Design Features of the Clean Energy Finance Corporation

Transcription

1 Design Features of the Clean Energy Finance Corporation Clean Energy Council March 2012

2 Contents Executive Summary...i 1 Vision and mission Key barriers and gaps in financing clean energy Acting as a catalyst Linkages with international initiatives and opportunities Alignment within Government Guidelines for investment strategy The CEFC team Limitation of our work Tables Table 6.1 : Proposed key financing mechanisms and other measures Table 6.2 : Potential financing mechanisms according to investment asset type Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms Deloitte Touche Tohmatsu

3 Executive Summary Background The Clean Energy Council has been advocating for the creation of a dedicated, independent financing body to underwrite multi-billion dollar investments in the clean energy economy and to play a pivotal role in freeing up private sector capital. Once the Clean Energy Finance Corporation (CEFC) was announced in July 2011 as part of the Clean Energy Future package, the Clean Energy Council recognised that, in addition to understanding the needs of the clean energy sector, it was important to engage with the finance and investment community. The Clean Energy Council therefore engaged Deloitte to develop a report that would canvas and consolidate private finance sector views of the design principles of the CEFC. The purpose of this project is to provide greater understanding about the private finance sector views of the design principles of the CEFC. More than 40 senior decision makers from the finance and investment sector and industry were consulted, to elicit their input and views on issues such as: capital market barriers to commercialising clean energy technologies; preferred financing mechanisms to catalyse projects and unlock private investment; how the CEFC could help reduce risk to increase capital flows; and the potential spread of investments across clean energy and low emissions technologies and projects. The organisations consulted included senior representatives from: Australian superannuation funds; Major commercial banks; Infrastructure fund managers; Cleantech venture capital fund managers; International investors and fund managers; Investment consultants; Project developers with significant financial capacity; and Senior representatives from the mining, manufacturing, retail and transport sectors. The findings and commentary in this report represent a synthesis of the views of these stakeholders and not the views of Deloitte or the Clean Energy Council. Vision The concept and need for the CEFC to play a role in financing clean energy, energy efficiency and low emissions technology was endorsed and supported by all stakeholders. Although there were differing opinions about how the CEFC could operate and the nature and type of investments it would make, there was unanimous support for the CEFC to play a role in catalysing the private financing of clean energy and helping to overcome barriers to investment. i

4 A strong message expressed by the majority of those consulted was the need for the CEFC to clearly define its vision and mission. Respondents said this should be the CEFC s first priority. Stakeholders from different areas of the investment community all identified the importance of defining the CEFC s overarching vision, mission and objectives before establishing its mandate and investment strategy. One of the main challenges for the CEFC in setting its vision and goals, identified by the majority of stakeholders, was to achieve the right balance between funding projects or companies that the private sector does not want be involved in, or that it deems to be commercially unviable, while still delivering a positive return on investment. Stakeholders identified that it is likely that the investment returns achieved by the CEFC may be below commercial rates of return, relative to the risk profile of the investment. If so this would enable the CEFC to collaborate as a partner to co-invest to potentially get projects off the ground and unlock the private sector capital that is not currently flowing to clean energy technologies or projects. Stakeholders stated that the CEFC should clearly define its financial and non-financial goals as part of its vision and articulate what its contribution to meeting clean energy policy goals would be. Within this context, the need to meet social and environmental targets, such as emission reductions or new renewable energy generating capacity, and measure these milestones, was a common theme. Barriers and gaps in clean energy financing Achieving the aims of the CEFC will involve overcoming specific barriers to finance clean energy projects and companies, and identifying the gaps where the CEFC can be most effective. The barriers and challenges involved in clean energy financing cut across policy, technology, finance and commercial dimensions. The report highlights some of the barriers perceived by stakeholders that illustrate the challenges CEFC must address. The CEFC will need to clearly identify what market failures it is trying to address and where commercial investment is currently not taking place in sufficient magnitude to achieve commercialisation and deployment of renewable energy and clean energy technologies. Some of the highlighted areas of financing gaps included: Projects in the capital intensive phase of technology development Tenor of debt suitable for renewable energy infrastructure projects Smaller scale renewable energy projects Institutional investor allocations to clean energy/technology fund managers Competitively priced long term debt finance for energy efficiency and low emissions technology Capital for enabling technologies, such as grid transmission, storage, and smart grid. Acting as a catalyst Stakeholders communicated strongly that the CEFC could, through a variety of mechanisms, act as a catalyst to unlock capital from large institutional investors, major banks and international markets. Suggestions included: the CEFC playing a role in bundling small renewable energy projects; developing specific risk competencies in green field ii

