CEFC: Where they stand and who wants what

The debate around the structure and the purpose of the Clean Energy Finance Corporation will be one of the most critical policy debates of 2012 – both for the clean energy industry and the incumbents.

The release of the Queensland Renewable Energy Plan last Friday highlighted perfectly the nature of the problem in Australia. Despite abundant resources, research and rhetoric, the pace of deployment of renewable energy sources in Australia is painfully slow.

In Queensland, apart from a rush to install solar PV and solar hot water (from one of the best structured feed-in tarrifs in the country), it is non-existent. Since 2008, not a single wind turbine, geothermal well, or wave energy project has been committed, and even the amount of biomass capacity fell in the last four years.

The CEFC, which is due to deliver its report to government next month is designed to supplement the hotchpotch of schemes that have so failed to see technologies on the verge of commercialization deployed in Australia – and as an independent authority will ostensibly have the ability to fill not just the financing gap, but the political one as well.

As we highlighted in this article, the submissions that have been made to Jillian Broadbent’s team from individual companies and lobby groups can broadly be summarized in three groups: those pushing for the CEFC to use various mechanisms to get these technologies deployed, and to reap the reward of Australia’s ample resources and excellent R&D; those anxious that it could distort the current market, and displace private finance already committed to technologies such as wind currently favoured by the RET – they want the CEFC to focus on supporting infrastructure that can benefit all technologies; and those who question whether we should be doing anything more than R&D, and avoid, at any cost, anything that could encourage their immediate deployment.

The Broadbent team’s report will be submitted to Treasury in March. The suggestion is that its focus will be on governance and independence, rather than any recommendation on technologies.

The question of the CEFC’s impact on the RET seems to be a critical one, and the future of the scheme, and how it is acquitted, is the other great policy issue for the year. Although there is no real expectation that a Productivity Commission review of the RET would result in changes, the fact that there is a review has added to the uncertainty, helped depress prices for renewable energy certificates, and so further delay power purchase agreements and project development.

It is as though the uncertainty will become a self-fulfilling prophecy. One consulting group, Reputex, last week predicted that the RET would fall short, and would achieve only 16-17 per cent by 2020, rather than the 20 per cent target. While some submissions warn that the CEFC could distort the RET, it may be that it could be the mechanism that ensures the target is met.

Here are the summaries of some of the key submissions from key interest groups.

Energy retailers

Origin Energy, the country’s largest retailer, says the carbon price will provide a clear signal for market players to prefer lower-emission technologies, “up to a certain price point”, across the Australian economy. The renewable energy target also provides a multi-billion dollar, multi-year incentive for the deployment of renewable energy technologies, and Origin believes the “plethora” of small-scale state and federal schemes reduce the clarity of the carbon price and RET signals and should be phased out. It says the CEFC had the potential to complement the carbon price and the operation of effective markets “if it is able to identify and address financial market failures to investment”, but it also risks operating as “another source of unsustainable subsidy of high cost technologies if it does not.”

“Our understanding of the intended focus for investments by the CEFC is lower-emission technologies that make a financial return but which private sector investors won’t invest in. In our view, this is a small target,” Origin writes. “Without strong and patient governance, the CEFC risks turning over time into another source of funding for ideas or technologies that raise the cost of energy without contributing to a sustainable lower-emission energy sector in the long run.”

Origin recommends a “technology neutral” mandate and says market failures are most likely to to occur in the area of shared infrastructure, such as transmission to connect new lower-emission technologies to the existing grid, smart energy to connect all energy users, generators and networks; and, public charging infrastructure for electric vehicles. The CEFC could provide equity for proof and establishment of smart energy trials for new technologies such as smart in home displays, direct load control and appliances, as well as skills development which Australia could in turn export.

It also notes that carbon and Renewable Energy Certificate (REC) price volatility is limiting smart energy investment and compromises revenue certainty. “Another option for the CEFC to consider could be to cover the risk of volatile carbon / REC prices and ensure a certain price trajectory by underwriting a carbon price for the period while the carbon market matures.”

