Climate Change, Energy, the Environment and Water portfolio

The Climate Change, Energy, the Environment and Water portfolio is responsible for: developing and implementing a national response to climate change; improving Australia’s energy supply, efficiency, quality, performance and productivity; and advising the government and implementing programs on heritage, the environment, meteorological services, water resources, and Antarctica. Further information is available from the department’s website.

In addition to the Department of Climate Change, Energy, the Environment and Water, there are 12 entities within the portfolio. These entities are responsible for: renewable energy regulation; financing the renewable energy sector; advice on climate change mitigation; meteorological services; Commonwealth national parks; managing Commonwealth lands around Sydney Harbour; and the Great Barrier Reef Marine Park.

On 1 July 2022 an Administrative Arrangements Order took effect which included the creation of the Climate Change, Energy, the Environment and Water portfolio. The total expenses and average staffing level by entity for the Climate Change, Energy, the Environment and Water portfolio will be updated in this overview following the Budget, expected in the third quarter of 2022, which will reflect these changes.

In determining the 2022–23 audit work program, the ANAO considers prior-year audit and other review findings and what these indicate about portfolio risks and areas for improvement. The ANAO also considers emerging risks from new investments, reforms or changes in the operating environment.

The primary risks identified for the portfolio relate to the oversight of government investments (particularly those relating to equity, concessional loans and guarantees) and the Department demonstrating that it can effectively implement risk based regulatory regimes and that it follows through on the implementation of agreed recommendations from the large number of review activities it undertakes or are undertaken externally of it. Failure to implement agreed recommendations would result in a risk to the department’s ability to provide Parliament assurance that it is using its resources appropriately to manage regulatory risk.

The Climate Change, Energy, the Environment and Water portfolio strategic risks predominantly relate to governance, service delivery, procurement, regulation and asset management and sustainment.

Governance

Measuring, evaluating and reporting on the contribution of activities to their intended outcomes has been identified as an area for improvement in a number of recent performance audits within the portfolio.  Past reviews and audits of the Department of Climate Change, Energy, the Environment and Water’s (the department) predecessors, have found weaknesses in governance and culture.  A key risk for the new department will be to ensuring that the Machinery of Government changes commencing on 1 July 2022 don’t impact the continuity of functions across the department. Sound record keeping, including documented rationales for key decisions, will be central in providing continuity in administration  

New programs that offer a range of more complex financial mechanisms, such as equity, concessional loans and guarantees, will create the need to establish related risk tolerance levels and risk mitigation actions, as well as capabilities in managing these instruments.

Service delivery

A number of new initiatives in the Climate Change, Energy, the Environment and Water portfolio have been announced over recent years. These initiatives include: $1 billion to protect the Great Barrier Reef; $800 million to strengthen strategic and scientific capabilities in Antarctica; the $200 million Bushfire Recovery for Wildlife and Habitat program; the $269.7 million Murray–Darling Communities Investment Package. There is a risk that new initiatives may not achieve desired outcomes if they are not supported by sufficient planning, a clear rationale of where intervention is required, use of the best available evidence, and application of appropriate risk management and performance measurement frameworks.

Procurement

Previous performance audits have identified deficiencies in demonstrating value for money in the department’s procurement activities.  Establishing and implementing effective arrangements to ensure value for money will remain important for procurement activities delivered by the department.

Regulation

Effective regulatory approaches are required to achieve the desired outcomes of regulation. Past audits have identified failures with regulation in the portfolio, including the use of intelligence, establishment of a risk-based approach to regulation, implementation of effective regulatory plans and strategies, governance arrangements, compliance with procedural and legislative requirements, and performance measurement and evaluation. 

Asset management and sustainment

The portfolio carries a large number of physical assets, including: Snowy Hydro infrastructure used for energy generation activities; an icebreaker vessel; and weather and research stations. These assets require specific maintenance and sustainability planning unique to the nature and use of the asset.  It is also important that targets are set in asset management strategies, and that tracking and reporting against targets is undertaken, to provide a clear focus for performance and accountability for delivering on objectives.

Overview

On 1 July 2022 an Administrative Arrangements Order (AAO) took effect which included the creation of the Climate Change, Energy, the Environment and Water portfolio. Entities which are now part of this portfolio are shown in Table 1. The risk profile for each entity is based on the 2021–22 financial statements which were prepared prior to the AAO taking effect on 1 July 2022.

