CLIMATE SPECTATOR: CEFC misfire

The Clean Energy Finance Corporation Expert Review Committee released its recommendations for how the CEFC should operate yesterday.

The report recommends the $10 billion CEFC provide funding on a highly tailored, project-by-project basis, predominately as loans. It is unlikely to get involved in supporting projects through underwriting power purchase agreements.

Unfortunately they have not learnt from the repeated failure of past greenhouse reduction programs. While the report cites the Grattan Institute on multiple occasions to support their arguments, they have not paid heed to chapter two of the Grattan report 'Learning the Hard Way – Detailed Analysis' which details the problems with government:

1) Taking a highly tailored project-by-project basis to how it funds low emission technology, rather than supporting broader technology categories (for example, solar thermal or co-generation) through a standardised level of support provided equally to all technologies within the category; and

2) Providing funding through up-front commitments rather than linked to project output performance such as megawatt-hours of electricity.

While this is probably all a bit academic – because the balance of probabilities suggest the CEFC won't be around for long – it is concerning that advice swirling around Canberra seems to think supporting projects one by one is somehow less of a picking winners exercise than supporting broad technology categories on a standardised basis – through such things as mandated targets or feed-in tariffs.

There are a number of positive things to take from this report, but the $10 billion could have been allocated through a better model than an investment bank.

Below is a brief summary of key take-outs from the report.

Timing

The objective is for the CEFC to commence operations on July 1, 2013. This is an incredibly tough ask considering the limited employment security they can offer staff and the fact they will need very high calibre staff to do their job effectively. It seems unlikely they'll have much time to make an impact before the next federal election, which would be essential for them to stand any chance of defending themselves against Abbott's razor gang.

Target return

The CEFC will aim to achieve a return on funds close to the government bond rate. This will be assessed on an averaged basis across the entire portfolio of investments and across time, including an allowance for losses and operating expenses. This is well below the rate of return that private sector financiers would generally require and provides the essential wriggle room to allow the CEFC to invest in renewable projects such as solar thermal and geothermal, that without new government subsidies would probably lose money. These loss-making ‘investments' can then be balanced out by other more financially attractive projects in energy efficiency that will have little difficulty delivering returns above the government bond rate.

Eligibility for funding

Across the entire portfolio of investments, the CEFC will focus on technologies that have largely been proven but are not yet in widespread use. They do not however, rule out supporting technology demonstration projects where these pose acceptable risks and financial returns consistent with the CEFC goal to obtain returns approaching the government bond rate.
Also only activities that are predominantly located in Australia will be considered for funding.

Stream 1 – Renewables

Anything that qualifies for support under the renewable energy target will qualify for funding support from the CEFC. Of particular note is that hybrid projects that also employ fossil fuels or electrical storage will be eligible. This could potentially cover biomass co-firing with coal fired power plants or solar thermal pre-heating for coal-fired power stations.

It also states that it could consider funding supporting infrastructure for renewables projects such as new transmission lines to connect projects in remote regions.

Interestingly, the report does not appear to explicitly rule out wind projects for support, even mentioning them as an example of what institutions similar to the CEFC are financing.

Of very high importance to wind and solar PV businesses, the CEFC intends to invest in projects that will create renewable energy certificates, thereby potentially depressing the price of these certificates and the attractiveness of privately funded wind and solar projects.

The report recommends that the requirement that 50 per cent of funding be allocated to renewable energy be relaxed to a goal rather than a hard constraint.

Stream 2 – Low emissions and energy efficiency

The review states that projects that achieve an emissions intensity of 50 per cent or lower than the electricity grid average would be deemed eligible and explicitly mention an emissions intensity of 0.416 tonnes of CO2 per megawatt-hour of electricity as a cut-off threshold. An entirely conventional gas-fired combined cycle power plant would meet this threshold, which is concerning. Although it seems that the review had combined heat and power plants in mind when it set this threshold and could knock out financing gas combined-cycle plants on other criteria.

The authors state that the CEFC's direct investments in the energy efficiency area will focus on large-scale projects, where the primary purpose of the capital expenditure is on energy efficiency. But they also note that smaller scale energy efficiency projects could be financed indirectly through a third party aggregating these transactions. They open the door to supporting demand management initiatives outside of energy efficiency where these might reduce network infrastructure costs.

Funding tools/methods

The report recommends that funding, at least initially, be provided through loans rather than equity. These loans would be provided on terms that would seek to avoid cannibalising projects that could be successfully financed through private sector channels. In addition, they wish to be a co-investor in projects with other private sector financiers rather than just the sole funder.

The intention is to complement the private sector through providing loans at interest rates and time periods that are critical to the viability of projects employing eligible technologies but may not be available from the private sector, at least at the immature stage of these technologies' market deployment.

The review authors recommend against the use of loan guarantees and suggest that while there may be some scope to underwrite the electricity price risk from power purchase agreements, it would be limited.