Australian governments have traditionally played a key role in leveraging private investment in clean energy projects and technologies.
Programs such as those at the Australian Centre for Renewable Energy – now to be rolled into the newly-established Australian Renewable Energy Agency (ARENA) – the Innovation Investment Fund and Commercialisation Australia, among others, have helped encourage the marketplace development of Australian clean energy innovations.
However, as acknowledged in the wording of the Federal Government’s Clean Energy Future legislation, these existing measures were insufficient to effect the change needed in Australia’s energy mix in order to meet emission reduction targets.
Australian governments are moving from utilising grant-based schemes to establishing co-investment institutions for a variety of reasons, according to Julian Turecek, Honorary Fellow in Carbon Finance at Macquarie University’s Applied Finance Centre.
“Firstly, the track record of grant-based programs is far from stellar,” he says. “Grant programs are subject to too many variables, including political and budget cycles.
“Secondly, in this type of financing, governments are being asked to accept – which largely they do – that their role in ‘picking project winners’ leads to sub-optimal outcomes. Co-investment means that the private market is doing the ‘heavy lifting’ of vetting projects and opportunities, so only the best are funded.”
How the CEFC is shaping up
Mr Turecek anticipates that the Clean Energy Finance Corporation (CEFC), the main financing component of the Clean Energy Future package, will “hit the ground running” in its first year of operation to make up for the disadvantages of previous government schemes.
“I imagine that the CEFC will have a significant quantum of investment ready to be deployed in the first year from when it starts investing,” he says.
According to Mr Turecek, this will require active deal sourcing from late 2012 or early 2013, after establishment and staffing processes are undertaken in mid-2012.
“From my experience of seeing around 200–300 potential deals per year, there should be a variety of opportunities that the CEFC could consider investing in,” he notes.
“As an example, $500 million is equivalent to a 125 megawatt (MW) solar thermal plant or 50–100 MW of ocean power, so it should be possible to have something to show from the first year of operation – possibly in construction, if not commissioned.”
Co-investment: the key
Mr Turecek predicts that the CEFC will function as a co-investor alongside private capital, for those clean energy projects that can’t raise sufficient capital to proceed but which have sound business cases in their own right.
“The CEFC might invest through a variety of instruments, such as loan guarantees, first loss loans or a variety of debt instruments,” he notes. “It has a large amount of capital to deploy in a relatively short time, so the Corporation can play an active role in facilitating large-scale projects.”
The key factor, according to Mr Turecek, will be a company’s ability to de-risk its project and identify sources of matching private debt or equity capital – which will be a prima facie indicator to the CEFC that the project has merit.
“It would restrict the CEFC’s investment mandate too much if there was a specific number of private dollars required for each dollar of public capital,” Mr Turecek says.
“Leverage is something that the CEFC should have when it selects projects to invest in, but it will be just one among many of the factors in the investment decision.
“It may be that leverage in more difficult projects where there are more market failures (such as in transmission investment) would be lower than where there are fewer market failures (such as in wind farm investment).”
Regulating the new era
Mr Turecek says that an appropriate measure for the Federal Government to set for the CEFC would be the level of return it requires from the Corporation’s funds, such as what margin is required above a benchmark – for example, a long-term bond rate. Once such a benchmark is set, it would allow the board of the CEFC to select a portfolio of projects to deliver the return.
Most importantly, says Mr Turecek, the CEFC needs to deploy its capital alongside private investment, otherwise it risks funding ‘white elephant’ projects that might not have a sensible business case.
“The funds could perhaps be most efficiently deployed into the gap that currently exists in the financial markets, and which has been exacerbated by the global financial crisis,” he says.
“While there is some venture capital available for early-stage projects (to be enhanced by the Renewable Energy Venture Capital Fund under ARENA’s remit) and there is bank debt and project finance available for mature, proven technologies, there is a gap between these sources of finance where venture capital is extended beyond its means but before a technology is proven at sufficient scale, and for sufficient longevity to be suitably de-risked for bank debt.
“The CEFC could play a very useful role in funding large-scale (10–100 MW) demonstration projects where there is minimal risk from a venture perspective, but too much residual risk from a banker’s perspective.”
Encouraging clean energy
Mr Turecek says that Australian clean energy companies can increase the attractiveness of their projects to Australian and international investors by de-risking the projects as much as possible, either before or during the capital-raising process.
“Clean energy projects compete with other projects within the infrastructure investment class, so they need to show competitive risk-adjusted returns,” Mr Turecek notes.
“Having an offtake agreement, a brand-name engineering, procurement and construction contract, connection agreements and all site and land access arrangements and environmental approvals tied down is a big plus.”
Mr Turecek holds a positive view on the outlook for investment in Australian renewables, and believes that the next five years will be pivotal for the country’s clean energy industry.
“With the combination of the carbon price, the renewable energy target starting to bite, and the CEFC and ARENA funding, we are going to see investment in renewables at an unprecedented scale,” he predicts.