5 developments; and developing innovative financing mechanisms, such as capital guarantees. Many stakeholders also highlighted the importance of the CEFC taking the opportunity to become a centre of excellence in clean energy investment in Australia. It was suggested that the CEFC could provide a valuable point of information, knowledge exchange, market education and collaboration. The CEFC could act as a facilitator between clean energy and technology companies, government, private sector and international investors. Linkages with international markets Investing in renewable energy, energy efficiency and low emissions technologies is a growing global phenomenon. Consultations were conducted with many senior representatives of companies that operated in a global market and it was clear that stakeholders had strong views that the CEFC should cultivate international linkages, and be a conduit to global investors. A key element of this will be facilitating and growing inbound investment from potential international investors, such as multinational companies, infrastructure funds, pension funds, export credit agencies and global venture capital funds. Similarly, the CEFC could play a key role in facilitating outbound growth of renewable energy and clean technology companies to help to accelerate access to export markets for Australian technologies. Stakeholders identified the potential benefits of leveraging the domain specific experience and investment track record in investing in renewable energy and clean technology that international fund managers have built up. For example, the CEFC could potentially help support the establishment of new venture capital funds in Australia in partnership with local fund managers in Australia. The potential international partners could come from the global cleantech community, which include experienced investors in this space. Alignment within government A critical element of the establishment of the CEFC s vision, mission and mandate will be determining its alignment with, linkages to, and differentiating role from other government programs. Many stakeholders noted that this alignment should ensure the CEFC s role does not overlap with other existing programs and CEFC funding is therefore being deployed where gaps exist. Although linkages and alignment with government were deemed important, many stakeholders strongly expressed the need for the CEFC to maintain independence from government and to operate at an arm s length. Stakeholders raised concerns that the goals and success of the CEFC may be impacted if the investment decision making was not independent of government and Ministerial control. Establishing a continuity of financing for clean energy projects and technology companies will be critical to encouraging successful development, commercialisation and deployment in the sector. The CEFC, in conjunction with Australian Renewable Energy Agency (ARENA) can play a key role in facilitating a continual evolution of technologies and projects to full commercialisation, rather than stop-gap funding which results in projects falling over at the challenge of moving to the next phase. iii

6 Several stakeholders highlighted the challenges the CEFC faces in potentially impacting existing government policies, in particular the Renewable Energy Target. It was emphasised that it was imperative that CEFC funds were deployed where financing gaps existed, to avoid the risk of distorting complementary clean energy policies or crowding out existing investors. For example, the CEFC would need to avoid competing with private sector financing of projects, where that funding would otherwise have been made with the support of the exiting Large Scale Renewable Energy Target (LRET). From an overall policy perspective, it was suggested that, to achieve the best possible progress towards a low-carbon future in Australia, the strategic decisions made by the CEFC would need to consider and align with the emissions reduction goals, renewable energy target and other policy objectives defined by the Government to date. Guidelines for investment strategy A core focus of consultations with stakeholders was addressing how the CEFC could approach developing its mandate, including: its investment strategy; the financing mechanisms it would employ and the projects; and companies and technologies it would invest in. In absence of a clear, defined vision, different views were conveyed by banks, superannuation funds, venture capitalists and corporate financiers on the CEFC s investment strategy focus. However, stakeholders suggested that there were some guiding principles that would help manage the risk and governance of the CEFC. These included: The CEFC should generate a long term return sufficient to enable it to be self-sustaining A long term investment perspective should be adopted Investments and financing should provide funding where private capital was currently not available and avoid competing with private sector investors The CEFC should act in partnership and co-investment with national and international capital providers Investment risk across the portfolio should be managed by having investment limits over individual companies, technologies and asset classes Investment should be managed against recognised benchmarks for asset classes and overall investment returns managed across the portfolio Investments should not distort other complementary policies Investments must achieve positive environmental or social impact through, for example, emissions reduction or new renewable energy capacity. An extensive list of potential investments was proposed by stakeholders but the main suggested projects/companies the CEFC could include in its portfolio ranged across the following six key categories of investments: Large scale renewable energy infrastructure including solar PV, solar thermal, geothermal and wind Small scale renewable energy projects including community wind farms and waste to energy projects Commercial scale demonstration of emerging technologies including ocean, wave and tidal power systems, second generation biofuels and bioenergy iv

