The expert review led by Reserve Bank board member Jillian Broadbent into the operations of the planned $10 billion Clean Energy Finance Corporation has proposed a flexible mandate that would allow it to have considerable discretion over its investments.
The long-awaited review from the Broadbent committee has made a series of recommendations about the operations of the CEFC, which have been agreed upon by the government. The establishment of the CEFC, however, is being strongly opposed by the Opposition and parts of the business community.
Among the key recommendations of the panel is to have some flexibility in the proposed two investment “streams” – renewables and low-emission technologies. Broadbent has suggested the targets be regarded as a “goal” rather than a strict target, and to modify them to “at least 50 per cent” for renewables and up to 50 per cent for low emission and energy efficiency technologies.
“(The panel) considers that adhering to strict interpretation is impractical and could limit the board’s ability to respond to opportunities in the market as they arise. The board will not have control of the number of proposals that are presented, their timing or into which stream they fit,” it said.
The panel recommends that the “renewables” stream be defined along the same guidelines as the Australian Renewable Energy Agency, but also include hybrid technologies and “enabling technologies,” such as grids or grid extensions.
The low-emissions technology stream will be defined as anything that has no more than 50 per cent of the current average emissions intensity in Australia – so a limit of 0.416 tonnes of CO2e for each megawatt hour of electricity produced. This will allow trigeneration, cogenaration and fuel cell technologies to be included, as well as distributed energy and energy efficiency and demand management investments. The panel suggests that that the CEFC either absorbs the government-funded Low Carbon Australia, or it funnels its energy efficiency investments through that organisation.
Carbon capture and storage and nuclear technologies remain excluded.
The CEFC expects much of its investments – at least initially – to be in the form of loans rather than equity. Loan guarantees will not likely be considered. It also says that suggestions that it design and grant tax exemptions or raise capital in the market by issuing bonds would lie outside its mandate and legislative powers.
It is also proposing that generation projects that it supports qualify for renewable energy certificates. This was a particular concern for wind energy developers, who feared that they may get sidelined by other technologies such as solar. Some had suggested including LGCs (large-scale generation certificates) but expanding the target, or not including LGCs at all if the project gained CEFC backing.
“To exclude the CEFC from financing projects within the RET would significantly inhibit the corporation in achieving its objective and the public policy intention of facilitating increased flows of finance into the clean energy sector thus preparing and positioning the Australian economy and industry for a cleaner energy future,” it said. It is expected that green and clean energy groups will push for an expansion of the RET, although other industries are pushing for its abolition. The CEFC panel says this should be a consideration for the Climate Change Authority.
The CEFC said it will apply a commercial filter to investment decisions, will focus on projects and technologies at the later stages of development and will “invest responsibly and manage risk so it is financially self-sufficient and achieves a target rate of return.”
It says the 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.
“Consequently, it has different risk/return requirements,” the report notes. “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. While focusing on the later stages of project development, the CEFC should still be able to invest in market demonstration projects provided they pass the commercial filter and are assessed to be able to produce a positive return. To achieve the target rate of return, the portfolio will need to earn a rate sufficient to incorporate a margin for losses and operating expenses.
“This focus on later stage developments, together with the CEFC’s commercial filter, distinguishes the corporation’s role from some other government initiatives. Interaction between the CEFC and other government initiatives is important to support projects and technologies along the innovation chain.
It also said it will invest on the premise that existing Commonwealth policies such as the carbon price and the RET continue to exist. The CEFC plans to start investing from July 1, 2013, and recommends that $2 billion a year for five years from 2013/14 be specially appropriated in the government legislation.
“As a financial institution able to offer concessional finance, has capacity to directly influence financial barriers. The individuality of each project necessitates a case-by-case approach. The CEFC can tailor concessionality in each case and apply it through availability, tenor or cost of finance or by absorbing additional risk. In setting the terms, the CEFC will provide only the least generous terms required for the proposal to go ahead (that is as close to market terms as possible).
(More to follow)