Background

1.1 Electricity generation is a major source of greenhouse gas emissions, accounting for around 35 per cent of Australia’s national emissions in 2016.⁵ Burning fossil fuels such as coal, natural gas and oil, including to produce electricity, releases carbon dioxide (CO2) and other greenhouse gases into the atmosphere. In order to support the development of greenhouse gas emission reduction technology, the Australian Government is funding the research and development of technologies under a suite of a Low Emission Technologies for Fossil Fuels (LETFF) programs that would:

• reduce the amount of CO2 generated by burning fossil fuels;
• provide for greater capture of CO2 released during the combustion process;
• support low emissions coal technology deployment over time to enhance energy security and coal’s contribution to Australia’s economic growth; and
• explore options to store CO2, including through geosequestration.⁶

1.2 LETFF technologies comprise those technologies or processes that could result in a measurable reduction in greenhouse gas emissions, either through carbon capture, avoidance or by substantially improving efficiency. Carbon Capture and Storage (CCS) is one type of low emissions technology. CCS is the process of isolating CO2 from stationary emission sources such as power stations, industrial facilities, or natural gas production and injecting it deep underground into suitable geological formations.⁷

Key policy changes

1.3 The Australian Government’s commitment to fund research and development of low emissions technologies for fossil fuels occurred within a broader suite of energy policies and reforms, aimed at reducing CO2 emissions and promoting the development and take-up of renewable energy sources. Policy changes over the last decade are likely to have affected the operation of LETFF programs. Table 1.1 outlines some of these key policy changes.

Table 1.1: Key Australian Government policy changes relating to low emission technologies

Note a: This legislation was first introduced into parliament in May 2009.

Note b: The Paris Agreement builds on the Kyoto Protocol. Under the Agreement, all signatory countries are required to put forward emission reduction targets every five years to contribute to the international effort to limit the global temperature rise from pre-industrial levels to two degrees or less. This agreement was ratified in November 2016.

Source: ANAO analysis of departmental and publicly available information.

Low emission coal technologies initiatives

1.4 The National Low Emission Coal Council (NLECC) was established by the Australian Government in July 2008 with the purpose of bringing together key stakeholders to develop and implement a national low emissions coal strategy and a national program for low emission coal research and development. Specifically, the NLECC was tasked to: address the goal of ensuring that low emissions technologies for coal, including CCS, are demonstrated at a commercial scale from 2015; are available for commercial deployment by 2020 and; are deployed as they become commercially available. The NLECC also initially proposed eligibility and selection criteria for a large-scale CCS program in its January 2009 Interim National Strategy Report and provided advice to the Minister for Resources and Energy on the technological priorities for demonstration in Australia. In developing the eligibility and selection criteria, the NLECC considered the technological priorities for Australia and the scale and cost challenges for CCS demonstration projects.

National Low Emissions Coal Initiative program (NLECI)

1.5 The NLECI program was announced as a $500 million election commitment in November 2007, to contribute to the Government’s goal of reducing Australia’s greenhouse gas emissions. The program was established in the 2008 Federal Budget, and aims to help accelerate the development and deployment of low emission technologies and CO2 transport and storage infrastructure.⁸ NLECI included specific funding commitments of:

• $50 million for a pilot coal gasification plant in Queensland;
• $50 million for a post combustion capture demonstration project to be retro-fitted to an existing brown coal fired power station in Victoria’s Latrobe Valley;
• $50 million towards a $150 million demonstration project that involves CO2 geological storage assessments and a retrofit of a post combustion power plant on an existing coal fired power station in New South Wales that would capture in excess of 50,000 tonnes of CO2 per annum;
• $75 million for a national research program to develop clean coal and related low emission technologies; and
• $50 million towards a National Carbon Mapping and Infrastructure Plan to identify large scale geological storage sites for carbon dioxide.

1.6 These commitments were the main components of the NLECI program. The remaining $225 million in funding was to be allocated to other projects that supported the program objective of accelerating the development and deployment of low emissions technologies and CO2 transport and storage infrastructure. The projects undertaken to support these commitments and other NLECI projects are shown in Figure 1.1.

Figure 1.1: Projects supporting NLECI commitments and other NLECI projects

Note: The department advised that $900 000 from both the Queensland election commitment and the New South Wales election commitment was moved to contribute to the CCS Communications Strategy.

Source: ANAO analysis of Department of Industry Innovation and Science (DIIS) information.

Carbon Capture and Storage Flagships program

1.7 Australia committed to the July 2009 overall G8 Summit⁹ goal of reducing global emissions by at least 50 percent by 2050, with developed nations to reduce their emissions by at least 80 per cent in that timeframe. The Australian Government announced that Australia would take a leadership role in driving the global goal of launching at least 20 large-scale, integrated CCS demonstration projects globally by 2010, for broad deployment of CCS by 2020.

1.8 The $3.5 billion Clean Energy Initiative (CEI) was announced in the May 2009 Federal Budget to support the growth of clean energy generation and new technologies, and to reduce carbon emissions.¹⁰ As part of this initiative, the CCS Flagships program was established in May 2009 to support the construction and demonstration of large-scale integrated CCS projects in Australia. The 2009 Federal Budget allocated $2 billion¹¹ over nine years to the program to fund between two and four projects and to the extent possible, demonstrate a range of low emission technologies.

1.9 The CSS Research Development and Demonstration Fund (CCS RD&D Fund) is a sub-program of the CCS Flagships program and commenced on 1 July 2016 for a four year period. The program aims to provide up to $25 million under a competitive grants program, to support research, development and demonstration activities on CCS, and in particular, for activities related to transport and storage of CO2. The Fund has its own set of program guidelines. This audit did not examine the grant selection and assessment process for the CCS RD&D program.

Administrative arrangements

1.10 The Department of Industry, Innovation and Science (DIIS or the department) has responsibility for legislation, policy and program delivery for low emissions fossil fuel technologies (LETFF) initiatives.¹² These initiatives include the CCS Flagships and the NLECI programs which are the focus of this audit.