Table 1: Climate Change, Energy, the Environment and Water portfolio entities and risk profile

Department of Climate Change, Energy, the Environment and Water

The Department of Climate Change, Energy, the Environment and Water is responsible for developing and implementing a national response to climate change and improving Australia’s energy supply, efficiency, quality, performance and productivity; conserving, protecting and sustainably managing Australia’s biodiversity, ecosystems, environment and heritage; advancing Australia’s interests in the Antarctic region; and improving the health of rivers and freshwater ecosystems and water use efficiency.

On 1 July 2022 an Administrative Arrangements Order (AAO) took effect which included the creation of the Department of Climate Change, Energy, the Environment and Water. The total budgeted financial statements by category for the Department of Climate Change, Energy, the Environment and Water portfolio will be updated in this overview following the Budget, expected in the third quarter of 2022, which will reflect these changes.

Financial statements audit

There are two key risks for the former Department of Agriculture, Water and the Environment and one key risk for the former Department of Industry, Science, Energy and Resources 2021–22 financial statements that the ANAO has highlighted for specific audit coverage that the Department of Climate Change, Energy, the Environment and Water will have responsibility for from 2022–23. The ANAO considers all of these to be potential key audit matters (KAMs).

• The calculation of the government’s liability to restore Antarctic bases to their original condition, given the significant judgements required in the selection of the assumptions used in the valuation model. (KAM – Valuation of restoration obligations in Antarctica)
• The valuation of the government’s water entitlement assets, due to the estimation and judgement involved in the valuation methodology, and given the trading of water assets is a relatively new and developing market. (KAM – Valuation of water entitlements)
• The valuation of the Australian Government’s investment in Snowy Hydro Limited, due to the materiality of the investment and complexities associated with the choice of assumptions and judgements applied in the valuation model. (KAM – Valuation of Snowy Hydro Limited administered investment)
• As a result of the Administrative Arrangements Order which took effect on 1 July 2022 the ANAO’s 2022–23 financial statement audit will also focus on risks arising from Machinery of Government changes. These risks relate mainly to the completeness and accuracy of assets and liabilities transferred to the department from the former Department of Agriculture, Water and the Environment and Department of Industry, Science, Energy and Resources. This is due to the materiality of the assets and liabilities transferred to the department and resultant increase in complexity of the process for preparation of the financial statements.

Bureau of Meteorology

The Bureau of Meteorology (the Bureau) is responsible for providing weather, water, climate and ocean services for Australia.

The bureau’s total budgeted assets for 2022–23 are just over $1.2 billion, with almost 45 per cent of these assets attributable to property, plant and equipment, 32 per cent attributable to intangibles, and 13 per cent attributable to land and buildings (Figure 1).

Figure 1: Bureau of Meteorology’s total budgeted financial statements by category ($’000)

Source: ANAO analysis of 29 March 2022–23 PBS.

There are three key risks for the Bureau’s 2021–22 financial statements.

• The valuation of non-financial assets, particularly specialised weather equipment, due to the complexity of the valuation process which involves significant judgement and estimation.
• The valuation of intangible assets, particularly computer software, given the judgement applied by the Bureau in confirming that they are capitalised and valued appropriately in accordance with Australian Accounting Standards.
• The valuation of the Bureau’s leases in view of the large number of leases managed by the Bureau and the complexity involved in calculating the value of lease right of use assets and liabilities in accordance with Australian Accounting Standards.

Clean Energy Finance Corporation

The Clean Energy Finance Corporation (CEFC) is a corporate Commonwealth entity established under the Clean Energy Finance Corporation Act 2012. The CEFC is responsible for facilitating increased flows of finance into the clean energy sector. The CEFC’s role is to invest with commercial rigour in a diverse portfolio of clean energy technologies that are solely or mainly Australia-based – either directly or indirectly through industry and the banking sector – and that, in aggregate, have an acceptable but not excessive level of risk relative to the sector.

The CEFC seeks to mobilise capital investment in renewable energy, low-emissions technology and energy efficiency in Australia through commercial loans, concessional loans, equity investments and loan guarantees.

