Australia's Clean Energy Finance Corporation Explained

Introduction to the CEFC

The Clean Energy Finance Corporation (CEFC) represents the most aggressive environmental finance initiative sponsored by the Australian Government to date. The CEFC is an independent entity established as part of the Clean Energy Future Policy by the Australian government. As of March 2012, funding for the program totaled AUD $10 billion in government-backed investments for the commercialization and deployment of clean energy technologies. This paper explores the CEFC and its role in the development and deployment of environmentally friendly energy sources and alternatives.

Governments around the world recognize the need for developing clean and renewable energy sources that reduce their environmental impact. The topic of global warming and climate change has increased the urgency of developing less energy-intensive and environmentally damaging energy sources. Although the role of human beings in these changes remains a topic of debate, it is broadly accepted that humans are at least contributing to these climate changes (Department of Climate Change and Energy Efficiency, 2012). The need to invest in our future and ensure that present and future generations can live in a world that sustains them is the central reason for interest in developing clean and renewable energy sources.

The need for clean, alternative energy sources has been evident for many years. Research has focused on the development of renewable and clean energy technologies. Many technologies are ready to deploy, but face barriers to adoption such as intensive capital investment, financial risk, and other practical concerns that have limited the uptake of renewable energy technology. The purpose of the CEFC is to reduce capital market barriers to the introduction of clean energy technology.

The CEFC targets three main areas. First, it targets the development and deployment of renewable energy and technologies that enable renewable energy sources to be utilized. Second, it targets the development and deployment of low-emission technologies and energy-efficient products and services. Third, it targets the transformation of existing businesses toward renewable and environmentally conscious energy alternatives (Institute for Industrial Productivity, 2012). The CEFC has chosen these three areas as its main focus because they represent the primary barriers to a renewable energy future and have been identified as the major hurdles to the introduction of green technology for energy production.

The CEFC is more than a funding stream dedicated solely to Renewable Energy Products. It is not providing grants for renewable energy products or research. This initiative by the Australian government is an investment upon which it intends to make a return in the future. The underlying theory is that the government will provide funding to private companies for the development and deployment of renewable energy sources, and will make a return on that investment through tax revenues, loan repayments, and the interest earned on them. The funding sources include private capital, meaning that this program will also provide a boost to the Australian economy by stimulating the financial sector, creating renewable energy jobs, and aiding business growth in the renewable energy field.

The program will be operated through a partnership between experts in banking, investment, and clean energy technology. The Australian government will oversee the program and ensure that the needs of all stakeholders are addressed. Government involvement will help ensure that this new partnership achieves goals that benefit Australian society as a whole. The role of the Australian government will be to implement rules and regulations to confirm that the program achieves its stated goals (Institute for Industrial Productivity, 2012).

A New Financing Model

The CEFC represents a new financing model that is unlike traditional government funding programs. Traditional government funding has typically involved grants to support research and development of renewable energy sources. This was an appropriate form of financing for the early stages of renewable energy development, when companies engaged in clean energy technologies did not yet have marketable products and could not be expected to sustain themselves through the research and development stage.

This is not an unusual circumstance — it affects the research and development of almost any product. Failures are as much a part of the research and development process as successes. When a new need for products or services is identified, many people will have ideas on how to address it. Some of these ideas will not work, but in order to identify those that do, the process of research and development must be funded. Grants are the most common form of research and development funding, particularly for projects expected to benefit society as a whole.

After the research and development stage, it becomes apparent which ideas have succeeded and which have not. Those with potential must then move from research and development to a marketable product or service. Starting any new enterprise is risky. Even if an idea is excellent and needed, there is no guarantee that people will buy it. In the case of a normal product or service that benefits a single business entity rather than society as a whole, the burden of financing lies on those wishing to begin the enterprise. If such a business fails, the impact is limited to those individuals and does not noticeably affect society as a whole.

The funding of renewable and clean energy technologies is different. Society needs these entrepreneurial endeavors to succeed. The government understands that beginning production of new technologies and putting them into place is a capital-intensive process, and it recognizes the risks involved. The purpose of the CEFC is to give these companies a greater chance for success than they would have on their own. The CEFC will evaluate potential projects to determine their likelihood of success, and will then help companies obtain financing from private and government sources. This helps ensure that money set aside for investment in renewable energy is distributed to projects with the greatest chance of success, improving the likelihood of recovering the initial investment and generating interest for the banking industry. It will also help ensure that worthwhile projects have a greater chance of being funded than they might on their own. The purpose of the CEFC is to match the best projects with appropriate funding sources.