1.11 As at 30 June 2017, approximately $217 million had been expended on the CCS Flagships program¹³, and approximately $233 million on the NLECI program.¹⁴

Audit objective, criteria and methodology

Audit objective and criteria

1.12 The objective of the audit was to assess the effectiveness of the Department of Industry, Innovation and Science’s implementation and evaluation of the Low Emission Technologies for Fossil Fuels (LETFF) program.¹⁵

1.13 To form a conclusion against the audit objective, the ANAO adopted the following high level criteria:

• has program funding been allocated effectively;
• has the department responded effectively to the changing policy and funding environment; and
• have LETFF program outcomes been monitored, evaluated and reported on.

Audit methodology

1.14 In undertaking the audit the ANAO:

• reviewed and analysed departmental files and program documentation;
• reviewed external reporting on the program; and
• interviewed and received written input from departmental staff.

1.15 The audit was conducted in accordance with ANAO auditing standards at a cost to the ANAO of $363 490.

1.16 The team members for this audit were Tara Rutter, Jillian Blow, Samuel Meredith and Andrew Rodrigues.

2.1 As outlined in paragraph 1.5, the National Low Emission Coal Initiative (NLECI) program primarily consisted of five election commitments which were the main components of the program. Remaining program funding was allocated to projects that supported the program objective of accelerating the development and deployment of low emissions technologies and carbon dioxide (CO2) storage and transport infrastructure. The program was comprised of grants, technical consultancy work, and funding to third parties to undertake activities in support of the NLECI program.

Were appropriate program governance arrangements in place?

Program guidelines

2.2 Program guidelines for the assessment and selection of projects were not developed for the NLECI program.¹⁶ The department advised that the program comprised a number of specific projects that were based on specific requirements set by the Government. One of the later projects under the NLECI program—the Advance Lignite Development Program (ALDP), was supported by program guidelines. An overarching program management plan was also not developed for the NLECI program.¹⁷

2.3 The department advised the ANAO that, as the three state-based election commitments were unable to be fulfilled as originally intended due to technical and financial reasons, other projects were undertaken for each state as alternative projects to the election commitments. However program guidelines were not subsequently developed to provide advice to departmental staff on project selection, decision making processes, and applicant requirements.

Conflict of interest arrangements

2.4 Specific conflict of interest arrangements were not in place at the commencement of the program. Currently, conflict of interest matters for departmental staff are managed through the viewing of an online video on potential conflicts of interest and completing a conflict of interest declaration form where relevant. The department advised that where staff move divisions, they are required to declare any potential conflicts of interest within four weeks. The department was able to provide evidence that declarations were made for all staff working on the NLECI program from 2014–15 onwards. The department advised it was not aware of any potential or actual conflict of interest issues being identified or raised during the program.

Risk management

2.5 The ANAO reviewed the available risk management plans for the NLECI program. The risk management plans identified the key risks to the program, including risks related to projects not being able to be completed within the funds available under the program and the program not achieving its objectives. The mitigation strategies for these risks primarily related to regular reporting to the senior officers and the Minister.

2.6 Additionally, the risk management plans identified key internal stakeholders/officers in the management of the program risks and outlined their risk management role and responsibilities as well as risk escalation/delegation protocols. Despite the program being in operation since 2008, the first risk management plan for the program was not completed until the first quarter of 2011–12.

Was there a sound basis for project selection?

Project selection

2.7 Projects under the program were selected by the department at various times to address the specific program commitments and the broader NLECI objective. There were no funding rounds for the NLECI program and no specific eligibility criteria developed for the overall NLECI program.

2.8 For the projects in New South Wales (NSW), Victoria and Queensland, the relevant state government was responsible for planning and developing the respective projects along with industry partners and then submitting their proposals to the department for approval prior to funding being provided. The day-to-day management of those projects became the responsibility of the relevant state government.

2.9 The National Low Emissions Coal Council (NLECC) and the Carbon Storage Taskforce (CST) were established as part of the NLECI program.¹⁸ In line with the election commitment, the role of the CST was to develop a National Carbon Mapping and Infrastructure Plan (NCMIP) to assist with the prioritisation of developing suitable CO2 storage sites to accelerate the deployment of CCS technologies in Australia. The NCMIP was presented to the then Minister for Resources, Energy and Tourism in September 2009.¹⁹

2.10 Also in September 2009, the NLECC published its National Low Emissions Coal Strategy, aimed at accelerating the development and demonstration of low emission coal technologies. The Strategy outlined key priorities to be addressed in order to ensure that low emissions technologies for coal, including CCS, were: demonstrated at a commercial scale from 2015; available for commercial deployment by 2020 and; deployed as they became commercially available. The department advised that when selecting projects to be supported under the NLECI program, the recommendations outlined in the Strategy were actions required to achieve the objective of the commercial-scale demonstration of CCS and were taken into account.²⁰

2.11 For all the projects under the NLECI program, the department was responsible for the development and management of the funding agreements with the relevant state government or other party.²¹ The management of the projects was the responsibility of the relevant state/territory government, or other party.

2.12 Unlike the Carbon Capture and Storage Flagships program, the department advised that an Independent Assessment Panel (IAP) was not established to assess any NLECI projects, with the exception of the ALDP project.²²

2.13 Table 2.1 shows the projects that were selected for the NLECI program. A total of $500 million was allocated to NLECI, with $275 million set aside to address specific election commitments and the remaining $225 million to be allocated to projects that would support the achievement of planned outcomes under the program.

2.14 Project expenditure on the remaining two specified program components in Victoria and NSW have been lower than expected due to delays and projects being closed early, particularly in NSW due to a lack of storage options and delays in the passing of supporting legislation. In May 2012, the then Minister approved a re-allocation of $45 million from the original funding set aside for the election commitment in Victoria towards the ALDP project.

2.15 As noted in paragraph 1.5, part of the election commitment included $50 million for a pilot coal gasification plant in Queensland which the department attempted to complete as a component of the NLECI program. The Queensland Government initially requested $38 million of Commonwealth funding towards a project to develop a national coal gasification research centre. However the Queensland Government did not commit to provide the amount of contributory funding required under the NLECI program and the project did not proceed.²³ The department then proposed that the funding be redirected towards the Wandoan CCS Flagships project, however this project did not proceed past pre-feasibility.