7 Mature energy efficiency and low emissions technologies including cogeneration, trigeneration and green building technologies Early stage clean energy technology companies including a broad range that require equity growth capital to expand their operations Enabling technologies including smart grid, energy storage and transmission. The stage and quantum of funding needs for the different asset classes 1 vary considerably. Similarly, the financing gaps and market failures for each asset class and sub-sectors of each category are not consistent. Therefore, to accelerate deployment and to catalyse private sector investment in the varied asset classes, the CEFC will need to develop and utilise a range of tailored and targeted financing mechanisms and risk reduction strategies to achieve its investment objectives. The report highlights and defines a range of debt, equity and innovative financing mechanisms proposed by stakeholders. A broad consensus did emerge, that the CEFC should diversify across technologies and asset types. This portfolio approach would mean that different financing mechanisms would be applied to each asset class and there would be a range of risk/return outcomes. Depending on the asset allocation strategy, the CEFC could establish a portfolio that achieves the balance between debt and equity and between higher risk venture capital and lower risk long term infrastructure returns. The CEFC team Many stakeholders noted that the CEFC would need to set its investment strategy before recruiting its team, as the nature and type of investments would dictate the expertise and competencies required to fulfil investment objectives. A key decision to be considered in the early stage of the CEFC s establishment will be whether it adopts an outsourcing model, or recruits internal teams to manage investment in-house. Stakeholders proposed that, in addition to clean energy sector-specific experience, the core skills of the CEFC needed to cover asset management, portfolio construction, risk allocation, risk mitigation, negotiating offtake agreements, project finance, loan syndication, public policy and regulation. However, stakeholders also noted that there could be an adverse impact on the skill and competency of potential partners and investors if the CEFC picked the talent out of each of the current and relevant organisations. If the CEFC decides to use an outsourcing model, it will be crucial to build internal relationship managers who are able to manage the chosen fund managers and ensure that they meet clearly defined KPIs and benchmarks aligned with the mandate and objectives of the CEFC. It was highlighted, particularly by fund managers, that there were significant benefits in issuing mandates to external fund managers to deliver the CEFC investment objectives. The main benefits cited included that fund managers have the governance, risk and compliance processes established, and a history of managing funds that aim to deliver financial returns to investors. 1 For the purposes of classification of the varied investments, we have used the term asset class v

8 1 Vision and mission A strong endorsement of the concept The concept and need for the CEFC to play a role in financing clean energy, energy efficiency and low emissions technology were endorsed and supported by all stakeholders. Although opinions differed on how the CEFC could operate and the nature and type of investments it would make, there was unanimous support for the CEFC to play a role in catalysing private financing of clean energy and helping to overcome barriers to investment. A critical first priority The need for the CEFC to clearly define its vision and mission, as a first priority, was a strong message expressed by the majority of those consulted for this project. Stakeholders from different areas of the investment community, including superannuation funds, asset managers, large corporations, banks and venture capitalists all identified the importance of defining the CEFC s overarching vision, mission and objectives before establishing its mandate and investment strategy. A key factor to be considered in this process, includes ensuring that the CEFC s vision and mission align with desired public policy outcomes for clean energy in Australia including advancing the national greenhouse gas emissions reductions goals. Commercially orientated and self-sustaining Stakeholders emphasised that the CEFC should be judged by private sector standards, using a commercial approach, employing investment benchmarks that any other private sector fund would be required to meet and managing to an appropriate defined return on investment (ROI). The overall long term ROI should not have to meet the hurdle rate of other commercial funds, however the CEFC would need to make a positive return after meeting all establishment and operating costs. This is particularly important given the intention, for the CEFC to be commercially oriented and self-sustaining. Balancing objectives The CEFC is expected to generate returns and is not intended to compete directly with the private sector in the provision of financing but will rather provide funding where private capital is currently not available. However, it was acknowledged that these objectives may appear to be conflicting. As some stakeholders pointed out, if there was an opportunity to generate a commercial return relative to risk, it is likely that finance would already be made available by the private sector. Therefore, it is likely that the investment returns achieved by the CEFC may be below commercial rates of return, relative to the risk profile of the investment. It was highlighted that CEFC funding should particularly avoid impacting on the current or potential interest in financing renewable energy projects under the the Renewable Energy Target (RET). 1

