Hockey sets 'impossible' targets for CEFC in green investments | RenewEconomy

Hockey sets ‘impossible’ targets for CEFC in green investments

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In new attempt to nobble CEFC, Abbott’s economic ministers instruct it to almost treble targeted returns, without raising its risk profile. Meanwhile, RET talks stall.

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Treasurer Joe Hockey and Finance minister Matthias Cormann – no friends of renewable energy – have been accused of setting impossible rate-of-return targets in an updated mandate for the Clean Energy Finance Corporation.

Both ministers have tried to abolish the $10 billion green bank, but have been frustrated by numbers in the Senate. Now, they have found a new way to try and frustrate the CEFC’s operations, by ordering it to nearly treble its targeted returns, but not lift its risk profile.

The CEFC is providing loans to wind and solar farms, wave energy projects, solar thermal heating installations, financing energy efficiency projects and solar leases and solar PPAs, as well as investing in a variety of waste gas and other technologies. So far it has allocated around $930 million to help fund projects worth more than $3.2 billion.

It was previously mandated to achieve the equivalent of the 5-year bond rate – 3.4 per cent – which it was happily doing in its latest year with estimated returns of 6.5 per cent, despite the fact that it had been derided by other Abbott ministers as a “high risk venture.”

Now, Hockey and Cormann have set a new benchmark of the 5-year bond rate plus 4-5 per cent, effectively setting a target of 8.4 per cent. But in setting the challenge of achieving these returns, the nation’s  two most senior economic ministers have instructed the CEFC not to lift its risk profile.

Any fund manager or financial analyst, or indeed anyone with a superannuation fund, knows this to be an absurdity.

CEFC chairwoman Jillian Broadbent, a former senior banker and member of the Reserve Bank of Australia, said the new requirements were “outside the scope of normal market opportunities.”

She sent the below letter to the ministers to point out that the CEFC was now being expected to outperform the market “by a considerable margin” – thus requiring the CEFC to find a body of investments that were “inconsistent with traditional market-based principles to deliver out-of-market investment returns.”

cefc letter

The CEFC sent a paper prepared by former Audit Commission head Bob Officer and financial analyst Steve Bishop to give the ministers and their staff an “economics 101” of how markets work, and the correlation between risk and returns. Basically, if you want higher returns, you need to take more risks.

The decision continues the scatter-gun approach of the Coalition towards the CEFC. Originally, it alleged that the CEFC would be making loans in “wild and whacky” investments that “other banks would not touch in a fit”, and then complained when it joined with other banks in a wind farm refinancing, accusing it of “crowding banks out of the market.”

Hockey, who has said he finds the appearance of wind farms “utterly offensive”, has previously said he would repeal loans made by the CEFC, before it was pointed out to him they had a legal mandate, and to do so would further undermine Australia’s sovereign risk.

Broadbent, however, said the CEFC would continue within the spirit of the act, and would take “all reasonable steps” to comply with the new mandate – “even, as all evidence suggests, it will prove highly challenging.”

She also noted that, while the Abbott government still sought to abolish the CEFC, the institution would work to help in its emissions abatement task.

Meanwhile, despite a lot of talk in mainstream papers and elsewhere, and a fair bit of salesmanship from environment minister Greg Hunt, there appears to be no real progress in talks on the future of the renewable energy target. There is hope, however, that a deal can be reached when parliament resumes in 10 days. There is a two week sitting before a long break before the budget sitting.

Still, the problem remains around the numbers. The Abbott government has not budged from cutting the target to 31,000GWh. Hunt said on radio yesterday this represents a “doubling” in renewable energy, referring to the 16,000GWh already built. But, in effect, it represents a 40 per cent cut in the remaining task to 2020 from 25,000GWh to 15,000GWh.

Labor may agree to a cut to as low as 35,000GWh, meaning another 19,000GWh to be built between now and 2020 (so just a 22 per cent cut), but will require other concessions, such as higher targets in interim years and possibly an extension of the “back end” of the target to beyond 2030.