The CEFC is required to liaise with relevant bodies, including the Australian Renewable Energy Agency, the Clean Energy Regulator, other Australian Government entities, and state and territory governments, to facilitate its investment function. In the Investment Mandate Direction 2020, the responsible ministers have strongly encouraged the CEFC Board to make available from its original $10 billion of funding up to:

• $1 billion of investment finance over 10 years for the Reef Funding Program;
• $1 billion of investment finance over 10 years for the Sustainable Cities Investment Program;
• $200 million for debt and equity investment through the Clean Energy Innovation Fund;
• $100 million for an Australian Recycling Investment Fund; and
• $300 million in concessional finance through the Advancing Hydrogen Fund.

The CEFC’s total budgeted revenues for 2022–23 are $207.4 million, with 70 per cent of this revenue attributable to interest, as shown in Figure 2. Advances and loans, investments in shares and investments in other interest-bearing securities contribute to 87 per cent of total budgeted assets.

Figure 2: Clean Energy Finance Corporation’s total budgeted financial statements by category ($’000)

Source: ANAO analysis of 29 March 2022–23 PBS.

There are five key risks for the CEFC’s 2021–22 financial statements.

• The measurement of interest and fee income from the CEFC’s loans and deposits, which continues to be a significant portion of the CEFC’s revenue, in view of the corporation’s contractual lending arrangements.
• The accounting for complex financing arrangements, due to the bespoke nature of each investment transaction, and ensuring ongoing compliance with the accounting standards for financial instruments as the portfolio continues to develop.
• The adequacy of the impairment provision relating to loans, in view of the complexity of the transactions undertaken, the concentration of sectorial exposure and the degree of management judgement required to estimate the provisions.
• The valuation and accounting for direct unlisted equity investments, which are required to be at fair value under Australian accounting standard AASB 9 Financial Instruments. CEFC apply a range of valuation methodologies and exercise increased levels of judgement and estimation in determining an appropriate fair value for these investments.
• The verification of the carrying value of the CEFC’s investment in its associates – entities that the CEFC does not control but has significant influence over – and the resultant adjustments through the income statement for the CEFC’s share of gains/losses from associates.

Snowy Hydro Limited

Snowy Hydro Limited (Snowy Hydro) is a government business enterprise whose primary business includes energy generation activities to supply the National Electricity Market (NEM) and operating as a retail energy provider to over 1.1 million customers through the Red Energy and Lumo Energy brands. Snowy Hydro’s energy generation capacity of 5,500 megawatts supplies New South Wales, Victoria and South Australia, primarily through the generating capacity of the Snowy Mountains hydroelectric scheme.

Snowy Hydro is currently progressing Snowy 2.0, a pumped hydro project that will add 2,000 megawatts of on-demand generation and approximately 350,000 megawatt hours of large-scale storage to the NEM. In 2021–22 Snowy Hydro commenced construction of a 660 megawatt open cycle gas turbine power station at Kurri Kurri, New South Wales, known as the Hunter Power Project. The project obtained approval from the NSW Government in December 2021 and environmental approval from the Australian Government in February 2022.

Snowy Hydro’s total actual assets for 2020–21 were just over $5.9 billion, with property, plant and equipment contributing to almost 66 per cent and other assets (encompassing other financial assets) contributing to 18 per cent, as shown in Figure 3. Other expenses contribute to 15 per cent of total actual expenses, and includes the impairment loss recognised on trade receivables.

Figure 3: Snowy Hydro Limited’s total actual financial statements by category $’000)

Source: ANAO analysis of Snowy Hydro Limited’s 2020–21 annual report.

There are three higher key risks for Snowy Hydro’s 2020–21 financial statements.

• The valuation of financial instruments, including hedging instruments, forward contracts and swaps, reflecting the complexity of the valuation process and model. These valuations require an increased level of judgement from management to determine inputs into the valuation model – particularly unobservable inputs.
• The capitalisation of Snowy 2.0 costs, which reflects the complexity of the underlying project work and the judgement that needs to be applied to meet the requirements of the accounting standards.
• The completeness and accuracy of the impairment of retail debtors given the reach of Snowy Hydro’s retail customer base, the economic impacts of natural disasters and the COVID-19 lockdown periods, and the increased level of judgement required by management to determine the key inputs to be applied in the expected credit loss model.