Government backing of renewable energy investment will make banks more willing to take risks than they would without the prospect of partial recovery should a project fail. This new renewable energy funding source is not expected to "crowd out" private financing options. Rather, it is intended to work in conjunction with them, providing negotiating tools for parties on both sides of the table and acting as a catalyst for private investment in a field where bankers may be wary of the risks involved.

In addition to financing major corporations and projects, the program also provides assistance to households that wish to install and utilize renewable clean energy sources. The Household Assistance Package was set to begin in May 2012 with an initial payment, followed by tax cuts in July 2012 and ongoing assistance through March 2013. This program particularly targets low-income Australian citizens and retirees on fixed incomes (Department of Human Services, 2012).

Design Features of the CEFC

The CEFC will finance many types of projects. It will support large-scale infrastructure projects for renewable energy, including solar thermal, solar PV, geothermal, bioenergy, and wind. For these projects it will resolve many of the obstacles that have plagued prior infrastructure projects, including difficulties in securing long-term debt, a lack of available local power purchase agreements, challenges related to project scale, large upfront capital requirements, and bank debt terms that were too short. The CEFC will help to resolve these issues through its various financing mechanisms (Clean Energy Council, 2012).

The CEFC will also support small-scale renewable energy projects such as community wind farms, landfill gas recovery, and commercial solar PV projects. It will resolve many of the issues associated with securing commercial bank finance due to small project size and relatively higher energy costs. It will use bundling and aggregation of multiple small projects to achieve some of these financing goals, and will also utilize soft loans and growth capital as financing tools for these types of projects (Clean Energy Council, 2012).

The CEFC will also fund commercial-scale demonstration of emerging technologies such as ocean wave and tidal power systems, as well as second-generation biofuels and bioenergy. For many of these projects it will help provide the large upfront capital needed, manage the risk inherent in this type of technology, and secure the additional equity required to scale the project appropriately (Clean Energy Council, 2012).

The CEFC will finance a number of projects across various asset classes. Different asset classes require different benchmarks to measure the success of the investment strategy. The CEFC has published the following guidelines for its investments and projects:

These guidelines are general and encourage the development of specific benchmarks for various projects. It is difficult to devise project-specific benchmarks for the CEFC because every project is different. These general guidelines allow benchmarks to be established according to project parameters, serving as guidance rather than rigid prescriptions.

Certain benchmarks have been defined by the government and will serve as a filter for project selection. These benchmarks will not be as strict as those in the private sector. Each type of asset class will be expected to provide a defined rate of return (Commonwealth of Australia, 2011). Some projects will be permitted to carry higher risk than others, and in some cases a lower rate of return will be accepted if a project is deemed to have sufficient social value (Commonwealth of Australia, 2011). A panel will decide the appropriate rate of return for specific projects and financing instruments; however, individual stakeholders will also be allowed to apply their own rate of return and assessment criteria (Commonwealth of Australia, 2011). The CEFC serves as a filter to ensure that projects meet minimum requirements, while the project may still need to meet more stringent guidelines set by the individual lender or stakeholder.

Conclusion

The CEFC is one of the first initiatives by any country to take renewable energy from the research and development stage into the free market. It provides mechanisms that were not available in the past for companies wishing to participate in the renewable energy and environmentally conscious economy. This strategy is expected to spark growth in the green industry, thereby having a positive impact on the overall economy. At the time of writing, however, the effects and success of the CEFC remain speculative. Financing was not set to begin until July 2013, and at that point there were many competing opinions about the CEFC's effects and prospects for future success.

Critics accused the CEFC of being a "slush" fund that would ultimately build no additional renewable energy, and some claimed it would prove to be a waste of money. Supporters of the CEFC countered that many of these critics were misinformed (O'Connor, 2012). One thing on which many agreed was that arguments about the CEFC were, at that point, largely academic. The CEFC takes a tailored funding approach, making it difficult to predict the exact results of the funding initiatives. Exact calculations and results will not be available until projects are actually being funded.

The CEFC takes its example from the UK Green Investment Bank. Both of these projects are paving the way for similar initiatives in other countries and for the eventual development of international initiatives as well. Whether it proves a success or failure, the CEFC will have a major impact on the future of environmental finance.

Appendix I: Proposed Key Financing Mechanisms and Other Measures

Source: Clean Energy Council. March 2012. Design Features of the Clean Energy Finance Corporation. Deloitte. p. 16.

References

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Commonwealth of Australia. (2011). Clean Energy Finance Corporation expert review. Retrieved from

Department for Business Innovation and Skills. (2012). UK Green Investment Bank. Retrieved from http://www.bis.gov.uk/greeninvestmentbank

Department of Climate Change and Energy Efficiency. (2012). Climate change. Australian Government. Retrieved from

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