Emissions intensive industries

The Australian Industry Greenhouse Network, whose members account for more than 90 per cent of Australia’s mining, manufacturing and energy emissions, said the challenge for the CEFC was to demonstrate that there was any market failure in the finance industry “that is leading to the claimed economically inefficient levels of private investment in reducing emissions, and in clean energy supply and demand.” It says this task is not just important for directing the investment strategy of the Corporation itself “but, perhaps even more importantly, for providing transparency to the emissions, energy and manufacturing markets that could be influenced whenever the Corporation decides to make an investment.”

It goes on: “The AIGN looks forward to a compelling statement on market failures to be addressed by the CEFC and rigorous evidence of the claimed economically inefficient levels of private investment in reducing emissions, and in clean energy supply and demand.” It argues that the CEFC should be technology neutral, and should include investment in carbon capture and storage. However, it says it is concerned that interventions by the CEFC through preferential finance or equity “is likely to distort those markets by discriminating among market participants.” It says that if the CEFC goes ahead, then it should replace at least some of the 200 government programs and policies identified by the Productivity Commission that could be abolished and not add to the replication that already exists.

Pacific Hydro

Australia’s largest independent renewable energy developer, with interests mostly in wind but increasingly in solar PV and geothermal, as well as hydro, said it saw a clear alignment between the CEFC and the UK’s Green Investment Bank. PacHydro argues that the CEFC should focus on grid investment as this would enable a diverse range of renewable technologies to come forward, and with limited impact on the existing RET.

It says the CEFC should be mandated to “accelerate long term clean energy deployment beyond current mandated levels.” It also says governance is critical and it should be independent from “political influence, government policy cycles and private sector lobbying.” And it recommends the CEFC adopt an approach similar to the CDM executive, which administers abatement projects in the UN’s cleand development mechanism. This requires an assessment that proposed projects be able to prove that they would not be viable without the additional revenue stream from CDM credits.

PacHydro It says it will be some years before the carbon price and markets are sufficiently mature to replace the existence of the RET, and the CEFC could play a key “facilitation” role. This would include a short-term role as an early stage equity investor – with the option of scaling down that equity at certain pre-agreed milestones, medium term role as a larger equity investor, and/or provide loan guarantees along the lines of the US Department of Energy program; or a longer term role in providing investment support for grids.

Solar PV

US-based First Solar, the world’s largest solar PV manufacturer, and the builder of Australia’s first utility-scale solar PV plant in Geraldton, says the goals of the CEFC needs to be properly defined – does it aspire simply to build more megawatts, or create the path for technologies currently too expensive to deploy to be sustainable without subsidies. It suggests the CEFC should focus on the gaps it can influence most – the cost of financing, which, with the lack of project opportunities in the first place and the difficulty in obtaining power purchase agreements – is the biggest factor preventing the deployment. First Solar says it can do this either through loan guarantees, subordinated debt or tenor arrangements, or direct equity investments – and delivering experience on construction and technology.

First Solar argues that if the private sector is to be leveraged (and most people suggest a properly constructed CEFC should be able to leverage private funds on a 1:10 basis), then the CEFC should rely on the private sector to filter viable opportunities, as they have most at stake. This would allow the CEFC to take a broader portfolio approach to risk management. “The agency will then largely not be responsible for picking winners and being exposed to the backlash associated with failed projects,” it writes.

Solar thermal

US-based BrightSource Energy, which is building the world’s largest solar tower plant – the 392MW Ivanpah project – with the help of $1.6 billion in US federal loans, recommends the CEFC adopts similar mechanisms to the US Department of Energy. “The CEFC should allow for a portfolio of projects to be progressed and assessed at any point in time and, while there may be upper limits to the amount of funding that can be secured and time limits for applications to be submitted and approved (and/or deadlines for construction commencement etc.), it should be an “open” process, as is the DOE program, rather than a “funnel” process, as is the Solar Flagships program.” It says this “open” approach allows for multiple projects to be assessed and, as appropriate, approved in parallel, yielding a portfolio of projects that can then be progressed to meet our 2020 portfolio targets.

It recommends the CEFC would provide either equity and/or debt funding from its own funding sources or provide a guarantee to enable debt to be raised at an appropriate cost from third party lenders. But it notes that as the economics of projects such as Ivanpah improve with scale, it is most likely that projects that will best meet the economic and portfolio requirements will be very large in nature and will therefore need large scale financing.

