With last month’s release of the Clean Energy Finance Corporation Expert Review, market participants now have some visibility around how the CEFC will operate and its investment mandate.
Ambitiously, the CEFC is expected to commence operations by 1 July 2013. An aggressive timetable will have to be adhered to for this to be achieved.
Once operational, three principles will form the basis of the CEFC’s investment mandate:
Rather than taking an industry-based approach, investment decisions will be made on a case-by-case basis and will primarily focus on technologies that have been proven but are not yet widespread.
CEFC funding will be split into two streams (i) renewable energy and (ii) low-emissions / energy efficiency, and while the eligibility criteria is broader than the market initially anticipated, carbon capture and storage technology and nuclear power have again been explicitly excluded. The CEFC will seek to make 50 per cent or more of its funds available to the renewable energy stream and up to (but not more than) 50 per cent available to the low-emissions / energy efficiency stream, although these thresholds are considered goals rather than binding constraints.
Under the renewable energy stream, anything that falls within the definition of a “renewable energy technology” in the Australian Renewable Energy Agency Act 2011 (Cth) will qualify for funding support from the CEFC. This includes hybrid technologies employing fossil fuels and technologies that are related to renewable energy technologies. Further, the CEFC’s mandate is now broad enough to encompass established technologies such as wind farms, as well as infrastructure necessary to support renewable energy projects such as transmission lines.
Under the low-emissions / energy efficiency stream, CEFC support for low emissions technology will be limited to projects that achieve an emissions intensity of 50 per cent or lower than the electricity grid average. Further, the expert report recommends the CEFC focus primarily on large rather than medium or small-scale energy efficiency projects. However, smaller scale projects could be financed indirectly through third party aggregation. Support may also be available for demand management initiatives, where these might reduce network infrastructure costs and manufacturing businesses that produce later stage inputs for renewable energy and low emission / energy efficiency projects.
As a general principle, the CEFC will co-invest in projects alongside other private sector financiers. In its early years, CEFC funding is likely to be provided through loans before expanding to equity co-investment once the CEFC has built its capability and portfolio. The CEFC may also channel a proportion of its funds to the market through intermediaries like fund managers.
In contrast to green energy loan programs in the US and Continental Europe, the CEFC will not offer loan guarantees nor is it likely to issue bonds. The CEFC will aim to achieve a return on funds close to the Federal Government’s long-term bond rate. This target rate will not be assessed on an individual investment basis but instead averaged across the CEFC’s entire portfolio of investments. Presumably, this approach has been adopted to allow the CEFC to offset investments in less profitable (but otherwise strategically valuable) projects against more financially robust projects.
Government funding for the first five years of CEFC’s operation was appropriated in the latest Federal Budget. It is likely this funding was included in the forward estimates to insulate the CEFC from a change in government.
The CEFC is intended to address financial market barriers. However, arguably it is not financial markets that are inhibiting investment, but more fundamental problems with renewable energy projects. In order to be a viable, bankable project, the developer of a renewable energy project in Australia needs to obtain a purchase power agreement (PPA) with a major energy retailer. This is a bankability issue common in all project financings: financiers are unlikely to lend where they are unable to see a reasonably certain revenue stream or where they are exposed to market risk. While the CEFC may reduce the capital cost of developing a project, the PPA risk arises because the three large retailers in the NEM develop their own renewable energy projects in competition with independent power developers.
The expert report also states that renewable energy projects funded by the CEFC will be eligible for large scale generation certificates (LGCs). The effect of this will be that existing market participants who have not had the benefit of concessional funding will have the “double whammy” of the higher cost of funds and, potentially, a lower LGC price once Australia moves into the floating carbon price stage. The expert report acknowledges the potential for market distortion and suggests the CEFC be cognisant of its potential impact on existing market participants. However, this will be cold comfort for those who have already invested without CEFC support in LGC eligible projects.
Despite the mixed response from stakeholders, the CEFC will soon be a reality. Financiers and sponsors need to analyse how they might leverage opportunities in a broad range of green investment projects and technologies.
Additional opportunities may also arise for independent investment managers. Assuming the CEFC sets itself up in a similar way to the Future Fund, the CEFC will engage a panel of investment managers who will undertake the research and analysis on investments and then make recommendations to the CEFC. This could be a lucrative source of work for investment managers with strong green energy credentials.
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