New “ethical” debt fund targets renewables merchant market

A new investment fund that plans to specialise in providing debt security to solar and wind energy projects being developed on the merchant market has launched in Australia, with a $50 million cornerstone commitment from Future Super.

The Infradebt Ethical Fund, launched on Monday by specialist find manager Infradebt, will invest in projects “that make a positive and sustainable difference to society”, including a range of “exciting” renewable energy projects.

In a media statement, Infradebt said the fund would “directly originate lending opportunities with project proponents, co-invest in syndicated lending facilities, and trade opportunistically in the secondary debt markets.”

The fund will focus on wind and solar projects that have not secured power purchase agreements, but will operate  on a full merchant basis – trading on the spot market for electricity.

That moves demonstrates a growing confidence in the strength of Australia’s renewable energy sector, even without firm federal government policy support.

It also demonstrates the opportunity for renewable energy investors to capitalise on Australia’s high wholesale electricity prices which, rather perversely, are being pushed up by the very political uncertainty that has served to put mainstream banks off backing the merchant sector.

“We have confidence that in the short term, electricity prices are likely to remain relatively high,” said Infradebt CEO Alex Austin in an interview with RenewEconomy on Monday.

Meanwhile, he added, there is this “huge bottleneck” of renewable energy projects out there “with development approval and grid approval and are ready to go,” but which can’t get an off take deal and are struggling to get finance.

(RenewEconomy’s data shows more than 13GW of solar plants alone in the “pipeline”, over and above the 3GW currently under construction or about to begin).

“From a super fund perspective, there are lots of funds very keen to invest in renewable energy, and a lot of super fund members that are keen for their fund to invest in renewable energy,” Austin said.

“And it’s much easier to invest in renewable energy from the debt side. As a debt investor, we are much less exposed to longer term risk. We can invest on quite a conservative basis, without need to assume subsidies.”

On the other hand, he added, “the banks we speak to are very sensitive to the regulatory risks from government. It’s very difficult for them to see how they could lend (to merchant projects).”

Indeed, only the federal government’s green bank – the Clean Energy Finance Corporation – has taken the plunge. Last December, the CEFC committed up to $120 million in debt finance to the 270MW Sapphire wind project near Glen Innes in northern NSW, allowing the $588 million project to proceed to construction.

At the time, the CEFC said it hoped the commitment would demonstrate the bankability of large-scale renewables projects in Australia and help allay concerns about merchant risk, as an increasing number of wind and solar projects turned to the merchant market.

But not much has really shifted.

Infradebt, however, says its new Ethical Fund has a strong pipeline of renewable energy investment opportunities, including several solar farms, wind farms and embedded generation projects – some of which will be revealed in more detail in coming weeks.

“We (are) looking at both solar and wind,” Austin told RE, adding that the early projects were “most likely to be solar” because they would be quicker to get up and running, to take advantage of current electricity market conditions.

“We’ve found a sort of sweet spot with (solar) projects ranging from 5MW to 30/40MW range,” he said.

Austin also noted that Future Super had been a “very big supporter” of getting the Infradebt Ethical Fund to this stage, and was now keen to demonstrate to its members how the renewable energy market could be leveraged.

“There’s been much debate of late about the capacity of Australia’s superannuation sector to fund nation-building infrastructure projects like solar farms and social infrastructure,” said Future Super founder and managing director Simon Sheik, in comments on Monday.

“Our investment in this fund is one way we are making sure Future Super members grow their retirement savings whilst helping build a sustainable future.”