companies, for transmission and distribution lines supplying power to their projects.
Domestic market obligation
Under the NEA Act the Authority will be the sole regulatory body responsible for 'domestic market obligation gas'. The Authority:
- will, subject to the approval of the Oil and Gas Minister, receive the volume of domestic market obligation gas requested by it annually for utilisation by the electricity supply industry;
- regulate the licencing of gas secured by agreement with gas producing projects under the domestic market obligation requirements of the Oil and Gas Act 1998 or under a Gas Agreement or a Petroleum Agreement;
- allocate domestic market obligation gas to operating gas-based electricity projects in accordance with guidelines prescribed by Regulation;
- in consultation with the Department of Petroleum, regulate gas utilisation for power generation, including safety standards for off-take of gas from producers; transportation of gas to electricity project sites; storage, usage and environmental considerations for utilisation of gas; and
- regulate the storage, distribution and usage of liquefied petroleum gas (LPG).
It appears from the provisions of the NEA Act that 'domestic market obligation gas' refers to gas secured by the PNG Government by agreement with gas-producing projects under the domestic market obligation requirements of the Oil and Gas Act 1998. We assume that these provisions and any new licensing requirements will not affect existing gas-fired power stations, although that remains to be seen as the Second Reading Speech does not contain any references to domestic market obligation gas.
The Electricity (Industry)(Amendment) Act 2020 will, upon its commencement, amend the EI Act by repealing the list of functions of the ICCC, as well as parts of the EI Act relating to land access and ownership of transmission lines, safety and technical requirements and offences. However, none of Part IIIB of the EI Act, which deals with licensing by the ICCC of participants in the Electricity Industry, will be repealed. Thus the electricity supply industry will remain a regulated industry for the purposes of the ICCC Act, but will also be a regulated industry under the NEA Act, and both acts contain licensing requirements for participants in the electricity supply industry
Concerningly, some of the sections of the EI Act that will be repealed provide statutory easements for existing licence holders, as well as protections from removal or tampering with existing electricity infrastructure.
While the NEA Act contains statutory easements identical to the repealed provisions of the EI Act, those protections will now only apply in respect of electricity undertakers licenced under the NEA Act and will to be available to existing licence holders.
There are numerous errors in provisions of the NEA Act and some sections where the same provisions appear more than once. These apparent typographical errors may be corrected before the final form of the Act is certified. What is not clear is the way in which the more problematic changes, such as the duplicated licensing functions of the ICCC and the Authority as well as the removal of the statutory protections provided under the EI Act, will be addressed.
We will keep track of the progress of the new Acts and keep you up to date with any significant developments, including their commencement.
In the meantime, if you'd like to discuss this development, please contact any of the people below.