Audit focus

In determining the 2019–20 audit work program, the ANAO considers prior-year audit and other review findings and what these indicate about portfolio risks and areas for improvement, as well as emerging risks from new investments, reforms or operating environment changes. In the Environment and Energy portfolio, considerations predominantly relate to the planning and implementation of environmental regulation, the design of grant programs for environmental restoration activities delivered by third parties, and financing arrangements to support reliable and low-emissions energy technology.

Regulation

The portfolio has a range of regulatory functions in both the environmental and energy sectors. Previous audits have identified risks to the protection of matters of national environmental significance arising from the department’s use of compliance intelligence to support its regulatory activities under the Environment Protection and Biodiversity Conservation Act 1999.

Grants administration

Recent audit work has identified weaknesses in the department’s encouragement of competition, establishment of clear performance targets, and the use of assessment criteria to support value for money for grants. Similar risks to effective grants management may also exist across other marine and biodiversity conservation programs administered by the department, including the $450 million Regional Land Partnerships Program and the $100 million Environment Restoration Fund.

Governance

The portfolio is responsible for implementing multibillion-dollar financing arrangements to promote investment in renewable energy, including the activities of the Clean Energy Finance Corporation and the department’s Underwriting New Generation Investments program, and through the ownership and expansion of Snowy Hydro.

Financial management

The portfolio is responsible for a number of significant high-value assets, including the Australian Government’s investment in Snowy Hydro Limited, the Antarctic bases, and the Clean Energy Finance Corporation’s loans and investments. The valuation of these assets is complex due to the judgements and assumptions applied in the various valuation models.

Portfolio overview

The Environment and Energy portfolio is responsible for advising the government and implementing programs with respect to the environment, energy, and meteorological services. The portfolio is also responsible for protecting matters of national environmental significance including flora, fauna, ecological communities and heritage places.

The Department of the Environment and Energy is the lead entity in the portfolio and is responsible for developing and implementing environmental and energy policy to support the government. The department is also responsible for managing the conservation, protection and sustainability of Australia’s natural resources, biodiversity, ecosystems, environment and heritage, and contributing to the national response to climate change. In addition, the department’s role includes advancing Australia’s interests in the Antarctic, managing environmental water use, and supporting the reliable, sustainable and secure operation of energy markets. Further information is available from the department’s website at www.environment.gov.au.

In addition to the Department of the Environment and Energy, there are nine entities (excluding one subsidiary) within the portfolio that are responsible for renewable energy regulation, weather forecasting services, financing the renewable energy sector, advice on climate change mitigation, and conservation of national reserves and the Great Barrier Reef.

In the 2019–20 Portfolio Budget Statements (PBS) for the Environment and Energy portfolio, the aggregated budgeted expenses for 2019–20 total $2.62 billion. The PBS contain budgets for those entities in the general government sector (GGS) that receive appropriations directly or indirectly through the annual appropriation acts.

The level of budgeted departmental and administered expenses and the average staffing level for entities in the GGS within this portfolio are shown in Figure 1. The Department of the Environment and Energy represents the largest proportion of the portfolio’s expenses, and departmental expenses are the most material component, representing 61 per cent of the entire portfolio’s expenses.

Figure 1: Environment and Energy portfolio — total expenses and average staffing level by entity

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

Financial statements and other audit engagements

Overview

Entities within the Environment and Energy portfolio, and the risk profile of each entity, are shown in Table 1.

Table 1: Environment and Energy portfolio entities and risk profile

 

Type of entity

Risk of material misstatement

Number of higher risks

Number of moderate risks

Material entities 

Department of the Environment and Energy

Non-corporate

Moderate

2

2

Bureau of Meteorology

Non-corporate

Low

0

3

Clean Energy Finance Corporation

Corporate

Moderate

3

3

Snowy Hydro Limited

Company

Moderate

5

2

Non-material entities 

Australian Renewable Energy Agency

Corporate

Moderate

 

Clean Energy Regulator

Non-corporate

Moderate

Climate Change Authority

Non-corporate

Low

Director of National Parks

Corporate

Low

Great Barrier Reef Marine Park Authority

Non-corporate

Low

Sydney Harbour Federation Trust

Corporate

Low

Other audit engagements (including Auditor-General Act 1997 section 20 engagements)

Commission for the Conservation of Antarctic Marine Living Resources

Natural Heritage Trust of Australia

         

Material entities

Department of the Environment and Energy

The Department of the Environment and Energy is responsible for advising the government on environmental and energy policy; managing the conservation, protection and sustainability of Australia’s natural resources, biodiversity, ecosystems, environment and heritage; and reducing Australia’s greenhouse gas emissions and contributing to the national response to climate change. Additional areas of responsibility include advancing Australia’s interests in the Antarctic, managing environmental water use, and supporting the reliable, sustainable and secure operation of energy markets.

The department’s total budgeted expenses for 2019–20 are just over $1.3 billion, with supplier expenses, payments to corporate Commonwealth entities and grants representing 28 per cent, 25 per cent and 24 per cent, respectively, of the total budgeted expenses, as shown in Figure 2.

Figure 2: Department of the Environment and Energy’s total budgeted expenses by category ($’000)

 

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The four key risks for the department’s 2018–19 financial statements that the ANAO has highlighted for specific audit coverage in 2019–20, including those that the ANAO considers potential Key Audit Matters (KAMs), are 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);
  • 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);
  • valuation of the government’s water entitlement assets, due to the estimation and judgement, and given the trading of water assets is a relatively new and developing market; and
  • wide variety of administered grant programs, such as Indigenous Protected Areas and the National Heritage Trust grants, which represent a material expense in the financial statements.

