When clean finance is green waste

Between a looming carbon tax and the Opposition's pledge to axe the proposed $10 billion Clean Energy Finance Corporation, the real question about the fund is why on earth we need it.

The expert review panel established to advise the federal government on the proposed $10 billion Clean Energy Finance Corporation has done a good job of highlighting some of the dangers associated with trying to pick and subsidise clean energy technology winners.

As the panel’s chair, Jillian Broadbent said in her covering letter to Wayne Swan and Penny Wong, the investment task confronting the fund will be ‘’challenging".

‘’The CEFC will need to manage the tensions arising from the interaction of an ambition for a publicly policy outcome, a mandate to invest where the market has not, an expectation for the CEFC to operate with minimal budgetary assistance and the allocation of concessionality, while not distorting the aspects of the market that operate efficiently," she said.

"Investing in the projects subject to the Renewable Energy Target complicates the task."

That task will be even more complicated because the fund won’t be up and running until July next year and the federal coalition has already announced it will axe the fund – which was a Greens-inspired demand as part of the complicated negotiations between the government, the Greens and the independents that produced the carbon tax – if it wins next year’s election.

The history of government-established vehicles offering subsidised funding to the private sector for investments that would otherwise be uneconomic isn’t encouraging – they’ve tended to produce rorting and waste. With the fund targeting an overall return of the government bond rate, the level of taxpayer subsidy/exposure to high-risk projects will be significant.

While the financial exposures and the potential for misuse and wastage of taxpayer funds might be considerable, however, perhaps the more fundamental question raised by the establishment of the fund is why it is necessary, given the looming introduction of the carbon tax and the existence of the mandatory renewables target of 20 per cent by 2020.

Last year the Productivity Commission looked at carbon emission policies in other major economies and, apart from the surprising finding that Australia wasn’t lagging the rest of the world in carbon abatement, came to a core conclusion that the most efficient approach to achieving abatement was to put an explicit price on carbon.

In effect, the commission concluded that a carbon price could deliver higher levels of abatement for a far lower cost that the plethora of state and federal abatement schemes, like the 20 per cent renewable energy target, or feed-in tariffs, or incentives for energy efficiency, or direct subsidies for renewables. If abatement at the lowest possible cost to the economy and the community were the objective, the carbon price is the preferred mechanism.

There is a further dimension to introducing subsidies, directly or indirectly, into markets. They create creates distortions in decision-making within those markets.

The CEFC panel touched on that, referring to the concerns of wind generators that if the fund financed projects eligible for large-scale generation certificates it would disrupt the market by affecting the returns of existing renewable projects with merchant risk and could change the competitive landscape for other viable renewable projects, which may have already incurred project development costs. While there were suggestions that projects funded by the CEFC should be ineligible for the certificates, the panel decided that they should remain eligible.

The existing renewable energy target already disrupts normal commercial decision making. Subsidising high-cost sources of energy displaces, as it was intended to, low-cost generation. The key target is, obviously, coal-fired generation.

It also, however, means that the competitiveness of cleaner sources of generation, like gas, is also impacted. In the near term, indeed probably for the next couple of decades, combined-cycle gas generators will be the only source of reliable new baseload power (unless there is a dramatic change in community attitudes towards nuclear).

Wind and solar don’t currently provide a baseload solution. If new baseload capacity were deterred by the heavy subsidies being gifted to renewables, it would raise an energy security issue.

The key problem with throwing $10 billion of taxpayer money at subsidies for clean energy while the mandatory renewables target scheme remains in place, however, is that the fund won’t actually reduce carbon emissions or lead to more renewable energy capacity being added – it will simply displace what would otherwise have occurred without subsidy. We’ll spend $10 billion for no material benefit.

The advocates for the fund, of course, say that it is an investment in a new green industry and the opportunity for Australia to become a world leader in clean energy technologies – despite the fact that the Europeans, for instance, have had several decades and spent (the Productivity Commission might say wasted) hundreds of billions on alternative energy technologies.

Our $10 billion is somehow going to help us catch up to a Germany, which is spending tens of billions of euros a year on renewables and is regarded as the world leader in clean energy technologies. Sure.

The CEFC plans to directly and indirectly subsidise some projects, primarily with cheap loan funding, but also through equity injections and investments in pooled funds. The panel says the fund will have its greatest impact if it can leverage the $10 billion by "catalysing" private capital, and envisages banks, investment managers, specialised funds, private equity funds and the renewable energy divisions of large companies to engage with it.

If that $10 billion of taxpayer money – available at the government bond rates – remains on the table for any reasonable period of time, it is a sure bet that banks, investment banks, private equity and a host of other intermediaries will be drawn to it like bees to honey, or perhaps vultures to a carcass.

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