CEFC: renewables funding without the risk

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The Clean Energy Finance Corporation will need to be as innovative as the projects it supports to avoid a home grown Solyndra.

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The Clean Energy Finance Corporation appears to be navigating a perfect storm of a solar crisis and the realisation that carbon pricing alone will not be enough to create low-emission projects. The government’s green bank is due to report in March on how it intends to invest $10 billion of taxpayer funds. Just in time to rescue the government’s Solar Flagship program from a financing meltdown.

The CEFC has a spending power equivalent to 6,000MW of baseload gas generation, or 3,000MW of wind. With Australia’s generation capacity at around 51,000MW that’s a sizable contribution to carbon reductions. It’s also sufficient funding to make the sorts of investments that in the US has delivered investors a “once in a generation” opportunity, with returns of up to 25 per cent, and to see the development of impressive infrastructure. The downside has been some spectacular failures when big bets fail to pay off.

As a carbon copy of the UK’s Green Investment Bank, the CEFC is taking the same steps towards its establishment – setting up an advisory board of finance experts and establishing governance arrangements — a sensible process ahead of investing that $10 billion of taxpayers’ money.

However, like the UK’s green banking experiment, the CEFC will find it difficult to describe clearly what sort of investments will meet its “stringent commercial criteria,” or how a roadmap to a cleaner greener future will be created. The recent Grattan Institute report, No Easy Choice – which way to Australia’s energy future?, states: “It is not easy for governments to steer a course between, on the one hand, inadequate support for low-carbon technologies, and on the other, picking winners or favouring one technology over another.”

The rationale for an Australian green bank is a government view that capital market barriers exist to clean energy. However the market’s view is that where a clean energy project is bankable, capital is available.

A bankable renewable energy project has four key features: proven technology, reliable fuel supply, revenue certainty, and grid connection on reasonable terms. The first two can be addressed to a large extent by due diligence and adequate governance. The second two are where the government’s and CEFC’s attention should be fixed.

The main barriers to technically viable clean energy projects are long-term price certainty for outputs – demonstrated by the Solar Flagship program’s bids to secure investor backing without power purchase agreements – and simplified processes for accessing infrastructure . That’s because it’s rare to find suitable sites located next to stable customers that can use all of the energy outputs.

While bankable projects for clean energy innovation don’t come shrink-wrapped with a press release attached, the CEFC could find that focusing on outputs and access is the most effective way to establish a portfolio of next generation renewable projects rather than direct investment in solar parks or geothermal schemes, with their intrinsic investment risk and potential for “moral hazard.”

Using customers to underwrite energy projects is a well-established method of getting investment funding. For the vertically integrated utilities, the profits from retailing energy run second to the long-term certainty it provides for generation and gas field developments. Energy sector consolidation has delivered a larger customer base to back off against longer-term supplies. The right ingredients to underwrite new projects for the big three: AGL, Origin Energy and CLP.

The CEFC could mimic these industry attributes by running a market process offering long-term carbon abatement contracts. By paying out only when production occurs, the commercial risk to tax payers of low emissions technologies would be minimised. When those innovative projects do start generating clean energy, the market can be relied upon to establish a price and take delivery. By offering long-term contracts to underwrite renewable energy, energy efficiency or low-carbon projects, the CEFC would be filling a market gap, creating a bridge between physical and financial markets. If handled intelligently, the CEFC could even start to correct some of the distortions created by a carbon price working alongside a renewable energy target.

$10 billion represents the tax from a million working families, and while the temptation will be to fund big clean energy proposals and support local green technology development, the Clean Energy Finance Corporation will need to be as innovative as the projects it supports to avoid a home grown Solyndra.

Bruce Macfarlane is an associate director at Exigency Management, an electricity and carbon advisory firm.

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1 Comment
  1. Andrew Want 7 years ago

    Bruce’s commentary usefully highlights the market gap that must be addressed if renewable energy development is to accelerate in Australia – the need for mechanisms providing access for renewable projects to reliable, stable, adequate, long term revenue streams to underpin long term financing.

    For so long as this gap remains un-remedied, CEFC’s other efforts, whatever they may be, will be of little value. Projects will not be financed without surety of revenue.

    Current market mechanisms (in the electricity market and REC market) force a focus on only the marginal cost of electricity generation facilities, not the value of output.

    Solar thermal power, for example, delivers output to meet high-priced daytime and evening peak demand, that can (and has) hit the NEM cap of $12,500/MWh. There is little sense in measuring the price of solar thermal power against coal-fired generation that churns on day and night, unable to respond to growing peak demand loads. The REC market similarly currently values a MW of output the same whether it is at 2pm when everyone wants it or 2am when it has no takers.

    The CEFC has a role to facilitate the development of financial products that recognise the value of renewable energy output not currently realisable in the electricity market, and that bring forward and level out projected revenue streams over the medium and longer term. Long-term price trends (for power, RECs and carbon) suggest this should be a profitable investment strategy for CEFC.

    This is not a gap that other Government agencies, such as ARENA, are equipped to fill, and there are no commercial or regulatory incentives for the utilities to step into a gap from which they are currently benefiting.

    If it is not addressed by the CEFC, who will address it?

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