2.16 As per the election commitments, a research program to develop clean coal and related low emission technologies (ANLEC R&D) was established and the NCMIP was completed.

2.17 Expenditure on all specified program components was lower than originally planned. As discussed further in Chapter 4, a significant amount of program funding was returned to Government as part of savings measures or redirected to other Government priorities, resulting in a reduction to the program budget from what was originally announced.,

2.18 There are ongoing projects in both NSW and Victoria, as well as the ANLEC R&D project, however all funding for the NLECI program has been expended.²⁴

Was the program supported by appropriate planning and governance frameworks?

3.1 As noted in paragraph 1.8, the Carbon Capture and Storage (CCS) Flagships Program was announced as part of the 2009–10 Federal Budget's Clean Energy Initiative to support the construction and demonstration of large-scale integrated CCS demonstration projects. At the time of the program's establishment, the construction estimates for CCS integrated power generation plants were uncertain as there was no commercial scale plant built at the time.

3.2 The Government's direction to the department was that the guidelines needed to account for high attrition rates of large-scale projects as projects may be delayed or abandoned based on a technical, legislative or economical basis. Given this expected attrition, advice from Government was provided that the selection process must start with as large a number of projects as possible. The 2009–10 Budget Papers set out the Government's design parameters for the program which outlined the intention that the $1.8 billion in funding for the CCS Flagships program would be subject to a competitive process for the demonstration of industrial scale projects with a C02 storage hub and the Government intention of contributing up to one-third of the non-commercial costs of the selected project costs. Additionally, prior to the announcement of the CCS Flagships program, the National Low Emissions Coal Council (NLECC) was engaged to provide suggested criteria to guide the selection of large-scale CCS projects. The NLECC advised that:

• the development of storage sites could be a delaying factor in the commissioning of integrated projects²⁵;
• a portfolio of around three commercial scale demonstrations and a selection of smaller scale projects implies a funding need of the order of $14–15 billion over the next seven to eight years for their design, construction and commissioning²⁶;
• a portfolio of demonstration projects should incorporate a range of projects of different sizes and at different stages of development; and
• to meet the target timeframes for deployment, capture technologies must already be developed to the stage of pilot testing or later development.

3.3 Following the 2009 Budget announcement, the department wrote to NLECC to confirm the technological priorities for the program in relation to the funding that was announced. The NLECC reaffirmed the previous advice that a portfolio of projects, covering a range of capture technologies (in particular post combustion capture and integrated gasification combined cycle technologies), should be supported under the program.²⁷

3.4 The original CCS Flagships proposal presented to Government was based on a costing of $4 billion for five to seven large scale projects that included a CCS project with China and a national storage site and pipeline infrastructure. Following a request from Government, a revised costing proposal of $2 billion was presented. This proposal did not include the CCS project with China and the national storage site and pipeline infrastructure project. Although the department sought additional funding from state/territory governments and the private sector, the total funding, including the Australian Government's contribution would have been insufficient to fund the intended two to four projects for the design, construction and commissioning stages based on NLECC's estimates. The department did not have an overarching strategy of how the funding would be managed across the potential projects. Instead, the department managed and monitored the funding on a project-by-project basis.

3.5 The program was developed under a tight timeframe in order to support the global goal of having 20 large scale CCS demonstration projects operational by 2015. To meet the timeframe, project nominations needed to be sought from state and territory governments for projects that they were already considering and would jointly fund. Not all projects funded under the program were Flagship projects, with other small scale CCS projects subsequently also funded under the program.²⁸ Table 3.1 outlines the projects funded under the CCS Flagships program.²⁹

3.6 As shown in Table 3.1 above, two of the CCS Flagship projects (CarbonNet and South West Hub) are still ongoing, although the South West Hub project scope has changed considerably from a large scale integrated capture, transport and storage project, to a smaller project to undertake analysis on information already collected. Further, none of the projects have met the original timeframe of the program. Reasons for this include: technical feasibility; absence of suitable storage options; and financial feasibility. Additionally, the CCS Flagships projects are yet to reach the stage of deployable technology originally envisaged in the program design, with the program due to close in 2020, with all program funding currently committed. The department advised the ANAO that the focus of the program had changed to proving up storage options for CCS. It is therefore unclear whether the program is capable of delivering on its strategic policy objective.

3.7 Following the budget announcement on 19 May 2009, the then Minister for Resources and Energy invited state and territory governments and Australian Coal Association Low Emissions Technology Ltd (ACALET)³⁰ in writing, to nominate projects to be considered for Australian Government funding support under the CCS Flagships Program. The invitation also outlined the commitments expected from the nominators. These were:

• support through the program would only be considered for projects that had commitments or the potential to obtain commitments from a state or territory government and an industry proponent which would facilitate and support the development of the project through the reduction of regulatory barriers;
• program funding intended to leverage equal contributions from state governments and industry, with industry funding primarily being obtained from the Coal 21 Fund—managed by ACALET, to mitigate the high cost and associated risks of large scale CCS projects. Therefore, projects needed to have a commitment from the state and industry to fund not less than two thirds of the projects non-commercial capital costs (discussed further at paragraph 4.9); and
• consideration of the provision of relevant infrastructure needed to be demonstrated.

3.8 It was intended that invitations for nominations would be followed up with a more detailed conversation with the department to further outline these initial eligibility considerations. Records of these consultations were not retained by the department to substantiate what advice was afforded to the States from May 2009, when state and territory governments were invited to nominate projects, to the circulation of the draft program guidelines on 9 July 2009.

3.9 In addition to liaising with stakeholders to discuss the nomination and selection process, other early activities undertaken by the department included the development of an overarching Project Management Framework (the Framework) which included the program guidelines and associated documents, such as project and risk planning materials. A risk, communication and stakeholder management plan and an evaluation plan for the assessment of applications was also developed as part of the Framework.

3.10 The Framework was finalised in June 2010 and was to be reviewed annually. The department advised that reviewing the Framework was a recommended but not mandatory action under the former Department of Resources, Energy and Tourism procedures. The department was unable to confirm if the Framework was reviewed.