“It will be important that the CEFC only progresses applications for projects that clearly will deliver outcomes that are consistent with achieving our portfolio plan of at least 20 per cent renewable energy supply by 2020 and the emissions reduction target. CEFC funds or guarantees should not be used for experimental or research projects or financing companies or techniques – the CEFC’s resources should be limited to appropriate large scale projects.”

Meanwhile, the Australian Solar Thermal Energy Association says CEFC mechanisms should include equity and project finance and loan guarantees, and it should also address revenue-side issues, and not just capital markets issues. “The major market gap currently constraining (if not preventing) investment in renewable energy is the failure of markets to provide the stable, long-term revenue streams essential to underpin renewable energy project development. Unless this issue is addressed by CEFC-backed products and services in the energy financial markets, this constraint will thwart all other efforts to promote clean energy investment in Australia.”

Geothermal

David McDonald, the head of Tasmanian-based geothermal company Kuth Energy, which is now pursuing projects in the Pacific and elsewhere for the lack of funding in Australia, says the CEFC needs to fill the space where commercial investors, be they equity or loan investors, are not prepared to enter. He says mezzanine finance facilities, subordinated loans, equity and quasi equity instruments – as well as innovative methods such securitising the carbon credits and REC’s as part of the debt repayment process – will be an important part of the investment mix from the CEFC.

For the geothermal industry, money will be needed at the front of the projects, which are very capital-intensive. “Innovative funding will be essential in the renewable energy space if there is going to be a determined effort to find base load alternatives to coal/gas. Seeing is believing and the geothermal industry is at a standstill and will remain in that space unless a working model can be established,” he writes in his company’s submission.

However, McDonald says that upfront risk of very early stage projects in the geothermal industry means they will unlikely meet the investment criteria set by the CEFC Board, and grant programs will presumably come from ARENA. He says the CEFC could provide a follow-on pathway to these projects once success criteria are met and private sector funding is not available. “It would be important to make sure that CEFC money does not replace this but rather fills the gaps.

Industry bodies

The Clean Energy Council says the CEFC will have a critical role in driving and promoting the necessary acceleration of private sector capital, risk management and financial services participation in the energy sector’s transformation. “To overcome current market constraints and accelerate commercialization and deployment of low-carbon technologies, support is needed in the construction of financial transactions in a way that will enable use of conventional capital markets products such as debt financing, private equity, venture capital and capital from longer term equity investors (like superannuation funds) at an affordable cost,” it writes in it submission.

The CEC says it is imperative that the CEFC is established as quickly as is practically possible, has strong governance, is independent of government and not constrained by government policy or budgetary cycles, and must have the flexibility to design and evolve over time a suite of financial products and services, including loan guarantees and co-investment.

Financing infrastructure investments, including transmission augmentation and extension and new and upgraded interconnectors, should be one of the priorities of the CEFC, and it should be open to “all clean energy sources” of generation and energy efficiency, with a primary focus on the demonstration of emerging technologies and the deployment of pre-commercial technologies, and helping these technologies cross the “Valley of Death” The commercialization of these projects faces what is commonly known as the ‘Valley of Death’.

“It is irrational to wait until a high enough price on emissions is in place to commence research in technologies to reduce emissions,” it writes. “Private sector market participants will not invest in scale-up to bring down clean energy technology costs, or in demonstration at scale to eliminate perceptions of technology risks, in the absence of clear commercial incentives to do so. Australia’s capital markets do not currently have commercial incentives to make these investments.” However, it said it should take care not to impact the dynamics of the market for Renewable Energy Certificates and undermine the investment certainty in commercial, least cost renewable energy projects.

The Sustainable Energy Association said the CEFC should be looking beyond just financial returns in its investment criteria, assessing projects inclusive of emissions reductions, public benefits and energy market efficiency, to build a more sustainable economy and environment. “The inclusion of companies in the supply chain for renewable energy (technology providers) as well as energy efficiency companies and projects is a positive aspect to the CEFC’s role and fulfills an existing gap in the market place. However, such businesses face different market entry and adoption barriers to businesses involved in stationary energy generation.”