Ten things you should know about the CEFC

By Giles Parkinson on 17 April 2012    www.reneweconomy.com.au

The long-awaited “experts review” into the proposed $10 billion Clean Energy Finance Corporation has been delivered to – and accepted by – the federal government.

The CEFC is seen as one of the most critical elements of the Clean Energy Future package by large parts of the clean energy industry, particularly those trying to introduce new technologies.

It will certainly be one of the political hot potatoes going into the next election. The federal Government says it intends to introduce legislation into the Budget sittings of parliament which begin in May.
Here are some highlights from review by the team led by Reserve Bank board member Jillian Broadbent, and supported by funds manager David Paradice and former banker Ian Moore.
1. Australia is behind the rest of the world
One of the key points made by the CEFC panel is that Australia is a “late starter” in the transformation to a low-carbon economy, thanks to its reliance on low-cost fossil fuels.    The challenge for Australia is further complicated by the complex nature of its electricity markets, the cost of renewable energy and the preference among investing institutions for listed assets, and because they prefer to provide loans over shorter time frames.              But, the CEFC panel said, cutting emissions will reduce Australia’s exposure to global energy prices, and earlier action will reduce the cost and disruption to the economy. Climate Change Minister Greg Combet said failure to act would allow other countries to gain a competitive advantage and leave Australia exposed to trade penalties. Broadbent said: “No action in this area leaves us very vulnerable to the future.”
2. There are many barriers to clean energy in Australia
The CEFC panel noted that the Australian energy market was highly concentrated, was  focused around centralised power generation and meeting peak demand, and that the structure of the national grid inhibited distributed generation. “The long lead times and substantial level of capital already invested in fossil fuel energy make the process of change incremental rather than transformational,” it noted. In particular, it noted the power of the vertically integrated utilities, who had “significant market power” over (power purchase agreements), which together with limited liquidity in the renewable energy certificate and energy hedging markets, have been challenging for new clean energy projects. This echoes the concerns of government departments and the Greens, who have referred the matter to the ACCC. Other barriers were financial, including the reluctance of banks to support new technologies, the short-term nature of their loans, and the cost of the loans, mostly due to risk. Most institutions in Australia preferred equity investments in regulated assets, only a few had been attracted to the clean energy sector. The GFC had worsened the situation.
3. Other countries do this and it works well
The panel noted that major economies such as the US, China, Brazil, Germany and the UK had a similar mechanism to the CEFC. The UK has a £3 billion Green Investment Bank, Germany’s KfW provides banks with liquidity for clean energy loans and will commit €100 billion over the next five years, China has already allocated $30 billion in credit to the top five solar manufacturers alone, Brazil is providing $1.8 billion in financing to help deploy wind farms, and the US Department of Energy is deploying around $35 billion in loan guarantees, and nearly all – notwithstanding the high-profile failures of Solyndra and some others – have performed well.
4. It is possible some of the CEFC projects will fail
Broadbent says it is impossible to guarantee that an investment will not fail – in any sector. “There is never an expectation that some projects will fail,” she says. “But as a financier – some things don’t turn out the way you plan.” However, she notes that the CEFC is different to the US DoE program and will operate at arm’s length to the government. Also, as a co-investor, it will be sharing risk with other financiers and investors.
5. Which technologies will they target?
The Greens insisted that on defined targets for “renewables” and a separate stream for low-emission technologies. The CEFC has proposed a subtle change, and wants instead “goals” that suggest a minimum 50 per cent for the renewables stream, which will include “hybrid technologies” (which might include solar boosters for gas, coal or diesel plants) and “enabling” technologies (such as grid extensions).  The CEFC recommends up to 50 per cent of the funds are applied to “low-emissions technologies,” which it defines as less than 50 per cent of the current emissions intensity of the Australian grid – or around 0.416t/CO2e per MWh. This, therefore, could include trigeneration and cogeneration, fuel cells, energy efficiency and demand management. CCS and nuclear are excluded. It suggests that its energy efficiency mandates be married with those of the Low Carbon Trust, and suggests that organisation could be either absorbed into the CEFC or serve as an agent, and it also says it could play a role in community renewable energy projects.
6. What criteria will they use?
The CEFC proposes to use a “case-by-case” approach to investments, rather than a sector-by-sector approach – and the investment must be developed beyond the R&D stage and have the capacity to repay capital. It says its “commercial filter” will not be as stringent as the private sector equivalent, as the CEFC has a public policy purpose and “values any positive externalities” being generated. Its investment will have different  risk/return requirements. “For a given return, the CEFC may take on higher risk and, for a given level of risk, due to positive externalities, may accept a lower financial return,” it says. The CEFC will seek a return comparable to the return on long-term government bonds and ultimately be financially self-sufficient. It says its tools will include providing funds, changing the allocation of risk among participants, lengthening the available duration of loans, and offering an appropriate concessional cost of fund. The CEFC says its offer will be the “least generous” required to enable a project to proceed.
7. How the CEFC fits in with the Renewable Energy Target
One of the biggest issues about the actions of the CEFC was its potential to “distort” the market, not just for the coal and gas generators, but also for “established” renewable technologies such as wind energy. The CEFC panel says excluding the projects it supports from the RET would significantly reduce the scope of its investments, and says projects it supports should qualify for renewable energy certificates, but has left the question of whether the RET be expanded – as some have suggested, and the Greens and environmental groups propose – to take account of these “additional” investments to the Climate Change Authority. The fossil fuel industry, and large emitters, want the RET dropped altogether, or reduced in scope.
8. The CEFC will favour loans over equity
The CEFC will likely be particularly cautious in its early stages.  It says that the majority of the CEFC’s early investments will be in the forms of loans and not equity. “In that period, the CEFC will be building a track record of investing and developing its internal risk management framework,” it notes. Read here, absolutely no failures. It says it see limited application for loan guarantees.
9. How much they will invest and when
Broadbent says that while $2 billion a year will come into the CEFC from 2013/14, it will not necessarily be disbursed at the same rate. There is, in fact, no timetable for expenditure. Broadbent says that in theory the $10 billion that the CEFC will deploy could unlock more than 5 times as much private capital – or more than $50 billion in private investment. It could be greater if more funds were invested as equity rather than debt.
10. Broadbent and her team have done an excellent job
This is a very skillful document, nuanced by the expert panel’s understanding of the investment industry and its recognition that a path to a low-carbon economy needs to be found at lowest cost, notwithstanding the political and industrial rhetoric. Broadbent has been careful not to pick winners, or to be too prescriptive with investment choices or mechanisms, and the panel have recognised the significance and the potential for new technologies to transform Australia’s energy system and ensure it remains competitive with other countries. Now, however, just watch the Opposition attack it, along with the usual suspects among the established energy generators and emitters. The key themes of this report – investment for long-term gains over short term costs, the “external” benefits which are overlooked by banks and statutory authorities, and the issue of future competitiveness – will no doubt be lost in the shouting.

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