CEFC may write financing contracts before July

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The Clean Energy Finance Corporation may enter financing contracts for renewable and low carbon projects before July, when its funds become available. CEO Oliver Yates also says solar leasing will be an area of interest. Meanwhile, Greg Hunt tweets a dodgy number.

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The newly created Clean Energy Finance Corporation is likely to enter contracts for financing deals even before July 1, when the first of its $10 billion in funding becomes available, according to CEO Oliver Yates.

In an interview with RenewEconomy, Yates said the CEFC was capable of entering contracts in coming months, even if the $2 billion that can be spent by the organization in 2013/14 is not available until July 1.

The CEFC has become a subject of controversy because of the Coalition’s pledge to disband it, among other clean energy and climate change institutions, should it be elected in September, and because of the Coalition’s demand that it not make any investments pending the result of the election.

The CEFC became fully operational at the start of this month, and now boasts 50 staff, including those incorporated from Low Carbon Australia (LCA). As we reported on Wednesday, the government has released its final investment mandate, which defines its targeted returns and manner of operations.

Yates said the work of the LCA, particularly in the areas of energy efficiency, would continue, and would likely be upscaled. This would allow larger clients such as municipalities, hospitals and universities to get financing assistance for these sorts of projects.

“These organizations have got budget cycles, so they find it hard to fund such investments up front,” Yates said.  “We can help with that.”

Yates also identified solar leasing as an area of interest for the CEFC. Solar leasing, which allows home-owners and commercial companies to install solar PV on their rooftops for no deposit, removing the problems of upfront capital cost, has taken off in the US, where it accounts for around three-quarters of new installations. The financing is now well supported by mainstream banks such as Goldman Sachs and US Bancorp.

In Australia, however, solar leasing is relatively new and has struggled to gain finance from banks at interesting rates because they have no experience of the technology or the financing, and have so far resorted mostly to the private wealth market.

Yates said it was typical of the sort of investments where the CEFC could play some sort of trail-blazing role that would encourage the commercial market to follow.

One of the problems for new technologies is the high cost of capital because the technology is either new or poorly understood. Banks either don’t want to finance the projects or will only do so at a high rate.

Yates noted that banks were now comfortable with large scale solar in the US and with solar leasing, and financing costs had fallen rapidly. Once a couple of these deals had been done in Australia, the same would happen here and the CEFC could then get out of the way.

“We are not there to kick out any banks,” he said. “We mobilise the capital to get the transaction done, and leverage that. But once we do one or two deals, then we could get run over by the other banks and let the capital markets do the work itself.

“Utility scale solar is not really an issue of risk, but of comfort. There are a whole series of things that are common offshore that will happen here.”

One thing the CEFC will be doing little of is making loan guarantees – the financing mechanism popular in the US government’s program to help start-up technology companies, and capital intensive investments such as nuclear projects.

The CEFC is limited to deploying 5 per cent of its resources to loan guarantees. Mostly this is the result of difference between the two countries in the way these guarantees are accounted.

The investment mandate said the CEFC would have to get a rate of return broadly equivalent to Australian government five-year bond rate (around 3 per cent) – and it placed an annual limit of $300 million on concessionality – the difference in value between the financing it offers and commercial rates.

On large scale renewable projects, Yates said the CEFC was likely to participate with other co-financiers in proposal that are “shovel ready”.

“A project could be well identified but is finding that financing is hard to get through the door,” Yates said.

“If the money easy to come through the door, we don’t need to be there. But if it’s a question of pricing, and the financing proposal can’t meet the IRR hurdles – then maybe it needs $50 million at a rate of Libor plus 150 points rather than 250 points.  That way, the deal gets done and the sector moves forward. You might call us spak filler to help get deals done.

Yates also expressed an interest in listed infrastructure “pure plays” that could invest in large renewable energy projects. Once built, these projects have a steady rate of return, which is why they have captured the interest of Warren Buffet and other large investors in the US, as well as institutional funds managers in the US and Australia.