9 It was highlighted that the CEFC would need to get the balance right between funding the projects or deals that the private sector did not wish to participate in or had deemed to be not commercially viable, while still delivering a positive return on investment (ROI). Clean energy projects that have not traditionally attracted private sector investment are likely to have a higher risk associated investments in more mature, commercially proven opportunities. It was further stressed that the CEFC s investment approach should not conflict with the private sector, but instead CEFC should collaborate, partner, co-invest and cooperate to help to unlock the private sector capital that is not currently flowing to clean technologies or projects. Meeting double or triple bottom line goals A common theme raised in consultations was the need for the CEFC to establish goals and measurements of both the financial ROI and the social and environmental net benefits of the CEFC s activities. That is, the CEFC should define its financial and non-financial goals as part of its vision and articulate what its contribution to meeting clean energy policy goals will be. Within this context, stakeholders suggested the need for social and environmental outcomes from investments to be defined, measured and reported. However, there were differing views on what should constitute the non-financial goals of the CEFC. Stakeholders expressed a range of sometimes opposing views as to what potential objectives could be measured including: Actual emissions reductions the CEFC could develop methodology to quantify emissions reductions as a result of its investments to assist Australia in the transformation to a low carbon economy and in meeting its commitments under the Clean Energy Future legislation and international commitments. Some stakeholders felt that, if this was the primary objective of the CEFC, then a technology agnostic approach should be taken. New renewable energy generating capacity the CEFC could, through its investments, quantify the new renewable energy generating capacity that it helped finance. A defined social dividend, including job generation some stakeholders expressed views that the CEFC could help kick start a robust clean energy industry and measure job creation and industry development outcomes. Although others expressed a view that the CEFC should not be subsidising an industry that does not make commercial sense in the long term. Others felt the aims should focus on emissions reduction rather than providing a job-creating initiative.. Acceleration of the commercialisation of Australian renewable energy technologies in Australia and internationally it was suggested the CEFC could track how its investments played a role in the growth of clean energy sectors or sub-sectors and how it helped to finance companies and technologies through the innovation value chain to commercialisation and scaled deployment into a global market. Leverage private sector investment the CEFC could measure and quantify over time the quantum of private sector capital it leveraged to fund clean energy companies and projects. 2

10 2 Key barriers and gaps in financing clean energy It was widely acknowledged that to achieve its aims the CEFC would need to overcome significant barriers involved in financing clean energy projects and companies and would need to identify specific gaps where the CEFC funds could be most effective. The barriers and challenges involved in clean energy financing cut across policy, technology, finance and commercial dimensions. It was acknowledged in consultations, that some barriers were consistent across all clean energy financing, while other barriers were specific to the technology, stage of development or type of project. Below we have highlighted a few of those barriers raised by stakeholders as illustrative examples of the challenges CEFC faces. In addition, we have highlighted a number of financing gaps, which stakeholders identified as being quite specific to the clean energy sector. Policy uncertainty A key barrier to investment in renewable energy and clean energy technologies, cited by many stakeholders, was uncertainty surrounding the regulatory and policy environment. The lack of consistency or guarantee of long-term stability in regulatory and policy developments relevant to potential clean energy investments, results in an uncertain environment for the commitment of capital. Stakeholders identified a perceived risk of making long-term investments that may be impacted by the significant differences in the policies of the major political parties, including the Federal Opposition s stated policy of repealing the carbon price if elected. They also noted the fluctuations and uncertainty over the carbon price at the beginning of the floating price period in 2015, the changing nature of renewable energy schemes and tariffs and the unpredictability of government grant funding. Impacting the Renewable Energy Target Several stakeholders highlighted the challenges the CEFC presents in potentially impacting existing government policies, in particular the Renewable Energy Target. It was emphasised that private sector capital and CEFC funds should be deployed where financing gaps existed, and to avoid the risk of distorting existing policies or crowding out existing investors, for example, where that funding would otherwise would have been made under the exiting Large Scale Renewable Energy Target (LRET). While there were varying views as to how this could reasonably be addressed by the CEFC, it was seen as an important factor to consider in the design and ultimate investment decisions being made by the CEFC. Technology risks Many investors consulted stated that they lack experience in dealing with the technology risks involved in clean energy finance and investment. In particular, investors highlighted the uncertainty of funding technologies that were not mature and had not been commercially proven or deployed at scale. The private sector s competency in 3

