CEFC: How to spend $10 billion ….

There is no doubt that the Clean Energy Finance Corp will be one of the lightning rods in the political and business debate about the deployment of clean technology and emission abatements this year.

The depth, and breadth of feeling, was highlighted in many of the submissions to the CEFC, which have not been made public, but have been highlighted in this article.

The Federal Opposition appears to remain implacably opposed to the idea, and of all the measures of the Clean Energy Future legislation, the CEFC appears to be one of the most exposed should the Opposition win government in 2013. However, as Nick Rowley pointed out in the this piece, it is one of the critical institutions that could take the challenge of dealing with climate change and reducing emissions beyond the day-to-day political rhetoric.

But if you had $10 billion to invest in a clean energy future in this country, then how exactly would you spend it? The Clean Energy Council commissioned Deloitte to survey around 40 financial market professionals to see what they thought.

As CEC acting CEO Kane Thornton points out, the main challenge facing the deployment of clean energy projects in Australia is that most Australian investors are used to investing in shopping centres and toll roads, but have little understanding of technologies such as solar thermal, or the risk premium that should be attached to them. Overcoming the “fear of the unknown” would be one of the primary functions of the CEFC.

“Like all new energy technologies, private investors alone won’t deliver the full finance necessary to scale up to commercial operation, he said. “The CEFC should play a role in sharing a part of the risk associated with new technologies, in order to turbo-charge the development of clean energy in Australia. Once our next generation of clean energy technologies becomes more familiar to investors and their track record has been established, there will be much less need for an institution like the CEFC.”

The question is how the CEFC should perform its role – what technologies should it support and with what mechanisms. The report found that the Australian market is beset by some considerable problems. The first has been policy uncertainty and political interference, so there was a strong desire for the CEFC to be independent and at arms length to the government, but its expertise should still be use to allow it to influence decisions regarding regulation on market impediments.

It was also strongly suggested that the CEFC team include professionals with finance and cleantech industry expertise, as opposed to being driven by civil servants, and that minimum bureaucracy should be involved in each investment deal, to encourage the private sector to participate.

Several barriers have to be overcome, including the need to get the finance community to understand risk, and to breach the obvious financing gaps peculiar to Australia – such as finance duration (In Europe, banks and export credit agencies offer debt finance with up to 15 year terms for renewable energy projects, but in Australia, it is seven years), the difficulties gaining power purchase agreements, the challenge of funding demonstration projects, as well as smaller renewable projects.

The report also underlined the importance, given the polemics over the failure of the US solar start-up Solyndra, which was given US government financial support in a similar scheme in the US, that the initial investments by the CEFC should be seen to be successful.

“To cement the success and reputation of the CEFC, it is critical that the first few projects that the CEFC invests in are strong deals with clear objectives and measures of success that are both met and achieved in their defined timeframes,” the report noted. Some stakeholders noted that the CEFC could undertake 2-3 deals in a specific technology or project that successfully demonstrated viability and then move its focus to the next frontier.

The main project and companies that the CEFC could include in its portfolio ranged across the following six key categories of investments;

– Large scale renewable energy infrastructure – including solar PV, solar thermal, geothermal and wind

– Small scale renewable energy projects – including community wind farms and waste to energy projects.

– Commercial scale demonstration of technologies – including ocean, wave and tidal power systems, second generation biofuels and bioenergy

– Mature energy efficiency and low emissions technologies – including cogeneration, trigeneration, green building technologies

– Early stage clean energy technology companies – including a broad range that require equity growth capital to expand their operations

– Enabling technologies – including smart grid, energy storage and transmission.

It also took a stab at how these technologies may appear in a portfolio.

and it looked at some of the financing mechanisms that could be deployed.

Table 6.2: Potential financing mechanisms according to investment asset type