Risk Management

3.11 The department established and maintained a risk management framework for the CCS Flagships program. A comprehensive risk management plan was developed, requiring regular review was approved by the Clean Energy Initiative Program Management Committee (PMC) in May 2010.

3.12 The ANAO examined the risk management plans and register for the CCS Flagships program from its inception and its ongoing management by the department. The risk management plan appropriately identified key internal stakeholders/officers in the management of the program risks and outlined their risk management role and responsibilities as well as risk escalation/delegation protocols. The department reviews the plan through its regular reporting requirements and at major program milestones/gate review points.

3.13 Included with the risk management plan is a risk register that identifies potential risks that may arise during the program's implementation. The risk register addressed each risk's source, impact, risk levels both prior to and post treatment outlined the planned mitigation strategies and identified the risk owner/s and timeframes. The risk register was regularly reviewed and updated by the department from October 2009 to May 2013 and from 2015 to 2017. Updates reflect the progress of the program throughout the process of its implementation and included potential risks arising from the introduction and absence of a price on carbon and considered arising global financial market uncertainties. Additionally, risks for the program were reviewed and reported to the Executive along with the monthly program reports. ³¹

Conflict of interest arrangements

3.14 Noting there was a high probability for individuals involved in the assessments having had or continuing to have contact with the project proponents through work associations in that industry and/or areas of expertise, the department implemented arrangements to identify and manage potential conflicts of interest under the program and in particular, during the assessment and selection process. All relevant persons were required to disclose and update when necessary any current, prior or proposed association with any proponent that could possibly be construed as having potential to influence. A conflict of interest declaration register was also developed and updated regularly to support the process.

3.15 The ANAO reviewed the conflict of interest register and its maintenance during the project selection and assessment process and found conflicts were recorded and regularly reviewed. Any questions around the management of conflict of interests were deferred to the external probity advisor.

Development of the program guidelines

3.16 The Department sought advice on the development of the CCS Flagship program guidelines. The process for the development of the guidelines is outlined in Table 3.2 below.

3.17 Overall, the CCS Flagships program guidelines provided a summary of the program which included detail on the policy background, intended selection process, projected timetable and the eligibility and selection criteria. The guidelines established that the terms and conditions for project funding would be set out in the negotiated funding agreements with the Government. Departmental contact details and application lodgement instructions were also provided. However, the guidelines did not outline how the selection criteria would be weighted or how the proposals would be ranked (this is discussed further below at paragraph 3.23).

Was there a clear framework for assessing and selecting projects?

Eligibility criteria

3.18 Criteria outlining eligibility should be straightforward, easily understood and effectively communicated to potential applicants to assist them when developing an appropriately considered proposal.³² The CCS Flagships guidelines outlined six essential eligibility criteria to assess potential applicants against, which aligned with the objectives of the program. The eligibility criteria required demonstration of:

• state/territory government and industry support;
• project scale;
• project timeframe;
• project technologies;
• transport and storage of CO2; and
• research infrastructure and partnerships.

3.19 The guidelines stipulated that all eligibility criteria had to be satisfied in order for applications to be put forward for assessment against the program's selection criteria. The use of the terminology must and essential within the eligibility criteria indicated to applicants there would be little to no discretion for projects that did not initially satisfy these requirements, however, the department did consider projects which met or had the potential to meet the eligibility criteria for the first stage assessment and short listing recommendations.

3.20 As noted in paragraph 3.7, letters to state and territory governments noted that when nominating potential projects for the program, that projects were required to have a commitment from the nominating state/territory and industry/private sector to fund two-thirds of the projects non-commercial capital costs. The guidelines however, noted that applicants need to have agreement (full agreement or in principle agreement) from the relevant state or territory government to provide 'an appropriate level of financial support', and 'significant support from industry' should the project be successful in securing Australian Government funding through the program.³³ The department advised that, as it was unlikely firm financial commitments would be given at the nomination stage of the project, the eligibility criteria was less explicit and allowed for in-principle commitments to avoid excluding projects that may have achieved the required two-thirds additional funding at a later stage. As discussed further in Chapter 4—the amount of contributory funding varied between the projects.

Selection criteria

3.21 The guidelines set out nine high level selection criteria and provided explanatory/general information outlining what would be expected to satisfy each criterion. The guidelines noted that proposals meeting the eligibility requirements would be ranked according to the merit selection criteria. The guidelines, however, did not indicate that at Stage 1 each criterion would be assessed against further sub-criteria (80) on a 1 to 5 sliding scale (1 = poor and 5 = high) with the each high level criterion receiving the average of those scores. Additionally, some (24) of the sub-criteria where determined to not be applicable until the detailed assessment and evaluation phase at Stage 2.

3.22 At Stage 2 of the selection process the Department provided a significantly more detailed and updated guide to applicants³⁴ which did detail 41 key selection sub-criteria and requirements. The Stage 2 guide, also outlined that the high level selection criteria would be prioritised according to the 'banding'³⁵ and that prior to further assessment the Independent Assessment Panel (IAP) would assign a specific weighting to each selection criteria, consistent with the banding.

3.23 Neither the guidelines nor the initial supporting materials clearly outlined to proponents the sub-criteria or banding that would be applied to actually assess applications. While acknowledging that more detailed information was provided later at Stage 2³⁶ of the selection process, clearly articulating all criteria within the guidelines or initial supporting materials would have provided greater transparency for applicants at the outset of the program and could have helped applicants to concentrate their efforts and reduce the potential costs from submitting an application that was ineligible or was unlikely to succeed.

Planned assessment and approval process

3.24 As highlighted at paragraph 3.17, the guidelines provided an overview of the planned assessment and selection process for the program. The guidelines set out the indicative timeline for the assessment and selection process outlined the key roles of stakeholders in the project selection decision making process and specified that the Australian Government would be the decision maker on projects to be shortlisted and funded under the program.

Complaints and appeal process

3.25 The CCS Flagships program guidelines did not include information on a complaint handling process or mechanisms for review/appeal of decisions and/or the outcome.³⁷ The department subsequently included an appropriate complaints and feedback process within their later guide to applicants that was provided at Stage Two of the program.

