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Clean Energy Finance Corporation: Australia’s Proposed Clean Energy Investment Fund – First Thoughts

July 12, 2011

As part of the carbon pricing package, the Australian Government has announced the re-organisation of $3bn of existing clean energy funding under an entity called ARENA, and the creation of a new AUD$10 bn fund called the ‘Clean Energy Finance Corporation’ (herewith referred to as CEFC for simplicity).

Information is sparse.  We have a lot of fun second-guessing what it’s all about.

It’s probably best to start with the existing funds, then work out what the additional funds are meant to achieve above and beyond that.

ARENA will provide early-stage grants and financing assistance for projects that strengthen renewable energy and energy efficiency technologies and make them more cost competitive. It will independently administer $3.2 billion in existing Government support for R&D, demonstration and commercialisation of renewable energy technologies. ARENA will oversee existing Government support for programs currently delivered by the Australian Centre for Renewable Energy, the Department of Resources, Energy and Tourism, the Australian Solar Institute and the proposed Australian Biofuels Research Institute.

So:  it seems that ARENA will have sole mandate for early- and mid-stages of the commercialisation cycle.

It would seem that CEFC will therefore focus on deployment, right?

Not necessarily.

The Government describes the function of CEFC as follows:

The $10 billion Clean Energy Finance Corporation will invest in businesses seeking funds to get innovative clean energy proposals and technologies off the ground. These Government-backed investments will deliver the financial capital needed to transform our economy.

The Clean Energy Finance Corporation will invest in the commercialisation and deployment of renewable energy, energy efficiency and low-pollution technologies. It will also invest in manufacturing businesses that provide inputs for these sectors; for example, manufacturing wind turbine blades.

Ah.

so the CEFC will invest in both deployment and commercialisation.  In two streams, apparently,

each with half of the allocated funding.

  • The renewable energy stream will invest in renewable technologies, which may include geothermal and wave energy and large scale solar power generation.
  • The clean energy stream will invest more broadly; for example, in low-emissions cogeneration technology, but will still be able to invest in renewable energy.

So this either means that the first stream of the fund will a) invest in technologies, or b) power generation with particular technologies in mind.  We think this means the latter, b).

The second stream couldn’t be more vague.  $5bn into cogeneration?  Why?  That is a LOT of cogeneration.  If invested in renewables, then what is the difference between the first and second streams?

The release goes on to say:

A variety of funding tools will be used to support projects, including loans on commercial or concessional terms and equity investments. To ensure that the Corporation has continuing and stable funding, capital returned from its investments will be reinvested.

This implies that there will be a return from the investments made:  these are not grants.  It sounds like the Government is willing to assume equity and debt risk that others are not prepared to do.

This takes the view that the market doesn’t know everything about risk – otherwise that investment would be available.  The Government knows more than the private sector and will make a return on that basis.  Either that, or the Government is willing to take risks using taxpayer dollars that the private sector won’t.

The fund will have to invest $10 bn.  Are there really $10 bn of commercially-viable opportunities in Australia in the clean-tech space?  This is a big issue and possible cause of problems:

1) The funds will be invested into poor deals either with high technology or other risks, and/or with uncommercial returns

2) Large corporations will be in a strong position to tap the finance as they will be able to use and deliver results at scale required by the fund – far better than small business.  Large corporations will benefit disproportionately, with small innovators not having political access or scale necessary.  The projects run by large corporations may not be in the most need of the funding – if at all – but will have their returns to shareholders supercharged by sub-commercial rates.

3) There is a dearth of risk capital in Australia in general, and for cleantech in particular.  The Government is currently hoping to address this deficiency already through co-investment in VC clean tech funds.  Whether private co-investment is available is yet to be seen.  There is a danger that the Government will crowd out a nascent cleantech VC industry, soaking up real commercial opportunities at sub-market rates.

There will, however, be opportunities for canny investors as a result of the funding splurge.

First:  dump the risk with the Government, and take favourable convertible or senior debt or preferential equity positions in projects where the opportunity for success is reasonable.

Second: bet against project structured finance packages where possible, or against the shares of the companies tapping the funds.

A $10 bn risk fund in Australia will be hard to spend with any sense.  The UK fund referenced in the Government release is $3bn – but there’s a whole lot more happening in cleantech in the UK than in Australia.

Justification for the fund is not clear-cut, and the plans as they currently stand are muddled.  That’s not to say that a massive wedge of cash into the sector is unwelcome or necessarily counter-productive – but let’s hope there’s real industry consultation on their formulation.

None of these points address the broader issue:  whether a (state-directed) technology development and export-oriented model can succeed in Australia.  To make a clean technology sector sustainable, there must be an export market opportunity due to the small size of the Australian domestic market.  So long as commodity prices determine the price of the Australian dollar and competitiveness of exports, real questions persist as to viability of such an industry.

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