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30 Comments
  1. john 5 years ago

    As I see it the only possible areas that the CEFC can help foster would be remote area power supply demands presently using Diesel Gen Sets.

    I suspect this narrows the possible scope of investment to a few paltry million at best.

    To achieve 8.4% return on capital the managers of this fund will outperform most of the companies in Australia I would expect.

    I am doing a quick check to find out.

    Ok the best return is 7.08% hmm how on earth are they going to get to 8.4%?

    Dividend Star ratings adjust to changes in dividend performance, technical and fundamental data. The current top 10 dividend stocks with a market capitalisation greater than $1 billion as ranked by Dividend Star Rating are listed below: – See more at: http://dividends.com.au/#sthash.vxZyqPqG.dpuf

    RatingMTUM2 Grp59529.5100.0%7.08%28.960.98×17.65%TOLToll
    – See more at: http://dividends.com.au/#sthash.vxZyqPqG.dpuf

    This is a brilliant move just set the hurdle too high then when they can not perform to the parameters set abolish the organisation.
    Now to move outside prudent governance guidelines would open the directors to prosecution, however I feel that the people who set such a high 8.4% level of achievement should be charged with untenable, unreasonable and grossly reckless exposure of capital risk.

  2. Leigh Ryan 5 years ago

    As always when the LNP doesn’t get it’s way they throw a hissy fit

    • Miles Harding 5 years ago

      … and then are forced to retract it a little later!

      Ricky Muir’s maiden speech hit that nail on the head when he suggested that pollies referring to the senate as dysfunctional may have it confused with the lower house. That senate is the only thing that has saved us from the effects of terminal stupidity so far.

      • john 5 years ago

        I am afraid I have no confidence in a person who got .05% of the vote and his performance lives up to that expectation.

        • Miles Harding 5 years ago

          It’s one of those quirks of the voting system we have, I’m sure he was as surprised as you were. I do feel that he has a social conscience and will ultimately be a good champion for many of us who didn’t vote for him. Time will tell, but I’m quietly confident.

  3. Connor Moran 5 years ago

    I wonder if the Senate can vote a disallowance of this instruction?

    • john 5 years ago

      Connor as I said the guidelines are outside reasonable and best business practise perhaps a call to the governess people would be in order.

  4. Bighead1883 5 years ago

    This is criminal by intent

    • Terry J Wall 5 years ago

      I recon they are in this ward, to get a checkup on their lobotomy operation

  5. michael 5 years ago

    weren’t financiers yesterday reported as falling over themselves to throw money at renewable projects due to the no-brainer economics of them? now, hurdle rates are too hard when needing to be 8%…. which is it?

    • Giles 5 years ago

      As ever obtuse Michael. CEFC has a specific mandate for new technologies. If you read the story, the complaint of the CEFC is that you can seek to lift the returns three-fold, but not if you don’t allow an increase in risk. It’s very basic economics.

      • michael 5 years ago

        not fun if it’s not obtuse 🙂
        anyway, fully agree the risk profile should be allowed to rise in step with demanded return, however risk is pretty subjective when you are taking major stakes in very early technology plays, so the CEFC shouldn’t have to chagne much, surely their risk profile is pretty high already, they aren’t in term deposits!
        Don’t private equity aim for at least that rough 8% level and above? CEFC/ARENA in some cases are pretty much angel investing, which should be aiming for high returns. Also, my point stands about the comment on financiers, why would you mention yesterday they were falling over themselves to put money in it, if there weren’t high returns available?

        • john 5 years ago

          The CEFC only finances a part of new energy projects and is careful to ensure that they are viable.
          They have done very well in this area.
          As to business they work on a 20% return and only go into areas where they can totally screw the market, preferably with a monopoly or a get in get out strategy.