Were projects selected using the assessment and selection framework?

Independent assessment panel

3.26 All applications for the program were assessed and shortlisted by a six member IAP, appointed by the then Minister for Resources and Energy, with support from technical and commercial advisors.

3.27 The assessment process for the program was initially planned as a two stage process. Subsequently, a third stage³⁸ was added to the process to enable the assessment of two revised project proposals which were not initially selected as they did not meet the selection criteria at the end of Stage Two.³⁹ The IAP disbanded following the Stage Two evaluation process. The ANAO notes, that for the Stage Three evaluations of projects, as the obligations of the CCS Flagships IAP had ceased with the end of the Stage Two Evaluation, the department conducted a separate process and engaged two external assessors from the original IAP. Additionally, the department contracted an additional advisor from Geoscience Australia to provide the technical expertise on a needs basis.

3.28 The ANAO examined key aspects of the project assessment and selection process that was implemented by the department for the CCS Flagships Program. The CCS Flagship program underwent a multi-staged project selection and assessment process. The program assessment framework included three key stages:

• Stage One – initial eligibility and assessment;
• Stage Two – detailed assessment and evaluation; and
• Stage Three – assessment of two revised project proposals.

3.29 Figure 3.1 outlines the project assessment and selection framework for the CCS Flagships program.

Figure 3.1: Project assessment and selection framework

Source: ANAO analysis of DIIS documentation.

3.30 As noted in Figure 3.1, a multi-staged approach was taken to assess and select projects for the CCS Flagships program. Following Stage Two, four projects were recommended to the Government. Funding was subsequently approved up to $120 million to support the prefeasibility studies for these four projects and progression to Stage Two of the selection process, as listed in Table 3.3 below.⁴⁰

3.31 In October 2010, the IAP through its Stage Two Evaluation Report recommended that the Government allow all four projects to proceed, with final project selection for the next stage of funding to be postponed until early 2011. The recommendation was made on the basis that the IAP could not make specific recommendations without additional evidence regarding each of projects storage viabilities, costs and risk mitigation strategies.

3.32 The IAP identified the risk of only pursuing a single CCS Flagship project with only one potential storage site and subsequently presented three alternative options that were not constrained by the guidelines. The alternative options caveated the progression of the South West Hub project with the addition of:

1. rephasing a portion of the program funding towards a national storage program, that supported the exploration and storage potentials of the Surat and Gippsland Basin; or
2. progressing a restructured CarbonNet project and rephasing a portion of funding to support exploration and storage potential of the Surat Basin; or
3. progressing a restructured CarbonNet project and progressing the Wandoan project with an alternative power configuration.

3.33 The IAP placed emphasis on the third alternative option arguing that it provided maximum flexibility through providing a selection of projects across different technologies and geographical locations.

3.34 On the basis of the IAP's recommendations the Government selected the Western Australian— Collie South West Hub project to proceed under a phased and gated approach, with the initial focus to be on proving up sufficient geological storage and agreed to the department continuing negotiations with the Victorian and Queensland Governments on the development of the CarbonNet and Wandoan projects with revised submissions to be provided in September 2011.

3.35 The Collie South West Hub project was allocated $52 million in Government funding with initial feasibility work to be focused on CO2 storage exploration and appraisal. The total capital cost of the project was forecast to reach $1 billion.

3.36 Following the Stage Three Evaluation, the CarbonNet project was granted flagship status and awarded up to $70 million towards feasibility on the contingency that $30 million was committed by the Victorian Government. Additionally, it was agreed that the Wandoan project did not meet the CCS Flagships criteria and the decision to support the project was deferred for 12 months. The Government's reconsideration of the Wandoan project was contingent on program funding availability and the project meeting a number of specific conditions. The Government provided a funding commitment of up to $5 million to progress the Wandoan project towards the feasibility stage. Subsequently, the Government agreed to progress a revised Wandoan proposal with a Government funding commitment of $112 million. The department advised it commenced discussions with the project proponents, however an agreement was unable to be reached and the project did not proceed.

Did the department respond to a changing program funding environment?

4.1 Funding for both the NLECI and CCS Flagships programs are sourced from administered appropriations. The expenditure for the NLECI program, as advised by the department, for the period 2007–08 to 2016–17 is outlined in Table 4.1.

Table 4.1: Expenditure on the NLECI program for the period 2007–08 to 2016–17

Note a: This figure was previously advised by the department however the department advised it was unable to confirm the amount expended as the program was administered by the former Department of Resources, Energy and Tourism (RET) and they did not have access to the RET data for those years.

Note b: As noted in the RET Annual Report. The department advised they were unable to confirm the amount expended as the program was administered by the former Department of RET and they did not have access to the RET data for those years.

Source: DIIS information based on the department’s General Ledger.

4.2 As shown in Table 4.1, around $233 million had been expended on the NLECI program as at 30 June 2017. The ANAO identified some discrepancies between the amounts recorded in the program expenditure tracking sheets and the department’s general ledger. Departmental documentation shows that although there are three ongoing projects under the NLECI program, all available program funds had been expended. Table 4.2 outlines the expenditure on the CCS Flagships program, as advised by the department, for the period 2008–09 to 2016–17.

Table 4.2: Expenditure on the CCS Flagships program for the period 2008–09 to 2016–17

Source: DIIS information based on the department’s General Ledger.

4.3 As shown in Table 4.2, around $218 million had been expended on the CCS Flagship program as at 30 June 2017. A further $42 million in funding has been committed to ongoing projects. The ANAO notes that there were some discrepancies identified between the amounts recorded in the program expenditure tracking sheets and the department’s general ledger. Additionally, the ANAO identified approximately $40 million that was unaccounted for when funding reallocations (discussed below) were taken into account. The department advised that, during the course of this audit, it undertook a reconciliation of funding from 2014–15 (being the first full financial year since the Machinery of Government change took effect) with all amounts since that period accounted for. The department further advised that it was unable to undertake a reconciliation of funding prior to the program’s transfer, and that the $40 million likely represented unutilised funding that had subsequently lapsed.

