The CEFC: a great way to spend $10 billion

Is it possible that the Clean Energy Finance Corporation is one of the most misunderstood climate policies in Australia?

The CEFC has been accused of being a slush fund, a Bob Brown Bank (perhaps explaining his surprise retirement from politics?), that it will build no additional renewable energy, or be a total waste of money. Now, on these pages, Tristan Edis claims that it is ‘the wrong answer’.

These all demonstrate a misunderstanding of the clear strengths and purpose of the CEFC.

It comes as no surprise, because until Tuesday this week, when Reserve Bank board member Jillian Broadbent’s Review was released, there has been scant information on how it will all function.

The CEFC is “a $10 billion fund dedicated to invest in clean energy [to] catalyse and leverage the flow of funds for commercialising and deploying renewable energy, low-emissions and energy efficiency technologies.”

In other words, the CEFC is targeted at untangling the regulatory, financial and physical ropes preventing the private sector from delivering a cleaner energy system.

At its core, the CEFC helps develop a diverse portfolio of renewable (and clean) energy at commercial scale, as “insurance to Australia securing the lowest cost of energy in a carbon constrained world” – in Broadbent’s words.

What is often overlooked in all this is how the fund can “catalyse and leverage” big private investors – our super funds in particular – to do the heavy lifting of delivering the massive investment required to transform our energy system. Not merely to 2020, but towards the 80 per cent legislated emissions reduction target by 2050.

The only source of capital big enough to make these investments is the $1.4 trillion tied up in our superfunds. The CEFC will increase the number of low carbon investment opportunities, bringing in these investors by creating a new asset class at appropriate levels of risk. At present, no matter how hard they are pushed, our super funds are limited in their ability to invest in clean energy due to the inappropriate structures and risk profile of these projects.  

This isn’t news to those in the know. According to the Institutional Investor Group on Climate Change, “more than 85 per cent” of necessary investments will need to be privately funded. But, “without government action…private sector investment will not reach the scale required to address climate change effectively.”

The CEFC, like numerous examples from the US, UK,  Germany and China, is not only about unwinding financial barriers (i.e. high cost of renewables), but also the multiple layers of non-financial barriers to bring in this private capital on scale (these barriers have been documented in ACF’s report Funding the Transition to a Clean Energy Economy, where the CEFC was first proposed).

Without the CEFC, we’re stuck. Pricing carbon pollution won’t get us unstuck for some time, leaving us economically vulnerable, and making the inevitable transition to clean energy more costly.

To claim that any one policy will overcome these blockages is to take a very narrow view of the drivers of investment in clean energy infrastructure.

And this is where the CEFC’s strength lies. Wisely, the Broadbent Review has taken a flexible approach to the financial tools it will have at its disposal to respond to any barriers on a case-by-case basis.

This is where Edis’ piece misses the point – the CEFC has at its disposal the right solutions to the challenges it faces and can adapt those solutions as technologies change and become cheaper.

It can offer loans, either at commercial or highly concessional rates, it can take long-term equity stakes in companies, it can build grid connections to enable renewable projects that would otherwise have to pay their own connection fees, or it can even assist with power purchase agreements (PPAs), if that’s what is deemed essential to achieve its mandate. Very little is off the table.

The fund’s investment parameters are in fact barely defined in the review, beyond a rate of return target. This focus on a rate of return across the portfolio gives the CEFC the chance to lend on incredibly favourable terms to some projects (even close to grant funding, for example to geothermal), whilst seeking close to commercial returns from others (such as certain PV projects).

This is where other clean energy policies fall short – they require picking winners without the flexibility to respond to changes in innovation, costs and barriers. They assume that every solar thermal plant, wherever it is located, needs the same level of support. That is simply not the case for renewables, nor any other infrastructure asset.

With the CEFC’s multiple objectives, it would be excessively narrow to measure the success only on its delivery of new renewables out to 2020.

This is not a pure renewable energy fund, it’s much more than that. It’s a catalyst towards reaching our long-term national emissions target of 80 per cent by 2050 as this $10 billion is invested again and again over the coming decades resulting in up to $100 billion of investment in clean energy.

And although it’s disappointing that the CEFC does not expand renewables beyond the 20 per cent renewables target, it is a crucial tool in moving Australia towards the inevitable clean energy economy, including stronger renewable energy targets for 2020 and beyond.

The CEFC is not the wrong answer to the right question, but the right answer to the big questions. And if it’s effective, the CEFC will be so successful it does itself out of business.

Simon O’Connor is economic adviser with the Australian Conservation Foundation.

See Simon’s other articles arguing the case for the CEFC: Why we need the CEFC and Cleaning up our Act.