The CEFC: wrong answer to the right question

The Clean Energy Finance Corporation will effectively be putting the cart before the horse – but there is a solution.

We need to develop a portfolio of low carbon technologies that, in combination, give us a good chance of meeting our future energy needs affordably with close to zero emissions. But the Clean Energy Finance Corporation (CEFC), at least as currently envisaged, is the wrong response.

The reason renewable energy projects aren’t being progressed in Australia at the scale required has very little to do with inadequacies of the financial markets, nor the absence of a carbon price. The problems are far more fundamental.

To address these we need to consider the particular circumstances of each technology.


The reason there are only a small number of wind projects proceeding at present has nothing to do with failures in the financial market. It is because the current electricity price, as well as the value of Large-scale Renewable Energy Certificates (LRECs or LGCs), when combined are sitting at prices of around $70 per megawatt-hour (MWh) of electricity generated. This is below the price at which wind projects become viable, which is approximately $90-$110 per MWh based on present market conditions. Nonetheless, it seems likely that the value of LRECs will rise significantly within the next 12 to 24 months such that construction of new wind farms will become commercially viable. This is because the supply of LRECs will be insufficient to meet the government mandated target by 2016.

Solar Photovoltaics

Over 2010 and 2011 more than 1000MW of solar PV was installed in Australia. These installations were solely the product of government placing a premium value on the electricity these systems generated. The households that installed the lion share of this capacity had no need for concessional loans from the government.

PV projects outside of the residential sector, which are large scale, are very rare but the problem is not financing, it’s the price they receive for their electricity. All major solar PV module suppliers provide 20-year guarantees on their panels, and there is extensive experience in Europe of private sector project finance for solar PV projects. The level of government support in Australia however, is heavily biased towards small household systems. At megawatt-scale these projects can only capture the wholesale value of electricity which is half what households pay.

Pacific Hydro’s Moree Solar Flagship project did not fall over because financiers were uncomfortable with the technology itself. Rather it was because the project could not lock-in a long term contract for purchase of its electricity from a power retailer. This is not unique to renewable energy – banks would be equally reluctant to lend to a conventional fossil fuel project if it lacked a power purchase agreement.

Where there might be a financing failure is in the medium-scale projects below megawatt-scale located on business premises. In this segment, solar PV is close to being competitive with grid electricity supply, but the owner of the building premise can be uncomfortable with getting into the power generation business. Yet the CEFC Review has concluded that such projects are too small for them to get involved.

Solar Thermal

Solar thermal is an area where financing is a genuine problem. This is not so much of an issue for trough-based technology, but rather towers, dishes and linear Fresnel which offer potential for improvement over troughs. Due to the lack of operating experience, these options for improvement are not considered reliable enough for banks to lend such projects money.

The CEFC could play a potentially useful role, but these technologies face a more fundamental problem: They won’t be able to pay back the loans because no one will pay them enough money for their electricity. The CEFC is essentially putting the cart before the horse. These projects need the government to either:

1) Fund a proportion of the capital cost of the project (without requiring the money to be repaid); or

2) Pay a premium price for the electricity above that available from RECs and wholesale electricity market.

Option two is preferable. If the government wants solar thermal projects to be developed it should establish a mandated target or a set subsidy per unit of electricity generated provided on a first-in, best-dressed basis. This then needs to be complemented with a loan guarantee for projects other than troughs.

Projects would be eligible for a loan guarantee up to say around 50 to 60 per cent of the project cost (the precise level would require greater depth of research) subject to passing an independent technical due diligence review. The loan guarantee would be provided for a fee to deter its use by projects that don’t need it. Should the guarantee be called upon, government would be first in line amongst creditors.

Such a program better allocates risk between government and the project proponent while still getting over the chicken or egg financing challenge with new technologies. By providing the subsidy reward on the basis of actual electricity generated, rather than through upfront subsidies based on construction milestones or concessional interest rates, the proponent faces strong incentives around managing both construction and technology performance risk. They are far better positioned to evaluate and manage this than government. Also, by requiring a large proportion of the project to be financed by the private sector, it discourages purely speculative ventures.  


Geothermal’s problem is there is too much uncertainty around the cost-effectiveness and reliability of the underground heat extraction process. Giving geothermal proponents a loan is not going to help them much. This is because they have no way of knowing when and how much electricity they’ll generate and therefore their capacity to pay back the loan. An equity investment could be helpful, but the recommendations from the CEFC review suggest that such projects would be deemed too risky.


Bioenergy power generation projects can encounter chicken or the egg dilemmas around establishing fuel supply chains. This can make them appear too risky for banks, and impose costs of capital higher than other power projects. This may be an area where the CEFC could be useful. 

Discussions with project developers however, suggest that rather than providing loans, what is more important is a stable, long-term market for their electricity or up-front grant assistance in establishing and derisking the fuel supply chain. In this respect, the value of Renewable Energy Certificates and the electricity price are the biggest constraint for these projects. Until prices improve substantially, the ready availability of loans is of very little help.

I apologise for not considering wave power, but my knowledge is insufficient to make an informed comment.

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