11 understanding and managing clean energy technology risks is low and its willingness to take on investments with these particular risks, or its ability to mitigate them, is therefore less than that associated with more conventional assets where expertise in risk management is greater. This problem is exacerbated by the perception that technology companies have a lack of risk management mechanisms in place; lack experience in managing large, complicated projects; and have a focus on technology, rather than financial returns. Once investors move outside of the proven large scale renewable energy technologies, such as wind and hydroelectricity, they typically add a premium to the costs of capital. Information deficit The consultations revealed that finance and investment sector professionals do not have adequate and up-to-date information on clean energy investment opportunities, risks and trends. Stakeholders did not generally have access to information regarding the successful commercialisation of renewable energy, energy efficiency and low emissions technologies and deployment of large scale renewable energy infrastructure projects in other jurisdictions. Although there may not be examples of certain types of clean energy projects financed in Australia, there may be many precedents of successful financing in overseas markets. This lack of transfer of market knowledge has inhibited the uptake and financing of some clean energy projects and technologies. Difficulty in securing offtake agreements Another key barrier to commercialising clean energy technology, particularly related to establishing large scale renewable energy power generation, is the difficulty in securing offtake or power purchase agreements (PPAs) for projects. Without the PPAs, there is significantly more risk for investors, no long-term price stability and a lack of a guaranteed income stream. Without offtake agreements or PPAs in place, it exposes the renewable energy producer, and therefore a potential investor in the project, to significant merchant risk and the volatility of power prices in the market. If a PPA cannot be secured with one of the limited number of energy retailers or large wholesale customers in the Australian market, an entity is needed to take the merchant risk so that the project can go ahead. The inability to secure PPAs has prevented the commercialisation and deployment of renewable energy projects of late. Lack of investor experience It was recognised in consultations that Australian fund managers did not have a track record of investing in the clean energy sector in Australia. This lack of a history of investment in the sector means that even if institutional investors, such as superannuation funds, wanted to make an allocation to clean energy, there is a limited pool of fund managers to choose from with prior experience in managing these types of projects and issues. For clean energy project developers and technology entrepreneurs raising capital, there are a limited number of finance and investment professionals to approach who have experience and depth in the clean energy sector in Australia. Clean energy financing gaps Given the number of challenges and barriers to the commercialisation of renewable energy and clean energy technology projects, a number of stakeholders noted that the CEFC would 4

12 need to clearly identify the market failures it was aiming to address. This will be critical to ensure that the CEFC is focused; has clear objectives; strategically invests where capital is most required; and avoids competing with private capital. A number of stakeholders, particularly the banks, noted the fine line between the CEFC s capital filling a financing gap, and potentially competing with their provision of debt. To avoid this, the CEFC will need to clearly identify where commercial investment is currently not taking place in sufficient magnitude to achieve commercialisation and deployment of renewable energy and clean energy technologies. A number of these financing gaps were identified by the stakeholders consulted. Examples of these are outlined below. Projects in the capital intensive phase of technology development a significant barrier to commercialising clean energy technologies is the need to fund demonstration projects which are very capital intensive, with no secure revenues. The increasing capital intensity of renewable energy and clean energy technology projects means that a financing gap currently exists between the R&D/prototype phase funding by venture capital funds, and the progression through the valley of death to commercialisation. Technologies at this phase of development require significant capital to move from demonstration to commercial scale operation. At this stage, less-proven technologies are unable to scale up to a level where banks are willing to provide finance, and there is currently insufficient growth or expansion capital in the Australian venture capital market that is able to be leveraged by these types of projects. Tenor of debt suitable for renewable energy infrastructure projects a significant gap in current financing of clean energy projects exists in the limited ability to secure tenor of debt beyond seven years, creating significant re-financing risk for infrastructure style projects. European banks and export credit agencies offer debt finance with up to 15 year terms for renewable energy projects, but in Australia, seven years is generally the greatest tenure available. This introduces another level of risk into projects and may prevent them from being commercially viable for many investors. Smaller scale renewable energy projects the commercial scalability of new technologies results in a financing gap of smaller renewable energy projects, which at the individual level are too small to attract institutional capital or commercial banking sector finance. Many projects around the size of 1-5MW, or $3-5 million, simply do not meet the requirements of commercial banks to finance, which begin around 30-50MW. There is currently no body to bundle or aggregate smaller projects to a size at which they could secure funding. Institutional investor allocations to clean energy or technology fund managers as outlined earlier in this chapter, stakeholders noted that private sector investment in clean energy is a small and relatively new market, with limited expertise amongst fund managers. Even though many Australian funds are signatories to the UN Principles of Responsible Investment which commit them to integrate environmental, social and governance aspects into their investment strategies, there have only been small allocations by institutional investors to clean energy or technology fund managers. Competitively priced long term debt finance for energy efficiency and low emissions technology energy efficiency and low emissions technology opportunities have been identified by a number of studies as low hanging fruit, in terms of relatively inexpensive clean energy opportunities with good payback periods. However, these 5

