The Federal Government (Government) has set in motion the investment arm of its Clean Energy Future Package (Package) by announcing the appointment of five Clean Energy Finance Corporation (CEFC) board members.
The announcement signals the establishment of the independent and commercially oriented CEFC, which is due to commence investment operations in July 2013.
The board will be responsible for the management, operational and investment decisions of the CEFC, which has been allocated $10 billion in government funding over five years to finance private investment in Australian clean energy projects.
Private investors facing capital market barriers that hinder the financing, commercialisation and deployment of clean energy technology projects will soon have the opportunity to pursue CEFC funding investment as part of the $2 billion per annum in available investment funds.
This article sets out the latest CEFC developments and how the funding opportunities may be available to your clean energy business or project.
The Package is intended to transform Australia's energy sector and comprises the carbon price, the Renewable Energy Target (RET), the Australian Renewable Energy Agency and the CEFC.
The CEFC will work in unison with the other parts of the Package and Clean Energy Future legislation, including the RET and the carbon pricing regime, to support Australia's transition to a lower carbon economy.
The CEFC, the investment arm of the Package, will supplement the RET and carbon price initiatives and leverage the funds to address barriers that currently inhibit investment in renewable energy, low emissions and energy efficiency technologies in Australia.
CEFC starts to take shape
The Government has been steadily progressing the establishment of the CEFC since its announcement in July last year.
- July 2011 - Government announces it will establish the Clean Energy Finance Corporation (CEFC) as part of its Clean Energy Future Package, which was announced in June 2011.
- October 2011 - Government appoints the Expert Review Panel, comprising Ms Jillian Broadbent, Mr Ian Moore and Mr David Paradice, to advise on the proposed design of the CEFC.
- March 2012 - Expert Review Panel delivers its report (CEFC Report) to the Government. The Government accepts all recommendations.
- June 2012 - the Clean Energy Finance Corporation Act 2012 (Cth) (CEFC Act), based on the recommendations of the CEFC Report, is passed and establishes the independent CEFC.
- August 2012 - Government announces the appointment of five CEFC Board members - Chair, Ms Jillian Broadbent AO and members Mr Michael Carapiet, Mr Ian Moore, Ms Anna Skarbek and Mr Andrew Stock.
The next phase in the CEFC establishment prior to starting investment operations from 1 July 2013 is the organisational set up, including engaging staff and setting up critical infrastructure.
Board members appointed
The CEFC Board is responsible for setting the corporate policy and strategy of the CEFC, benchmarks and standards for performance assessment of the CEFC investments, and risk management of the CEFC's investments consistent with the investment mandate.
The CEFC Act sets up an operational framework, but ultimately the implementation of the investment strategy is determined by ministerial directions and CEFC Board policy. While the Government sets the direction and broad mandate of the CEFC, it does not direct it in relation to specific investments.
As experts in banking, investment management, clean energy and low emissions technology, the newly appointed board members bring a rich and relevant cross-section of experience to the CEFC board.
OPERATION OF THE CEFC
The Government is aware of the commercial barriers currently faced by projects promoting newer and cleaner technologies.
Barriers include the reluctance of financiers to invest in innovative, capital-intensive and new industries, which are considered uncertain or risky.
The Government has announced the establishment of the CEFC as a tool to help overcome the capital market barriers to commercialising and deploying clean energy technologies.
It proposes to do this through investment of funds to commercialise new renewable energy, energy efficiency and low emissions technology projects.
The CEFC will also invest in manufacturing businesses that produce the required inputs for the clean energy sector (such as parts or components, with an example being wind turbine blades).
However, projects that have carbon capture and storage, nuclear technology or nuclear power elements of the clean energy project will be precluded from CEFC investment.
The core function of the CEFC is its investment function, focussed on investment directly and indirectly in clean energy technologies.
CEFC's funding options include loans, loan guarantees and equity investments.
The CEFC's investment mandate, given by the responsible Government Ministers, is to invest responsibly in clean energy initiatives and manage risk to achieve a target rate of return.
CEFC's ultimate mandate is to be financially selfsufficient.
Two streams of investment
The CEFC will have two streams of investment, each with up to $5 billion investment funds over five years:
- Renewable energy stream investing in an unspecified range of renewable energy technologies that meet a legislative definition of "renewable energy technology". This includes hybrid and enabling technologies.
- Low emissions and energy efficiency stream - investing in an unspecified but broader range of energy technology, including low emissions technology, which is at or below 50% of the emissions intensity of the grid, or large-scale projects where the primary purpose of the capital expenditure is on energy efficiency.
In its final phase of the five-year budget allocation, on or after 1 July 2018 the CEFC is required to ensure that at least half of the funds invested have been in the renewable energy stream.
Commercial approach to assessment of investment proposals
A principle function of the CEFC is a commercial approach to investment decisions. It will invest and manage risk so as to achieve a target rate of return and ultimately become financially self-sufficient.
The CEFC investment focus will be on projects or technologies developed beyond the research and development stage, which can be assessed as able to produce a positive rate of return and have the capacity to repay capital. A project in the demonstration stage may be considered if it can be assessed as able to produce a positive return.
The public policy purpose allows the CEFC commercial approach to be more flexible than the private sector equivalent. It will be able to address the financial barriers to funding clean energy projects through flexibility in investment.
Greater flexibility means the CEFC will be able to tailor its financing instruments, including changing the allocation of risk amongst participants, making upfront equity investments, lengthening the duration of loans (reducing debt refinancing risk for the equity providers), providing full or partial thirdparty guarantees and offering appropriate concessional costs of fund.
As a general principle, the CEFC will seek to cofinance investments. In accordance with its commercial approach it will also offer finance on the least generous terms possible for the project to go ahead.
The CEFC anticipates that initially, while it builds its capacity and portfolio, the majority of its investments will be loans rather than equity.
It remains to be seen how the CEFC will assess investment proposals in practice. However, it has confirmed that it will base its assessments on a clear investment framework and rigorous criteria, also assuring that investment proposals will be assessed on a case-by-case basis.
Ultimately, the investment must be assessed as able to produce a positive return, including a margin for losses and operating expenses of the investment.
WHAT FUNDING OPPORTUNITIES ARE AVAILABLE FOR YOUR PROJECT?
The CEFC provides greater opportunities for potential investors and project developers, both in Australia and internationally, to invest in Australian clean energy projects.
Key threshold questions for private investors to consider are compliance with the following:
- Is the project a clean energy technology such as energy efficient, low-emission or renewable energy technology? Or does the project manufacture inputs for clean energy technology?
- Is the clean energy project solely or predominately Australian-based?
- Is the technology beyond the pure research and development phase? Or if in
- demonstration stage, is it capable of demonstrating a positive return?
When might you consider seeking access to CEFC funding support?
Clean energy technology projects (or manufacturers of clean energy inputs) that are sub-commercial and fall into one of the two investment streams are prime candidates for CEFC funding, provided they can demonstrate a positive return on investment.
- Ahead of the commencement on 1 July next year, developers and equity investors should consider their project pipeline and opportunities and whether any may be eligible for CEFC funding.
- You should continue to monitor the CEFC release of relevant guidance material regarding investment guidelines and process for assessment of funding.
Please contact us if you would like to discuss developments in this area.
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