CEFC to spend only half its budget, even if it survives

The Abbott government’s attempt to dismantle the Clean Energy Finance Corporation is likely to be rejected by the Senate this week or next, but it is already half way towards its goals because the green investment bank is now unlikely to spend much more than half its budgeted funding this financial year.

The uncertainty around its future, along with cuts to associated organizations such as the Australian Renewable Energy Agency means that options are reduced and deal making has become challenging.

Mainstream banks, who the CEFC are seeking to attract into new technologies and business models, are more likely to stick with what they know – investing in coal loaders or other established industries.

CEFC CEO Oliver Yates told a Senate hearing last week that the CECF was unlikely to allocate much more than $1 billion of its $2 billion budget in 2013/14 – it’s first year of operation – citing the “great uncertainty” about its future which is making it difficult to put deals together with third parties

“At the moment, I do not think we will get through more than $1 billion,” he said, when asked about investment plans. “It would be a huge achievement if we were to do $1 billion. That is natural. We are still developing and people are still uncertain about our existence. So about $1 billion is the answer.

It is part of a triple-whammy against the renewables and clean energy industry in Australia. Investment has already been curtailed by the uncertainty surrounding the renewable energy target, which the Abbott government will review next year.

Recent cuts to ARENA, which had its budget over the next two years gutted as part of $435 million of cut-backs, is also restricting opportunities. The industry suspects that this will reduce ARENA’s ability to co-fund large scale solar projects – making it difficult for these first-of-a kind projects to gain bank financing.

This, in turn, is likely to push the CEFC into smaller deals, but these type of deals take time to put together and the challenge remains to encourage banks to participate when they can get good returns from their traditional operations.

“There are numerous transactions that would not happen but for the CEFC,” Yates told the hearing last week. “We have provided in this numerous case studies where you can go through time and time again, look at the transactions and say, ‘Why would the private sector not necessarily have done those deals?’ It is generally because the transaction might be too small, too complicated or too novel, or it may not have been done yet Australia but there are workable examples offshore.

“If you are working in a bank—you are trying to deal with your own credit committee and get the first deal done—and you are not specialist bank, it is a nightmare trying to deal with credit. They have multiple alternatives to deploy money and they going to say, ‘Why am I worried about this deal? I can deploy it on a coal loader or I can deploy it in another industry’.”

James Cameron, an Australian who is chairman of the London-based Climate Change Capital, and a member of the UK’s Green Investment Bank Commission, which laid the way for a UK equivalent of the CEFC, described the move to dismantle the CEFC as a “shocking” decision.

“The whole point of this was designed to accelerate the deployment of capital in ways that gave Australia strategic advantage in an area where it has a spectacular renewable energy resource. It seems to be a pretty stratenge decision to scrap that when had it had a lot of attractive elements and good leadership.”

The CEFC has a total budget of $10 billion, with $2 billion available over each of 5 years. But Yates said that – should the CEFC survive the repeal process – the amount it spends is more likely to be closer to $5 billion.

This is not because of a lack of project ideas – because the CEFC has already been swamped with hundreds of proposals – but because of the time needed to identify the best projects, create a balanced portfolio, and bring in other financiers into the market.

The government wants to dismanlte the CEFC because it says it will be a drain on the budget, will be costly, and make speculative investments.

But the CECF says it will actually deliver a surplus to the budget, at the same time as achieving up to half the government’s emissions reductions out to 2020 with a positive benefit rather than a cost.

However, the government does not appear to have been swayed by the arguments, and in the Senate hearing last week it was given less than an hour to explain its case.