13 projects are often funded off the corporate balance sheet and are in competition with other capital requirements. Projects, such as cogeneration, might be very positive for emissions reduction but companies expressed difficulty in securing debt finance with sufficient tenor and terms to make them viable or attractive and able to meet their Internal Rate of Return requirements. Stakeholders noted that, with better-priced debt over a longer tenor, there were many such energy efficiency, low emissions projects that would be implemented. Capital for enabling technologies, such as grid transmission, storage, and smart grid many parts of Australia have a significant renewable energy resource but the locations do not exist in proximity to the electricity grid. To invest in the expansion of the transmission and network infrastructure to connect renewable energy projects, involves significant capital outlay. Stakeholders were not often clear on who had the responsibility for the expansion of transmission infrastructure, i.e. whether it would be government, regulators, network and transmission businesses, or the private sector. There was, however, common agreement that to optimise the commercialisation and deployment of renewable energy in Australia investments in grid connection were needed. 6

14 3 Acting as a catalyst Stakeholders communicated strongly that the CEFC could act as a catalyst in a number of ways to unlock capital from large institutional investors, major banks and international markets. Outlined below are a variety of mechanisms and measures proposed as to how the CEFC could catalyse and leverage significant private sector investment. Getting projects to scale Many small renewable energy projects around the size of 1-5MW, or $3-5 million in value, do not meet the requirements to secure financing from commercial banks. The CEFC could potentially help secure finance for these types of projects by playing a proactive role in aggregating or bundling the projects. For example, it was suggested that the CEFC could bundle a number of small 3-5MW renewable energy projects or even multiple energy efficient projects in the commercial building space, to enable these projects to reach a scale that makes them eligible for commercial banks funding. Develop a strategic technology investment program It was proposed that the CEFC could assist in building a deeper understanding of particular targeted technologies and invest in them throughout the whole innovation cycle. The technologies chosen may have unique application to Australian conditions, have intellectual property developed in Australia or be previously funded through other government programs. As an investor, the CEFC could establish an understanding of the investment risk as the technology moves from the R&D/prototype phase to large scale demonstration and commercialisation and transfer this knowledge to the market, to increase the chance of other projects securing funding. Proving the market for projects/technologies It was also noted in the consultations that the first few investments of the CEFC would need to be strong deals which successfully met defined outcomes and timeframes. Some stakeholders noted that the CEFC could undertake 2-3 deals in a specific technology or project that successfully demonstrated viability and then move its focus to the next frontier. Playing a role in managing risk It was also suggested that the CEFC could unlock private sector capital by being strategic in its actions to reduce risk in critical areas and thereby accelerate further investment. For example, the CEFC could lead the greenfield process in renewable energy infrastructure by taking on project risk where it is not currently allocated. If the CEFC built its capacity to manage risks not typically covered by other project partners, it could help secure coinvestment and project approval on multiple projects. 7

15 Innovative financing Stakeholders suggested a range of innovative financing mechanisms the CEFC could develop and deploy. Capital guarantees, for example, could be used to create exposure to clean energy investment markets for institutional investors, by protecting them against losing capital, or at least protect them from a significant portion of the downside risk. Another product may be a low interest loan attached to a particular low emissions technology, such as cogeneration systems. A competitive financing package, attached to the technology, could be developed and marketed to enable a potentially wide market to access the package offering. Building out the grid A number of stakeholders also identified the potential for the CEFC to play a role in addressing the financing of transmission infrastructure. In particular grid extensions to areas of high renewable energy potential for wind, geothermal and large scale solar. However, there were opposing views regarding CEFC s participation in transmission and electricity network infrastructure, which was deemed by some investors as the role of other energy market participants. CEFC as a centre of excellence Many stakeholders also highlighted the importance of the CEFC taking the opportunity to become a centre of excellence in clean energy investment in Australia. It was suggested that the CEFC could provide a valuable point of information and collaboration and act as a facilitator between clean energy and technology companies, government, private sector and international investors. It was suggested that this could be achieved through a number of roles played by the CEFC, including: Educating the market about clean energy asset classes through collating and providing relevant information as a one stop shop on clean energy in Australia; training and supporting fund managers to gain expertise in the sector; and leading by example through its transactions. Establishing a knowledge bank that provides a repository of expertise about the technologies, companies, projects, Australian market conditions and best practice in international markets to create international knowledge transfer. Creating an entry point for investors in the Australian market through both providing Australian-specific information for international investors through the knowledge bank, and by acting as a facilitator and connector between overseas investors and Australian companies and projects. Building a portfolio to showcase what is possible as discussed above, the CEFC could catalyse further investment by undertaking strategic deals to prove the market in particular technologies or projects. Using this approach, the CEFC s portfolio should be designed to showcase what is possible for both Australian and overseas investors. Building unique competency in risk assessment and mitigation the CEFC could target risks in the renewable energy and clean technologies space that cannot be easily allocated in a transaction, and build its expertise to assess and manage that risk. It could assist in deal flow by accurately evaluating and pricing the performance risks of emerging technologies to reduce private capital providers exposure to technology risk. 8