Bureau of Meteorology

The Bureau of Meteorology is responsible for gathering weather, water and atmospheric observations in order to provide forecasts, warnings and long-term weather and climatic outlooks.

The bureau’s total budgeted expenses for 2019–20 are just over $407 million, with 43 per cent of these expenses attributable to employee benefits, as shown in Figure 3.

Figure 3: Bureau of Meteorology’s total budgeted expenses by category ($’000)

 

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The three key risks for the bureau’s financial statements are the:

  • valuation of specialised weather equipment, due to the complex valuation involving significant judgement and estimates;
  • valuation of computer software, due to the complexities involved in capturing costs and ensuring they are capitalised appropriately in accordance with Australian accounting standards, and significant judgement in relation to useful lives and impairment; and
  • completeness and accuracy of the bureau’s various revenue streams that are generated through multiple channels.

Clean Energy Finance Corporation

The Clean Energy Finance Corporation (CEFC) is responsible for the facilitation of finance into the clean energy sector. The CEFC’s role is to invest with commercial rigour in a diverse portfolio across the spectrum of clean energy technologies — either directly or indirectly through industry and the banking sector — that, in aggregate, have an acceptable but not excessive level of risk relative to the sector. The CEFC is required to liaise with relevant persons and bodies, including the Australian Renewable Energy Agency, the Clean Energy Regulator, other Australian Government entities and state and territory governments, for the purposes of facilitating its investment function. In the Investment Mandate Direction 2018, the responsible ministers have also directed the CEFC Board to make available up to:

  • $1 billion of investment finance over 10 years for the Reef Funding Program;
  • $1 billion of investment finance over 10 years for a Sustainable Cities Investment Program; and
  • $200 million for debt and equity investment through the Clean Energy Innovation Fund.

The CEFC’s total budgeted expenses for 2019–20 are just under $110 million, with 36 per cent of these expenses attributable to employee benefits, as shown in Figure 4.

Figure 4: Clean Energy Finance Corporation’s total budgeted expenses by category ($’000)

 

Source: ANAO analysis of PBS 2019–20 Budget related papers pre–machinery-of-government changes announced on 29 May 2019.

The CEFC’s six key risks for its financial statements are the:

  • measurement of interest and fee income from the CEFC’s loans and deposits, which continues to be a material portion of the CEFC’s revenue, in view of the CEFC’s unique contractual lending arrangements;
  • accounting for complex financing arrangements, due to the bespoke nature of each transaction, and ongoing compliance with the accounting standards for financial instruments as the portfolio continues to develop;
  • valuation and accounting for direct equity investments, which are now required to be at fair value under AASB 9 Financial Instruments;
  • verifying the CEFC’s investment in its associates, i.e. entities that the CEFC does not control, but has significant influence over;
  • adequacy of the impairment provisions relating to loans and equity investments, in view of the complexity of the transactions undertaken and degree of management judgement required to estimate the provisions; and
  • agreements underpinning the remuneration of senior management personnel, which must be consistent with the requirements of the Remuneration Tribunal Act 1974, while the CEFC has implemented a variable compensation plan to reward performance, ensure competitiveness, and encourage retention of key personnel.

Snowy Hydro Limited

Snowy Hydro Limited became wholly owned by the Australian Government on 29 June 2018, following the Australian Government’s purchase of the shares in the company held by the governments of New South Wales and Victoria. Snowy Hydro’s business includes energy generation activities to supply the National Electricity Market, and operating as a retail energy provider to over 1 million customers through the Red Energy and Lumo Energy brands. Snowy Hydro’s energy generation capacity of 5500 megawatt hours supplies New South Wales, Victoria and South Australia, primarily through the generating capacity of the Snowy Mountains hydroelectric scheme. Snowy Hydro is currently progressing the Snowy 2.0 program, which will increase the generation capacity of the Snowy Mountains scheme by 2000 megawatt hours, through new pumped hydro power stations. The first power will be generated in late 2024 followed by progressive commissioning of six new units.

Snowy Hydro’s total actual expenses for 2017–18 were just over $2.26 billion, with 66 per cent of these expenses attributable to the direct costs associated with revenue, as shown in Figure 5.

Figure 5: Snowy Hydro Limited’s total actual expenses by category ($’000)

 

Source: ANAO analysis of Snowy Hydro Limited’s 2017–18 annual report.

Snowy Hydro’s seven key risks for its financial statements are the:

  • valuation of financial instruments, including hedging instruments, forward contracts and swaps, reflecting the complexity of the valuation process and model and increased level of judgement required by management for some inputs into the valuation model;
  • valuation of renewable energy certificates, due to the complexity of management’s methodology for determining the value and accounting treatment for these certificates;
  • impairment of retail debtors, given the significant reach of Snowy Hydro’s retail customer base and reflecting the increased level of judgement required by management to determine whether an impairment event has occurred;
  • accounting for capitalised customer acquisition costs, reflecting the judgements applied in accounting for this balance;
  • calculation of unbilled retail revenue, reflecting the timing of customer meter readings and the end of financial year. The methodology for estimation of unbilled revenue requires increased management judgement and the use of a complex model;
  • 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; and
  • impairment of non-financial assets, particularly due to the judgement and estimation required to determine the economic and cash flow assumptions underpinning the valuation model applied.