Green bank plays reinvention game

INFRAMATION: GREEN BANK PLAYS REINVENTION GAME

1 August 2017

Australia's green bank has no shortage of projects to lend to even though it has been threatened with closure. But is the Clean Energy Finance Corporation playing fair with other financiers? Kate Burgess of  Inframation reports:

At the Australian clean energy industry's annual gathering held last month in Sydney, the atmosphere was electric.

Until two years ago the then cottage industry was dominated by start-ups. But the industry's largest talkfest now plays host to the world's big developers, equipment suppliers, banks and would-be investors, all with their noses in the air to sniff out the next wave of deals.

Among those gracing the podium was Ian Learmonth, the newly installed chief executive of the Clean Energy Finance Corporation (CEFC).

Having taken the reins of Australia's green bank in mid-May, the former investment banker and European renewables veteran has inherited a slickly performing machine from his predecessor and former Macquarie colleague Oliver Yates.

By numbers, the Canberra-based agency has done an impressive job supporting both early-stage ventures and budding utility-scale schemes all while weathering three mandate changes and several threats of closure in the four years it has been running.

Since inception, the CEFC has committed AUD 4bn (USD 3.2bn) to get AUD 11bn worth of projects moving, and more than half of this investment occurred in the most recent financial year ended 30 June. In 2016-17 it supported 35 individual transactions, up from just 15 a year earlier.

Because every time it invests a dollar, it attracts two dollars from the private sector, Learmonth claims the CEFC is "crowding in" commercial lenders, rejecting claims from critics the agency is playing a duplicate and unnecessary role in large-scale  projects.

He tells Inframation the CEFC's job is to carefully select projects that commercial banks find too risky because they use new technology or do not earn a steady income.

"Wind and solar are very important platforms for us. It's making sure our roles in those deals is an important one. If there is a fully contracted renewable energy project, there is no need for us," he says.

Winds of change

As the changing crowd at the Clean Energy Summit indicates, Australia's clean energy industry is maturing as fast as the various technologies are evolving.

Two years ago it was nearly impossible to finance a wind farm. It would have been inconceivable for a bank to consider meeting with Tesla Motors' luminary founder Elon Musk to chat about the merits of battery storage. Yet here we are.

Even though Australia's politicians are yet to revisit a price on carbon or agree how to subsidise clean energy beyond 2020, the arrival of Asian and European developers has sent wind and solar install costs plummeting, to the point where they are cheaper to build and run than coal and gas.

The CEFC played an instrumental role in financing several of the 12 utility-scale solar projects that won grants from its twin federal body, the Australian Renewable Energy Agency. Announced last September, the CEFC was the sole backer of the Griffiths, Parkes and Dubbo solar farms, loaning AUD 150m to Neoen to bring forward the construction of the plants. It also provided funding to Canadian Solar for the Longreach and Oakey solar farms in Queensland.

"If the CEFC weren't there as a catalyst I don't think there would be this activity," says Norton Rose Fulbright partner Simon Currie. "What I'm seeing them do is additional, not replacing what the banks do. They are effectively a business enabler - they promote projects and help developers meet others in the private sector."

Currie maintains the CEFC is also filling a gap left by Australian banks who do not offer long term loans to renewable projects. In April, the CEFC lent AUD 80m alongside German bank Nord/LB for 17 years to the Bodangora wind farm being developed by Infigen Energy. Most local banks will only lend up to five years.

Where commercial banks also fear to tread is those projects that don't sell all of their electricity to a single customer.

Bodangora sells 60% of its output to EnergyAustralia on a long-term contract, but the other 40% is flogged onto the highly volatile electricity spot market.

"The CEFC will continue to look at projects where there is a sub-investment grade off taker, merchant exposure or a battery requirement," Learmonth says.

The vast majority of the 24 renewable finance deals that closed in the year ended 30 June were able to strike long- term power purchase agreements with electricity retailers, according to Inframation data.
 

Crowding out or in?

Banks tend to cluster around projects that sign on one of the "big 3" electricity retailers, Origin Energy, AGL Energy or Energy Australia. They tend to scoff at deals with a counterparty that doesn't carry an investment-grade credit rating.

But some commercial lenders argue the wind and solar sectors are already "bankable" and no longer need the involvement of the CEFC.

While there has been a flurry of deals since the main policy instrument, the Renewable Energy Target, was recast in mid-2015, they could soon slow to a trickle.

The retailers are writing PPAs to secure the clean energy they need to comply with the RET. But without a clear plan for beyond 2020, they will simply stop contracting.