16 Acting as a conduit to the range of expert professional service providers the CEFC could play a role in enabling professional service providers to connect to help developers propose bankable projects, companies evaluate energy efficiency technology options and cleantech companies progress through the capital raising process. Working with similar institutions overseas sharing knowledge on best practice renewable energy investment with the UK Green Investment Bank, multi-lateral development banks, and other government funds. 9

17 4 Linkages with international initiatives and opportunities Investing in renewable energy, energy efficiency and low emissions technologies is a growing global phenomenon. Consultations were conducted with many senior representatives of companies that operate in a global market and it was clear that stakeholders had strong views that the CEFC should cultivate international linkages, and be a conduit to global investors. Facilitating in-bound investment A number of stakeholders noted that it would be important for the CEFC to play a role in establishing linkages with international investors, initiatives and opportunities. A key element of this could be facilitating and growing inbound investment from potential international investors such as multinational companies, infrastructure funds, pension funds, export credit agencies and global venture capital funds. This could include a role in proactively making connections with relevant investors and introducing them to opportunities in Australia, thereby creating an easy entry point for investors in the Australian market. This could be accomplished by providing Australian deal-specific information for international investors, and by acting as a facilitator, connector and potential co-investor between overseas investors and Australian companies and projects. Other comments by stakeholders regarding facilitating inward investment, included that the CEFC should not have an institutional bias towards Australian superannuation funds and banks, given that the cost of local finance can be relatively expensive and should cultivate relationships with international clean energy fund managers, institutional investors with a history of investment in this space and export credit agencies. Raising global funds for Australian investments It was also noted that the CEFC could play a role in training and pre-qualifying Australian fund managers, possibly by running an evaluation process for managers specialising in each asset class or technology, who can then go offshore to raise additional funds and also acquire further expertise from the experience of overseas investors and projects. Leveraging the expertise of international fund managers International fund managers, historically in the US and Europe, but increasingly in Asia, have developed domain specific experience and an investment track record in investing in renewable energy and clean technology. This has involved building up knowledge, through investments, of the risks and opportunities in a range of technologies, companies and projects. It was suggested in consultations that the CEFC could facilitate collaboration to enable Australian fund managers, cleantech companies and financiers to leverage the investment in due diligence that overseas private equity and venture capital firms have undertaken in technology evaluation over the last decade. Similarly, stakeholders identified 10

18 the potential benefits of the CEFC supporting the establishment of new venture capital funds in Australia with partners from the global cleantech community, who are experienced investors in this space and could establish operations in Australia. Facilitating export of Australian technologies Many stakeholders also emphasised the importance of facilitating outbound growth of the renewable energy and clean technology sector in Australia. Currently, many technologies are developed in Australia and eventually move offshore to become successful in the US, Europe or Asia, due to the lack of financing opportunities for growth, demonstration and commercialisation here. The CEFC could help to accelerate access to this export market through establishing strong linkages with international investors and opportunities, and create a pathway for international co-investment in Australian technologies and expansion into larger markets. Developing strategic technology programs In consulting with international investors, it was proposed that the CEFC could develop country to country programs to help commercialise technologies. In line with this aim, the CEFC could potentially develop a strategic technology investment program, including creating a joint matching fund with international partners, such as an Australia/China Clean Energy Fund or an Australia/USA Cleantech Fund. 11