NLECI and CCS Flagships funding reallocations

4.4 The initial funding for the NLECI program allocated in the 2008–09 Budget was $500 million, with $21.5 million allocated for departmental funding for the life of both programs. During the life of the program, uncommitted funds have been re-allocated to other departmental and government priorities, including re-allocation to other broadly aligned emissions reduction policies or returned to the Government for re-prioritisation, as outlined in Table 4.3 below.

Table 4.3: Overall NLECI program funding reallocation

Source: DIIS documentation.

4.5 Similarly to the NLECI program, uncommitted funding from CCS Flagships program was also re-allocated to other departmental and government priorities, as outlined in Table 4.4 below.

Table 4.4: Overall CCS Flagships program funding re-allocation

Note a: Budget Paper 2 of 2011–12 notes the Government will reduce funding for the program to provide savings of $420.9 million over five years from 2010–11 to be re-directed to other priorities including the establishment of a National CO2 Infrastructure Plan, with funding of $260 million to be restored to the program beyond the forward estimates.

Source: DIIS documentation.

4.6 As shown in Table 4.3 and Table 4.4 a significant amount of funding has been re-allocated from both programs—around $259 million from the overall NLECI program budget, and around $1.49 billion from the CCS Flagships program. However the NLECI program did receive an additional $13 million in CCS Flagships funding for the CS Energy – Callide Oxyfuel project, and $2 million for the Kawasaki Heavy Industries project from the Greenhouse and Energy Minimum Standards program, equating to an overall reduction in NLECI program funding of around $233.6 million, taking into account department funding.

4.7 The department advised that for the NLECI program, the reduced funding for the program resulted in no new projects being funded, however existing project commitments were fulfilled.

4.8 Advice to the Minister noted that the $459.3 million reduction in the CCS Flagships funding in 2014–15 meant that the program would be unable to fund the two major projects that were ongoing at that time past the feasibility stages.⁴¹ Currently, only one major CCS Flagships project remains ongoing—the CarbonNet project.⁴² The CarbonNet project has completed two out of six stages, and is currently undertaking its third stage. The department advised the ANAO that the remaining $23 million in the current funding agreement will be paid to the project to finalise offshore appraisal activities at its preferred storage site. The department further advised that at the end of the current stage, and if required, there will be a natural pause point for the project until commercial investment and other arrangements are finalised for a commercial scale CCS project.

Funding co-contributions

4.9 As part of their design, both programs required (to varying degrees) states and territories and others to contribute to the cost of the programs. The then Department of Resources, Energy and Tourism (RET) 2007–08 Annual Report notes that the department was implementing the NLECI program with the funding intention of it being ‘underpinned by a $500 million fund that will support activities and leverage investments worth approximately $1.5 billion’.⁴³ It was not specified that the funding had to come solely from the states and territories, allowing for private investment as well. It was also open to states and territories to meet their commitments through ‘in-kind’ contributions. For the CCS Flagships program, the 2009–10 Budget announcement for the program outlined the Government’s intention to contribute up to one-third of the cost of selected projects over the life of the project. Advice to state and territory governments on nominating eligible projects for the program also noted that, in order to mitigate some of the risks and costs associated with large scale projects, the government would only consider supporting projects that had or would obtain state/territory government and or industry support for two-thirds of the project’s non-commercial costs.

4.10 Table 4.5 and Table 4.6 show the funding co-contributions achieved for both the NLECI and CCS Flagships programs as at 30 June 2017.

Table 4.5: NLECI program funding co-contributions

Note a: In-kind contribution.

Note b: An agreement between the Victorian Government and the Australian Government was signed in July 2017 for the repayment of $10 million (plus interest) to the Australian Government due to one of the project components under the ALDP ceasing. The money will be repaid progressively by 30 June 2019.

Note c: Funding agreement based on dollar for dollar matched funding.

Note d: Includes funding from two states towards pre-competitive data exploration.

Note e: Includes the Post Combustion Capture of CO2 Technology Advancement project, the China-Australia Geological Storage project Phase 2, and the Australia-China JCG Partnership Fund.

Source: ANAO analysis of DIIS information.

4.11 As shown in Table 4.5, around $315 million was received from State governments and other contributors for the NLECI program compared to the $233 million invested by the Australian Government, significantly less than the $1.5 billion envisaged at the start of the program. The department advised the ANAO that monitoring of contributory funding was done at the project level, but not at a program level. Where program co-contributions are envisaged as part of the program design, the department should take a more active role in monitoring if the program is achieving these objectives to enable transparency and appropriate oversight of funding. Table 4.6 outlines the co-contributions from state governments and other contributors for the CCS Flagships program.

Table 4.6: CCS Flagships program funding co-contributions

Note a: Includes $11 620 000 of in-kind contributions.

Source: ANAO analysis of DIIS information.

4.12 As shown in Table 4.6, as at 30 June 2017, the CCS program received around $165 million from State governments and other contributors, as compared to the $214 million expended by the Government. While the intention was for the Government to contribute one-third of non-commercial capital costs over the life of the program, for four out of the five Flagship projects, the Government contributed significantly more than one-third for the initial phases of the projects. Given the Flagship projects did not reach the state of completion initially planned, it is not clear whether the projects would have achieved the level of contributory funding expected. Overall, the Australian Government contributed around 56 per cent of total funding for the CCS Flagships program.

Is there a transparent framework for publicly reporting program outcomes?

Performance measures

4.13 The performance measures for both the NLECI and CCS Flagships programs as outlined in the department’s Portfolio Budget Statements have changed over time. Prior to 2014–15, the performance measures were primarily activity-based. In 2014–15, the department revised its performance measures to include a single measure for each program—related to the number of projects supported (NLECI) and the number of companies supported (CCS Flagships)—and a target to be achieved. Table 4.7 outlines the department’s reported achievements against the performance targets since 2014–15 and the targets for future years.

Table 4.7: Achievement of performance measures

Source: ANAO analysis.