"The PPAs were very much driven by policy. If retailers had the incentive or need to do this then they will write them.  Otherwise they dry up and stop," a Sydney-based banker says.

Australia's main political parties are exploring a Clean Energy Target. It would include renewable energy and other technologies that emit below a certain level for the post- 2020 period. But they must navigate a fractious dynamic that threatens to splinter the conservative right faction of  the ruling Liberal/National coalition and alienate crossbench senators who hold the balance of  power.

A hiatus in retailers signing contracts could make the lending scene very crowded, warns the banker.

"In the coming months, both sides of politics will be looking at their policy. If we see a good project coming along with a PPA and the CEFC is in there already, then that's frustrating."

"The CEFC should be focused on the merchant projects or those that are difficult to bank," he adds.

New frontiers

As the retailers retreat from the contracting market, household name corporations such as communications provider Telstra and supermarket chain Coles are stepping into  the breach.

Herbert Smith Freehills lawyer Elizabeth Charlesworth says she expects more projects to raise money using a corporation to sign a contract for the power it generates, like Telstra did at Emerald solar farm in May.

"Corporate PPAs are where the market is headed and I think there will be a role for the CEFC in bringing those deals together. The credit of the off taking party is very significant [for the lender]," she says.

Learmonth highlighted the fast-moving game of battery storage as one of the CEFC's key focus areas now. The agency watched South Australia's recent 100MW tender, which Tesla and Neoen won, with interest, he says.

"In South Australia they have tendered for a standalone battery and are paying an availability charge - this could be funded with long-term debt. We had conversations with a number of the proponents but can't give details as it is commercial in confidence."

Learmonth also says the CEFC can help wind and solar projects staple on batteries. More will look to do this, in efforts to stabilise parts of the power grid where there are clusters of renewables projects. The recent Finkel Review into the electricity sector called for all new renewable developments to be built with storage.

In response, on 14 July the Council of Australian Government's Energy Council agreed to require all new generators supply "fast frequency response" and guarantee a level of dispatchable capacity, which could include batteries, before they enter the market - a move which if implemented could dial up the costs and risks of wind and solar.

"[A CEFC role] will depend on the transaction if the battery is a small component it will be put on the capital cost of the project," Learmonth says.

But the need for a government-backed player is minimal, say some lenders who believe batteries have already broken into the mainstream.

"Battery storage projects have already been financed by large banks in the US and Europe," the banker says, pointing to Macquarie Bank's USD 200m loan for a battery storage project at several sites in Southern California that was inked in March.

However he conceded banks will only touch batteries that have warranties from big international firms like Mitsubishi, which bid on the South Australian tender.

"If they are smaller and less well known like Zen Energy, the CEFC can probably help," the banker says.

To remain relevant, the CEFC must constantly evolve. Wind and solar technologies are constantly maturing, and new ways are being devised to make contracts secure enough to bank. The CEFC must maintain a vigilant eye on the cutting edge of the clean energy sector, if it is to remain a complementary source of finance and avoid being accused of crowding out other players in what is now a very busy marketplace.

The CEFC and infrastructure

Under its mandate, the Clean Energy Finance Corporation must put 50% of its funding into renewable energy.

In the past financial year, this has meant AUD 1.1bn has flowed into energy efficient building projects and AUD 102m into sustainable transport schemes.

Chief executive Ian Learmonth says social housing and infrastructure are two newer frontiers where the CEFC sees potential to reduce carbon emissions.

The green bank is now getting involved in public private partnerships where the sponsors are willing to try out new processes and technologies to make their assets less carbon intensive.

Last month it made an AUD 150m loan to the consortium that is developing a freight hub in Moorebank as a PPP, to help it reduce carbon emissions by 110,000 tonnes annually because the planned rail shuttle to Port Botany will take thousands of trucks off congested Sydney roads.

Learmonth says that while the property industry has led the way in slashing emissions from its buildings, infrastructure owners are a fair way behind.

The CEFC says it is ready to support ports and logistics companies who move to automate or electrify cranes and freight handling equipment, adopt electric or hybrid vehicles and install renewable energy in industrial precincts.

State-provided housing also lags, because the majority of homes are poorly maintained and lack proper insulation and energy efficient appliances.

To this end, the CEFC is supporting the Social and Affordable Housing fund, a PPP being run in New South Wales. The agency committed AUD 130m in March to help build 300 new energy efficient homes.

The money will be spent on insulation, LED lighting, energy efficient appliances, smart meters and solar installations, according to the CEFC.