19 5 Alignment within Government A critical element of the establishment of the CEFC s vision, mission and mandate will be determining its alignment with, linkage to, and differentiating role from government strategy, regulation, policies and programs. From an overall policy perspective, it was suggested that, to achieve the best possible progress towards a low-carbon future in Australia, the strategic decisions made by the CEFC would need to consider and align with the emissions reductions goals, renewable energy target and other policy objectives defined by the Government to date. Avoid overlap Many stakeholders noted that alignment with other government programs and funding initiatives should ensure that the CEFC s role did not overlap with other existing programs and capital was being deployed where gaps existed. The CEFC s mission therefore needs to identify its niche, which does not compete or overlap with the activities under other clean technology initiatives, government clean energy investment funding, or the carbon price. ARENA was cited many times in this context, as an example where clear delineation was required between the role and objectives of the CEFC as compared to ARENA in financing the development of clean technologies, as well as the linkages between the two. Link with ARENA and the evolution of technologies to full commercialisation These linkages between the financing provided by government programs such as ARENA and the investments made by the CEFC were an important point raised by a broad range of stakeholders, particularly venture capital funds, corporate financiers and banks. Stakeholders suggested that it should be made very clear what the different funding strategies are for ARENA and the CEFC. Establishing a continuity of financing for clean energy projects and technology companies will be critical to establishing successful development, commercialisation and deployment in the sector. For example, following capital grant funding received under ARENA, a company could be in contact with the CEFC to investigate options for financing through the demonstration to commercialisation phase. Stakeholders suggested the expertise built up in the CEFC and the knowledge gained in evaluating and making investments could be shared with the ARENA board and program managers. This can be achieved by leveraging the expertise within the CEFC in investment analysis and due diligence processes so that appropriate grant funding guidelines, developed under ARENA can take into account the prerequisites to secure funding at the next stage of commercialisation. If the investment strategies for CEFC and ARENA were clearly delineated, they could work in cooperation to facilitate a continual evolution of technologies and projects to full commercialisation, rather than stop-gap funding which results in projects falling over at the challenge of moving to the next phase. A number of stakeholders also noted that this linkage between government programs and the CEFC could also manifest in the form of CEFC providing an alternative route for projects or 12

20 companies to re-present proposals that had previously been submitted and were unsuccessful under government programs such as the Solar Flagship program. CEFC as a conduit to government Stakeholders identified that the CEFC could establish strong linkages with Governments to provide a channel of communication and influence between the investment community and the Government. This unique position as a point of communication and information flow could be leveraged to enable the CEFC to participate in and influence decisions regarding regulation on market impediments. This role could enable increased input of the finance sector in establishing what market gaps and challenges existed and how to best overcome them. This linkage could similarly enable the CEFC to leverage government to government relations to promote international investment opportunities and technology transfer. Maintain independence It should also be noted that, while alignment with government is critical as outlined above, there is a strong desire from industry for the CEFC to be at arm s length to the Government and to be seen to be fully independent. Stakeholders expressed the need for a clear understanding of whether the CEFC is intended to be a fully independent body or whether it would operate as an arm of the Government, and highlighted the need for the CEFC to maintain political independence. Observations included that the CEFC should be separated from government influence as much as possible and operate separately from government process; the CEFC team should include professionals with finance and cleantech industry expertise, as opposed to being driven by civil servants; and that minimum bureaucracy should be involved in each investment deal, to encourage the private sector to participate. Early wins A key theme raised by stakeholders in consultations was the need for the initial few investments by the CEFC to be successful. To cement the success and reputation of the CEFC, it is critical that the first few projects that the CEFC invests in are strong deals with clear objectives and measures of success that are both met and achieved in their defined timeframes. 13

21 6 Guidelines for investment strategy A core focus of consultations with stakeholders was to address the critical issue of how the CEFC could approach developing its mandate: including its investment strategy, the financing mechanisms it would employ and the projects, companies and technologies it would invest in. Design investment mandate around vision The CEFC has been mandated to invest 50% of its capital into renewable energy technology (across all types of generation) and 50% into clean energy technology (low emissions cogeneration) or renewable energy. This guiding statement leaves it open as to the spectrum of investment prospects and opportunities that it could consider. Most stakeholders consulted, clearly stated that CEFC investment mandate and parameters should be designed around CEFC s vision and objectives, and until that vision was set, and the financial and non-financial goals established, they felt it was difficult to propose a specific investment strategy. Guiding principles In absence of a clear vision, different views were conveyed by banks, superannuation funds, venture capitalists and corporate financiers on the CEFC s investment strategy focus. However, stakeholders suggested that there were some other guiding principles that would help manage the risk and governance of the CEFC. These included: The CEFC should generate a return to enable it to be self-sustaining in the medium term A long term investment perspective should be adopted Investments and financing should provide funding where private capital is currently not available and avoid competing with private sector investors The CEFC should act in partnership and co-investment with national and international capital providers Investment risk across the portfolio should be managed by having investment limits over individual companies, technologies and asset classes Investment should be managed against recognised benchmarks for asset classes and overall investment returns managed across the portfolio Investments should not distort other complementary policies Investments must achieve positive environmental impact through, for example, emissions reduction or new renewable energy capacity. Diversify across asset classes A broad consensus did emerge, that the CEFC should diversify across technologies and asset types. This portfolio approach would mean that different financing mechanisms would be applied to each asset class and there would be a range of risk/return outcomes. 14