“We have a solid pipeline of interest,” Yates said. “That’s good, we can cautiously work our way through which ones add most value to the sector, which ones will return to us what we need to earn.”

Hunt’s big dodgy number games

Last Sunday, Opposition climate change spokesman Greg Hunt appeared on the Bolt Report, the program hosted by noted climate skeptic and News Ltd journalist Andrew Bolt, complaining about the government’s “dodgy numbers” on its climate policy.

Hunt knows something about dodgy numbers. That’s how most experts describe his Direct Action policy, but on ABC Radio on Wednesday he came up with a new one when he said (unchallenged) that the CEFC would spend up to $240 million a day between July 1 until the writs for the election are issued in early August.  Hunt was so satisfied with his statement that he tweeted it too (below).

Screen Shot 2013-04-25 at 2.14.10 PM

Of course, it’s utter nonsense, as Hunt well knows. He arrives at that figure by dividing the $10 billion in funds the CEFC will have at its disposal over 5 years, by the number of days between July 1 and the election writs. But these funds are only allocated in $2 billion batches over 5 yeas, so even if the CEFC spent its entire 2013/14 budget is the first six weeks, it would be well short of Hunt’s number. But, the bigger the number, the bigger the scare.

And the CEFC is not likely to rush its entire funds out the door in one fell swoop. The CEFC can only be disbanded by an act of government, which makes it as easy, or as difficult, to unravel as the carbon price. Unless the Coalition gets a majority in the Senate, or the Labor rump rolls over, then the CEFC could continue for a while longer.

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4 Comments
  1. Peter Castaldo 6 years ago

    Yates – “$50 million at a rate of Libor plus 150 points rather than 250
    points” ok maybe I’m nieve but what has the Libor (London Interbank
    offered rates) got to do with anything. Then he goes onto mumbo jumbo
    150 250 points…… the CEFC is there to get a job done that is to get
    renewables down on the ground and increase energy usage in general.
    Now the public seem to think that governments produce the money, if that
    was the case the CEFC wouldn’t have to balance its accounts like a
    normal bank its there to offer cash get jobs done but only should be
    interested in collecting the cash back you could offer it interest free
    with repayment periods if it were not repaid then the difference could
    be exchanged with taking possesion of assets …… The CEFC can choose
    whatever it wants as the interest rate but is it just dancing to the
    tune the financial industry play, ensuring their cut? and don’t worry
    about inflation putting a 2billion in is nothing relative to our big
    brothers USA, UK and Japan are putting into the system….. maybe I’m
    missing something important here but I think we need “real or
    intelligent sense” not “common sense” here leave that for the sheep.

    • Peter Castaldo 6 years ago

      I ment CEFC was ment to increase energy efficiency not energy usage

      • Tim 6 years ago

        Hi Peter,
        Just to try to clarify the finance mumbo jumbo, any project or company is typically financed by a combination of equity and debt. Typical market rates of return required for these investments vary according to the riskiness of the project or company in question, but a good benchmark is around 15% for equity and for debt say between 1.00% to 4.00% (i.e. 100 to 400 “points”) over the relevant market benchmark rate (which could be LIBOR for offshore variable rate debt or BBSW for Aussie dollar variable rate debt).
        Given this context, the key question for the CEFC is whether the money they are investing is equity or debt in a particular venture – either they are offering to invest equity at 3% instead of the market rate of 15% (i.e. a discount of around 12%), or they are investing in project debt at a rate of approx BBSW + 0% (i.e. a discount of around 1% – 4%). Note that typically a project will have approx 4 times more debt than equity invested so discounted debt can be worth more to a project because there is more of it invested. Either way, it is important that the financing discount is passed on to end customers to encourage the take-up of the goods -like solar heating – rather than being siphoned off to pay the banks and venture partners. However, it is questionable that such a strategy would be sustainable once the discount period ended – maybe is the most optimistic guess…..

  2. Concerned 6 years ago

    Interesting to see what technology they “pick”.

    It would appear that there are problems ahead.

    http://www.nationaljournal.com/energy/california-s-dream-to-be-the-saudi-arabia-of-solar-is-dead-20130424

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