Tell us about the Investor Group on Climate Change

The Investor Group on Climate Change (IGCC) is an association of institutional investors that includes superannuation funds, funds managers, asset consultants, the research houses within the global investment banks, and listed property investment trusts. We are also a partner of, and have until this year, run the Carbon Disclosure Project in Australia. The IGCC has been around for about six years, and the first of our two main objectives is to influence policy setting on climate change, which thereby reduces our investment risk and opens up investment opportunities. Our second objective is to work with investors to educate them on how to minimise climate change risk in their investment decisions.

What are some of the ways you work with investors to educate them?

We do research reports, we have skilled and experienced people speak with investors, we run special events and act as a conduit of information developed by others. We provide frameworks for investors to engage companies so that they manage climate change risk. Also, in the past we have provided information for trustees on how they can incorporate policy at corporate and investment-management levels in their portfolios.

Describe the current landscape for investment in renewable and clean energy in Australia

I’d like to give a definitive answer – like ‘good’ or ‘bad’ – but I’m inclined to use a word like promising. It is looking better than it has looked for a while. For large institutions a carbon price is a threshold issue. The carbon price causes institutions to look at the asset class of infrastructure and property investment that relates to renewable energy and leads them to ask: should we be changing our allocation to this asset class? Should we be investing more?

The certainty of a carbon price causes those questions to be asked. This is because there is an expectation that the level of investment opportunity in renewables will grow substantially in the next ten years, and so institutions are trying to find a way to weight towards that.

The reason this sounds a bit distant is because institutions invest billions of dollars, use managers to make their investment allocations for them, and they allocate money at macro levels towards certain themes or types of opportunity. Actual investment decisions take some time to filter through the system.

Notionally, therefore, a carbon price is going to cause institutions to reconsider their allocation in infrastructure, because renewable energy is going to present some good opportunities in that space in the future.

How does Australia’s renewables investment landscape differ from those internationally, and how will bringing in a carbon pricing mechanism change this?

Australia compares well, and there are a couple of reasons for that. We have lots of natural assets, a stable economic environment and growing economy. Most other countries do not have these fundamentals at the moment.

The combination of the carbon price along with the Renewable Energy Target (RET) and the Clean Energy Finance Corporation (CEFC) is going to mean that in the next couple of years the opportunities and projects that have been around for some time in the clean energy sector are going to start happening.

The IGCC thinks that there will be a lot of opportunities in distributive energy, such as in wind and, later this decade, in large-scale solar. Technologies like geothermal and wave still need more research and development. As a result, big institutions deem them too risky to invest in. That doesn’t mean, though, that some companies won’t invest money in these technologies.

Grid infrastructure will probably present some opportunities this decade, and things like the CEFC have a role to play in that, by catalysing large-scale investment in those projects. Large regulated assets are a type of investment that we understand very well in Australia and it is possible that large energy connectivity infrastructure projects could fit into that kind of asset allocation for us, so we’re quite hopeful of the opportunities that are going to be thrown up in that space.

What are some of the things holding back investment in renewables in Australia?

An issue in Australia in the past has been the scale of deals. For everything except wind, either by virtue of the stage of technology, or by the inability to secure offtake agreements, the type of projects embarked upon have been fairly small. They’re too small for institutions basically, and that is one reason why super funds, for example, haven’t really invested in them.

Another barrier which is important to consider is the way the Australian energy market works. You really need to have different types of assets that can produce energy for different periods of demand in the day, and for super funds going in and owning one or two assets is a risky investment strategy, as they need breadth. This is the reason why they’ve always preferred to invest in companies who own a portfolio of assets.

I think this starts to diminish as some of the newer technologies come down the cost curve, and some of that risk is taken away. This is, of course, as long as those assets can secure power purchase agreements.

I also think that the level of uncertainty around the macro policy environment in Australia has dissuaded a lot of investors from approaching the clean energy sector with serious intent. We know that there have been specific issues around the RET with the oversupply of credits, however, linked to that is the issue of concentration in the market. We’ve only really got three retailers buying energy in Australia (Origin, AGL and Tru), and because the RET liability is linked to those organisations – and specific large energy users – it means that not just anyone can go out and build a wind farm and sell energy into the market.

What policy changes do you think will help to make a difference in the future for investment in renewable energy?

The passage of time in the next couple of years will give people a clearer of sense of how we’re going in relation to the 2020 RET target, and will see some permits clearing out of the system. I don’t think we necessarily need to change the policy settings on the RET, but there might be an argument for trying to accelerate the uptake or the extraction of some of those permits from the system to try and see projects commence earlier than 2014 or 2015, as the shorter the project build period the greater chance we have of a crunch.

I think that we still need investment to go into developing technologies, and geothermal, solar thermal and wave seem to be best opportunities for scale. The support of the CEFC and Australian Renewable Energy Agency funding within the existing framework that the Federal Government and the Greens have designed are going to be really important contributors for developing those technologies.