Market trends and risk
The CEFC works closely with other investors, businesses and project developers to achieve emissions reduction. In investing to accelerate the decarbonisation of the Australian economy, we seek to address market gaps and financing impediments. As a specialist investor, we operate in a rapidly changing market environment, with policy, technology and changing capital markets offering challenges and opportunities. These factors are among the key matters considered as part of our risk management processes.
The marked shifts in energy policy, technology and market dynamics are driving an unparalleled shift in the investor approach to clean energy investments. Increased capital availability is occurring alongside increased regulatory scrutiny. Analysis from the Responsible Investment Association Australasia put the total value of impact investment in Australia at $1.28 trillion at 31 December 2020, up from $983 billion a year earlier. Related analysis from the Australian Council of Superannuation Investors found 49 of Australia’s largest listed companies have established net zero emissions targets, up from 14 a year earlier, covering half the market capitalisation of the ASX 200. This reflects the increasing importance of climate reporting and disclosure for investors and regulators, both globally and in Australia.
Finance market dynamics
With debt finance accounting for some 75 per cent of the CEFC investment portfolio, we closely monitor finance market dynamics which may impact the ability of borrowers to repay principal and interest. Credit risk is influenced by a number of external factors, including general economic conditions and developments specific to particular industries. The disruption of the pandemic caused multiple pressures across the economy in 2020–21. In the energy sector, wholesale power prices persisted at historically low levels for much of the year, reducing revenues for electricity generation assets and borrowers. In contrast, we saw favourable market conditions in the property sector, where CEFC investments are driving emission reductions investments across a range of assets.
Energy market dynamics
Electricity emissions were down compared with previous years, influenced by an unprecedented growth in rooftop solar and record levels of renewable energy generation across the country. Coupled with a mild summer, renewable energy growth contributed to relatively low prices in the National Electricity Market for much of the year, however prices spiked in the March quarter 2021, with cooler weather and major outages at the Callide and Yallourn power stations. In the Western Australian electricity market, renewable energy growth contributed to lower balancing prices for much of the year.
Despite the welcome trends in emissions and renewable energy, delivery of the generation, energy storage and transmission needed to accommodate the exit of ageing coal-fired generation poses a very substantial and sustained investment task. Delivery of upgraded grid transmission infrastructure is becoming more necessary to transport increasing flows of new low-cost renewables generation and storage to businesses and communities. In that context, the development of renewable energy zones that incorporate renewables, storage and grid transmission is becoming more important as a means to transition the energy system at lowest cost. In addition, the accelerated adoption of rooftop solar is driving an enhanced focus on demand management solutions, including virtual power plants and distribution network solutions.
The market has seen profound advances in low emissions technology solutions in the 2020–21 year, across multiple sectors of the economy. Established technologies, such as large-scale renewables, are benefiting from the introduction of more large-scale, efficient and higher performing models, while rapid improvements in battery technologies are seeing large-scale storage become an increasingly important and competitive part of the energy system. A global shift to low carbon transport is gathering pace, from freight infrastructure to the increased uptake of electric vehicles, creating diverse investment opportunities in rail, hydrogen production and charging infrastructure. The growing focus on embodied carbon and Scope 3 emissions is driving the adoption of low carbon construction materials, while advances in on-farm management are accelerating innovation in soil carbon and bio-sequestration.
As a mature industrialised economy, global investment flows play a critical role in Australia’s emissions transition, reflecting both the strength of the national economy and the scale of the national emissions challenge. Increasingly, CEFC capital is working alongside that of global institutional investors and experienced large-scale project developers. This includes bringing established technologies to Australia as well as capitalising on emerging areas such as hydrogen and cleantech innovation, including soil carbon, measures to address embodied carbon and innovative demand management solutions. Increasingly, global investor sentiment is being influenced by evolving international regulatory and disclosure regimes with respect to both climate risk and ESG investment exposures, as well as climate policy in the context of the COP26 global climate summit.