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Clean Energy Finance Corporation and ARENA: Recent Lessons from the United States

July 26, 2011

The formation of the $10bn Clean Energy Finance Corporation and $3.2bn ARENA is a key part of the carbon package proposed by the Australian Government.  A few weeks ago we identified a number of problems related to the proposed investment vehicles.  Developments in the United States can be looked to for some lessons as to program focus and governance.

The establishment of a Government-directed investment vehicle is not unique to Australia.  The UK is moving ahead with it’s own plans (less sizeable than that proposed in Australia) and the US has also considered in detail the establishment of a Clean Energy Bank, which we understand to have been largely superceded by funding initiatives derived from the US Government stimulus program.

A high-profile initiative in the US is the Department of Energy’s Loan Programs Office, which provides loan guarantees to energy-related green-tech businesses.  This program is now the subject of investigation by the new Republican majority, with accusations made of potential political interference in company selection for government support.  This subject is now being discussed extensively in the US press.  The Washington Post runs a good introduction to both the nature of those accusations, as well as the possible detrimental effect on the competitive landscape that a potentially misplaced implied Government endorsement might have.

The direct provision to Australian corporations and projects of debt, and debt guarantees, are mechanisms currently explicitly named for use by the mooted Clean Energy Finance Corporation.

Despite the stated desire of the Government to secure an independent governance arrangement for the Clean Energy Finance Corporation, it is hard to imagine in a political environment such as Australia’s that a similar program wouldn’t come unstuck for the same reasons as alleged is the case in the United States.  Already there are examples of such funds being used in Australia for what can only be imagined are political considerations rather than technical or economic.  One might remember the regional development funds under the Howard Government here in Australia, where all sorts of spurious projects were funded apparently on the basis of propenent’s political connections or importance.

Strong governance and bi-partisan oversight of fund allocation will possibly be critical if the funding mechanism is to survive an electoral cycle.

As for the proposed research and development and commercialisation part of the carbon package, known as ARENA, an intended allocation of $1.5bn is somewhat known, yet a further $1.7bn seems totally unallocated .  There isn’t much to go on when trying to find out how it intends to spend the remnant cash.  We know from the Australian Centre for Renewable Energy‘s ‘Energy Directions’ strategy paper the generic thrust of what they think Australian public funds should be supporting.  We provide commentary on these ambitions (and link to the paper) at a previous post.

ACRE doesn’t aim at long-shot transformative opportunities – Perhaps it should.  We’re not saying that ACRE’s objectives are going to be those of ARENA, but we’re guessing that the same guiding principles are in danger of being the same.  The information provided on ARENA supports our hunch:

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.

ACRE’s and ARENA’s ambitions are clearly incremental R&D and commercialisation.  The difference is, that ACRE authors wrote the strategy paper with a few hundred million to play with in mind.  with ARENA, we’re talking about over $300 million per year that will need to be spent.

We are of the view, that the Australian Government should be more ambitious with at least some of the funds.  This is where it might be useful to look at Advanced Research Projects Agency – Energy (ARPA-E) in the United States.  The research it funds is early stage, transformational stuff.  It is modelled on the great success of the defence research agency, DARPA, and has received strong bipartisan support.

With all the other funds proposed in the carbon package, there isn’t anything ostensibly allocated to proof-of-concept or basic research aspects.

ARPA-E was funded $400m for the first two years.  In 2012 it got just $180m.  Surely Australia could eke some such funds from the honey pot for the basic lab and early work which is so hard to secure from other sources?  (for further reading, Ken Stiers at Bloomberg recently wrote a good article on ARPA-E).

The lack of detail and the inconsistencies within the proposals as currently stated are indicative of the hurry with which they were obviously conceived.  In Australia at the Commowealth level we see the effect that poor conceptualisation had in the ‘pink batts’ fiasco – a residential insulation program which resulted in rorting and deaths – and at the State level the New South Wales solar bonus scheme quickly went bust due to overgenerous feed-in-tariff establishment.

So – the message is that much, much more thought should be put into plans for the strategy and governance of both the Clean Energy Finance Corporation as well as ARENA.  The amount of funds being discussed for allocation can be truly transformative – but we are anxious that at present the plans are less than confidence-inspiring.  We look forward to further discussion of these proposed programs.


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