    • john 5 years ago

      The 8.4% is way out of good governess guidelines and is not how any prudent director would go.
      To do so would lead to exposure to prosecution for bad business practise.

      • michael 5 years ago

        do banks aim to make better returns than 5yr bonds?

        • john 5 years ago

          yes they do however they have this wonderful little earner called a credit card which is a gold mine

        • Peter Thomson 5 years ago

          Yes, but not with low risk investments.

          • michael 5 years ago

            early stage investment in new technologies is low risk?

          • Peter Thomson 5 years ago

            Tidal and wave harvesting are new technologies, where there is high technical risk as well as financial and regulatory risk.

            Wind is a mature technology with low technical risk – when you build it you know what you will get, how much it will cost you to maintain it, and how long it will last.
            Utility-scale solar is less mature than wind, but still mature enough that the technical risks are well understood.

            The risks for returns on solar and wind are regulatory, not technical.

  6. Chris Fraser 5 years ago

    Could Hockey & Cormann have information that suggests this return could actually be achieved ? This would be unlikely, though it tickles the imagination to think that these two are starting to have some belief in CEFC investment. It’ll become hard for them to reconcile their internal ideological conflicts with the fact that modest CEFC investment is a good earner for this poor cash-strapped government.

    • john 5 years ago

      Actually if the real cost to supply power to far flung users of power was taken into consideration, yes RE can deliver power at lower cost, however we subsidise the transmission losses and those in urban areas close to generation are paying for this.
      Is this fair?
      Well yes it was when we had no other way of making power, but now we are in a transition phase, where new technology is causing disruption to the business model.
      Managing this needs good people who can think of the immediate and for the future and possibly constrained by guidelines that make it difficult to proceed.

  7. Bella49 5 years ago

    I hope one day these two and a raft of like-minded LNP Ministers will be dragged up in front of a Royal Commission and asked to justify the many stupid and vindictive decisions by which they are destroying the Australian economy and community well-being. They should be charged with treason for their fixation with trying to bring about their imagined Tea Party utopian vision of a free-market state run by and for their benefit of their capitalist cronies at the expense of ordinary people.

    • zn 5 years ago

      Easy now…

  8. john 5 years ago

    As I set out below this is a very pathetic low knuckle moron bottom dweller idea.
    I can not believe that we have elected people of such low intellect and are so morally dissuaded from normal standings of even good persuasion that they could possibly implement such impossible to meat guidelines that transgress any level of intellectual propriety.

    • Peter Thomson 5 years ago

      We got them because Labor had made themselves unelectable at the last election and needed to be taught a lesson. Unfortunately the coalition took it as a mandate to progress their pro-coal anti-renewables agenda. Why wouldn’t they?

      So let’s tell them and keep on telling them that the country doesn’t agree with their policies. Then next election we vote them out.

      • john 5 years ago

        Unfortunately this is not going to save the situation.
        The guidance given has to be followed and it is impossible.
        I would advise legal advise frankly.

  9. Kevin O'Dea 5 years ago

    This gamble by Hockey and the Conman could be possible grounds for seeking a Double Dissolution of the Federal Parliament. The huge amounts of money involved and the new jobs, not to mention the collosal stakes in denial of human induced climate change, bring to mind the 1975 Dismissal in which the Khemlani loans affair provided the grounds for the Coalition at that time to take their action. Khemlani was small beer in comparison to the huge stakes in today’s situation.

    • Terry J Wall 5 years ago

      Some one should challenge this in the ICJ

  10. Raahul Kumar 5 years ago

    The only winning move is not to play the game. If Hockey gives impossible instructions, first publicize them, then refuse to abide by them. No matter what Hockey want, he can’t have the impossible.

    He must either permit increasing the risk, or lower the returns sought.

  11. John McKeon 5 years ago

    So, it must be true then …. King Coal actually holds Joe and Matthias LITERALLY by the balls ….

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