4.14 As shown in Table 4.7, for the period 2014–15 to 2015–16, the department has met, and for the CCS Flagships program in 2015–16 exceeded, the performance targets set for the program.

4.15 Key performance measures should be relevant, reliable and complete, and provide a balanced assessment of overall performance, using both qualitative and quantitative measures. Table 4.8 sets out the results of the ANAO’s assessment of the current performance measures for the NLECI and CCS Flagships programs against these criteria.

Table 4.8: Assessment of current NLECI and CCS Flagships performance measures

Source: ANAO analysis of DIIS performance measures.

4.16 While the existing measures offer some insights into the performance of the programs, they do not provide a basis for assessing outcomes against the program objectives of accelerating the development and deployment of CCS technologies. Given the potentially high expenditure and long time frames for the programs, particularly for the CCS Flagships program, the department should have developed a more complete set of performance measures to provide insight into program performance.⁴⁴

External reporting

4.17 The department reports publicly on both the NLECI and CCS Flagships programs through its annual report and its website. Annual reports for the period 2007–08 to 2013–14 outlined various activities that had been undertaken during the year, as well as specific reporting of program achievements. The annual reports for 2014–15 and 2015–16 only contained reporting on the achievement of the performance targets for the programs, with no performance information for the CCS Flagships program reported in 2014–15. The department’s website contains a ‘home’ page on Low Emission Technologies for Fossil Fuels, with links to the individual program pages. The specific program pages contain the objective of the program; timeline for the program; and some of the projects that have been funded by the program. The program specific pages also contain external links to some of the project pages which contain more detailed information on the projects.

Are effective program oversight and internal reporting arrangements in place?

Program oversight arrangements

Governance framework/committees

4.18 The CCS Flagships and NLECI programs are supported through a series of executive level committees and its officials, who review the program’s performance and have reporting requirements to the Senior Executive—via the Executive Board(EB). The EB is regularly briefed through the Resources division executive team and the following executive level committees and forums: Programme Assurance Committee; a programme summary database; the programme risk plan review, programme management committee reports, and other departmental sub-committees and ad-hoc reporting.

4.19 The Program Assurance Committee (PAC) is the main committee currently through which reports are made to the Executive on the status of its major programs.⁴⁵ The PAC’s oversight of programs helps to provide assurance to the Executive in relation to those programs it oversees and supports senior responsible officers to strategically design and deliver the programs. The PAC also meant to help to facilitate peer learnings through its monitoring of program performance with KPI’s, identify significant or systemic issues, and provide guidance on the management of identified risks through the confirmation of appropriate risk and evaluation frameworks to apply. Program status and risk reports are submitted to the PAC regularly to complement its meeting schedule.

4.20 DIIS governance committees are also supplemented through departmental online reporting tools and the Programme Summary Database (PSD). Each program has its own ‘landing page’ in the database for status reporting on the program. The CCS Flagships and NLECI pages contain a summary of the program and its projects, an outline of the policy objectives to achieved, and its performance indicators, key deliverables, milestones and risks.

4.21 The ANAO reviewed the oversight arrangements established for both the CCS Flagships and NLECI programs, that were initially developed by RET and subsequently performed by DIIS. This included an examination of program frameworks and a selection of executive and sub-committee papers. The review substantiates that the CCS Flagships program and the NLECI program are considered regularly, risk ratings are applied and agreed actions documented, including relevant responsibilities and key dates.

4.22 The ANAO notes, however, that the program reports to the Executive contained nominal indicators on the future direction of the programs from the responsible areas in the form of ‘traffic light’ reports that focus on the details of the projects progress under the program, funds expended and issues arising. There was limited program level reporting, particularly in regards to overall program achievement of outcomes. The senior executive oversight of program would benefit from regular updates from its line areas that contain program-level successes or failures and achievements of overall outcomes to inform its future decisions on the likely commitment and funding profiles needed for the program/s.

4.23 The ANAO notes that oversight arrangements for the programs have varied over the long lifetime of the programs and departmental movements; resulting in a number of Portfolios Ministers, committees, senior executives and departmental officers guiding the programs strategic direction and delivery of outcomes.

4.24 The projects aligned with these programs also have their own oversight arrangements and reporting arrangements, with all CCS Flagships projects having steering committee/board oversight requirements. The funding agreements reviewed generally require that key stakeholders meet at defined intervals (stakeholder management framework) to ensure continued alignment of the project with overall program outcomes.

Ministerial briefs

4.25 The department regularly reported to the Secretary and the Minister on both of the programs, through a series of submissions and briefs, especially during the establishment of the programs.

4.26 Briefings and papers generally outlined the progress of the programs and the related projects; expenditure to date; funding redirection requests—typically due to the delays experienced in progressing projects; and results and next steps from project stage gate reviews.

Knowledge sharing requirements

4.27 An objective of the LETFF program is raising public awareness and acceptance of low emission and CCS technologies, consequently a key component of program reporting is the requirement for projects (in particular those under the CCS Flagship program) to participate in knowledge sharing of CCS learnings to the global community through regular reporting to the Global Carbon Capture and Storage Institute (GCSSI).

4.28 The GCSSI was established in 2009 through government funding⁴⁶ and is now an independent non-for-profit company that brings together a large network of CCS experts and stakeholders through knowledge sharing activities and advocacy work to encourage the development, demonstration and deployment of CCS technologies in Australia and overseas.⁴⁷

4.29 Funding agreements reviewed for the CCS Flagships projects set out the requirement for participation and knowledge sharing reporting to the institute, with milestone reports reflecting the successful submission of such reports at defined intervals.

Program frameworks

4.30 The CCS Flagships and NLECI programs have not been included in the formal grants management system that underpins many of the department’s other grant programs. DIIS advised that it was decided, when programs transferred over from RET during the MoG, they would not be retrospectively brought within DIIS’ grant management systems/frameworks. The program areas manage the financial payments for CCS Flagships and NLECI projects through the departmental TechOne/financial management system, and manage the grant programs/projects and funding agreement requirements through a series of spread sheets and shared reporting systems.

Were programs evaluated against their objectives?

