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Australia: Lessons from China and US For Clean Energy Spending

September 16, 2011

The world is beginning to see the potential for waste and inefficiency from large-scale Government clean energy debt finance programs in the US and China.  Australia should learn some lessons in formulating the Clean Energy Finance Corporation.

The US Government  has a $38.6 BN program to underwrite company debt to create green jobs.  The bankruptcy of Solyndra and allegations of political interference in the award process has led many to question the program.

The Obama presidency has set much store in green job creation – targeting 65,000 new jobs.

As well as debt guarantees, companies are able to access the Treasury Department’s Federal Financing Bank for low-interest loans.  An understanding of the spread of renewable energy companies accessing this facility and the rates they pay can be gained from their monthly press releases.  Solyndra accessed the facility in June at an interest rate of just over 1%.  Their credit risk would suggest they would otherwise have been paying a few basis points more than this.

The Washington Post estimates the Solyndra guarantee to be worth about 3% of the Government initiative.

Anticipated failure rates of the program are in the 5-10% range.

Right-wing commentators decry the program as an unwarranted supply-side industrial policy exercise.

Now let’s talk about China.

China also has ambitions in the green-tech space, which are expressed politically within five-year plans.  China now ranks as no. 1 in the Ernst & Young country attractiveness index.

Through the China Development Bank, in 2010 alone $35 BN in low-interest debt was made available to China’s renewable energy companies.

There have been questions raised about the economic sustainability of China’s program.  If the US has a guarantee program for which 5-10% failure rate is expected, they what is China’s expected or actual failure rate?  It is impossible to tell from the CDB’s publications.

China Development Bank has extended billions in loans to companies including Suntech, Trina, JA Solar, LDK Solar, GCL-Poly Energy among others.  Not only that, but the CDB has also been taking equity stakes in these companies – moves which have attracted less press than the credit deals.

Is China any better at making these credit judgements than the US?

There have been allegations that, with the cheap finance made available to them, Chinese renewable energy companies are able to out-compete western companies on both technology and deployment.  Some, including the US Steel Worker’s Union in their WTO case against another, specific Chinese wind energy support subsidy, allege that this constitutes ‘dumping’.

Has massive plant investment by these companies funded by cheap debt, and the prices and margins which they are able to achieve, meant that these companies are winners?

There is now evidence to suggest that the commercial proposition is potentially flawed and, on paper at least, could lead to risk of failure of these companies.  That is the perspective of some commentators and investors.  For example, Bronte Capital’s view on Trina Solar – one of the recipients of China Development Bank credit – is that their cash burn rate is unsustainable.

Bronte states that they hadn’t counted on the willingness of banks to continue to lend to Trina under such circumstances.

Trina’s $14.6 BN 4-7 year purchase commitment for polysilicon is with GCL Solar – a subsidiary of GCL-Poly.

GCL-Poly just received another $713m loan from CDB bringing their aggregate with CDB to over $1BN since 2010.

Trina has received a whopping $4.4 BN in credit from CDB.

Trina has outstanding off-balance sheet short-term debt obligations of $651m according to Bronte.  While this debt facility is with ‘various banks’ you can believe that a large chunk of this will be with CDB.  If so, then CDB is lending to the buyer of the polysilicon company to which it is also lending.  It won’t want to let either fail.

Ultimately, the Chinese Government (backing the CDB) has for political considerations clearly decided to carry the risk.  If there is no end in sight to the funds they are willing to lend to the solar groups, then betting against the companies the CDB backs is a risky excercise.

We’ve written about the Australian Government’s plans to spend revenue from the carbon tax, for which the legislation started to be introduced to parliament this week.

AUD $10 BN of these funds are currently allocated to the ‘Clean Energy Finance Corporation’ over five years.  While the precise plans for deployment of these funds by the CEFC are yet to be determined, debt, debt guarantees and equity are significant parts of the plan.

It is yet to be seen whether the Australian Government will do any better (or no worse) than their Chinese and US counterparts in picking winners and a winning strategy.

Imagine the hundreds of millions of taxpayer money that would have been wasted on funding risky – e.g. hot fractured rock geothermal – companies and projects if the Australian Government had had the money a few years ago.

At this blog, we firmly support clean energy funding, and understand that there will inevitably be failures.  However, there are clearly lessons to be drawn from overseas experience in conceiving plans and operational rules for the CEFC.

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