4.31 An evaluation strategy was not developed at the commencement of these programs. In 2015, the department developed a new departmental evaluation strategy to guide evaluation and performance measurement of programs and policies in the department.

Early review of NLECI

4.32 In mid-2009, the department requested a high-level review of a selection of programs to assess the systems and processes in place to manage the programs, including the NLECI program. The review was completed in October 2009. The review assessed that:

• The governance maturity of the NLECI program required additional attention, as most of the projects at the time of review were still at the development stage with uncertainty growing over the timeframes and feasibility of some projects.
• The frameworks required to support the eventual management of projects had also not been developed and documented.
• There was no documented process for the payments of project milestones and no specialised information management system in use.
• The review further noted there was no compliance plan or strategy in place for the program, and while a mid-term evaluation had been planned, no evaluation criteria had been considered to enable appropriate data to be collected.

4.33 The review made five recommendations, with three aimed at improving the administration of the program, and a further two recommendations aimed at improving broader departmental processes.⁴⁸

NLECI mid-term evaluation

4.34 An internal mid-term evaluation of NLECI was conducted in 2012 and made nine recommendations. Key findings noted in the review were:

• The projects under NLECI all supported the broad objective of the program to accelerate the development of low emissions coal technologies.
• NLECI was a highly flexible program, however as a consequence of this flexibility, program governance was weak, including problems with approvals for payments and funding commitments and with record keeping.
• The program was aligned with Government policy and other related programs and was meeting its broad objective, although the review did note that the objective was not measurable and there were no Key Performance Indicators in place.
• Due to NLECI consisting of a number of pre-defined election commitments and requiring matched funding from state governments—this had hampered the department’s ability to implement the projects if a project was not supported by the relevant state government.
• The allocation of funding to specific projects, at the time, reflected an optimistic view of the progress that could be made to develop CCS technology, and comparing the projects aimed at research and development and those aimed at pilot and demonstration projects, the research and development projects aimed to have made more progress, due to the complexities in developing pilot and demonstration projects.

4.35 This review noted that the three program-related recommendations from the 2009 review had not yet been implemented.

4.36 Weaknesses in the NLECI program governance arrangements were identified in two internal reviews, however these were not addressed.

CCS Flagships mid-term evaluation

4.37 There has been no formal evaluation or review of the CCS Flagships program. Departmental documentation notes Terms of Reference were developed for a mid-term evaluation of the CCS Flagships program and approved by the then RET Program Management Delivery Committee in October 2013, with the proposed evaluation to commence in November 2013. The Terms of Reference outlined that the evaluation would examine:

• the management of projects in accordance with funding agreements;
• the progress of projects against key performance indicators or project milestones;
• whether the program funding was sufficient to meet project objectives;
• the relevance of the program against current government policy objectives and priorities and the extent to which the department’s involvement in the program contributed to progress towards the construction and demonstration of large-scale integrated CCS projects in Australia; and
• the monitoring and reporting being undertaken internally for the program.

4.38 However, this evaluation was never undertaken. The department advised that this was due to the Machinery of Government change⁴⁹ and the reduction of CCS Flagships funding due to only two of the Flagships projects remaining, which each had their own project specific planned reviews and evaluations.

Internal audit

4.39 In May 2014, the department commenced an internal audit to assess the financial management processes and activities of grants management within the department. The audit focussed on four grant programs, including the NLECI and CCS Flagships programs.⁵⁰

4.40 This internal audit reported that:

• The department did not have a central business unit with responsibility to provide guidance and support on grants management and there was no overall grants management framework.
• All the grant programs examined were managed by Excel spreadsheets and manually updated by staff, although at the time of the audit the NLECI program was undertaking user acceptance testing in preparation for migration to the department’s grant management system.
• The NLECI program did not have an overarching governance structure, communication plan or program guidelines for either applicants or departmental staff administering the program. Additionally, there significant budgetary issues that were identified by the department in late 2013, including the inadvertent omission of a number of projects in the programs 2013–14 Portfolio Budget Statements. This was due to a loss of corporate knowledge of the program and a lack of communication between financial management and program administration staff. The review further noted that these issues had been appropriately resolved by the department.
• The CCS Flagships program had a governance framework and program guidelines for applicants. However, there were significant delays in the achievement of project milestones leading to considerable underspends in the individual project (and therefore program) budget.

4.41 The audit made five recommendations, which the department advised the ANAO were all implemented by the end of 2015.

Future evaluations

4.42 As noted in paragraph 4.31, the department developed a new departmental evaluation strategy in 2015, however neither the NLECI program or the CCS Flagships program have been evaluated under this strategy. The department advised that both programs (including the CCS Research Development and Demonstration Fund) have been scheduled in its Departmental Evaluation Plan for 2017–18.

4.43 For long term projects, regular evaluation supports ongoing assessment of progress and risks and informs decisions relating to whether programs are still capable of delivering on their stated policy objectives and provides opportunities for adjustments where necessary. The CCS Flagships program has not been evaluated despite over eight years of operation. Further, although the NLECI program has been subject to a mid-term review, the absence of a measurable objective and key performance indicators has impacted the department’s ability to identify the program’s progress in meeting its objective. As noted in Table 1.1, there were a number of key policies changes, as well as administrative changes that took place during the duration of the programs that provided potential opportunities for the department to undertake an evaluation of the programs. The absence of an evidence base relating to the effectiveness of the programs over time, has made it difficult to assess the extent to which the programs have made a contribution to their respective program objectives, as well as to the overall LETFF objective of developing technologies to reduce greenhouse gas emissions.

Appendix 1 Entity response

Appendix 2 CCS Flagships program selection criteria and banding

Note a: Banding applied to the Selection Criteria at Stage 2 of the selection and assessment of applications. Band 1 was allocated the highest priority to reflect their importance in the assessment of Value for Money and Band 3 had the lowest importance.

Note b: 10 being the highest weighted and three the lowest.

Note c: The Stage 2 Proponent Guide separated the Technology Maturity selection criterion into two, Technology Maturity (excluding storage) and Technology Maturity – Viability of Storage Options, both of which received a banding of one.

Source: CCS Flagships Program, Program Management Framework as at June 2010.