Interview with Clean Energy Finance Corp CEO Oliver Yates
By Giles Parkinson on 26 November 2012, RenewEconomy
RenewEconomy secured the first interview with new CEFC chief Oliver Yates. He talks about his reasons for taking the job, the challenges he faces, the project pipeline he expects to build, the threat of the Opposition to can the CEFC, and why the financial community will soon see clean energy as a mainstream and low risk investment.
RenewEconomy: Oliver, congratulations on the appointment. But
why take the job?
Oliver Yates: It is one of those jobs that only comes around only so often. It's a job that fits my core skills and passions, and I jumped at it. I like building businesses and I like working with new teams. It is a valuable experience working closely with government, and develop a bit more of strategic ear of how Canberra works, and I must say I have been very impressed with the Treasury team we've been working with up there. There are some really good people and we will be able to attract some really good people. I'm looking forward to it and it ticks all my boxes.
RE: What is it about the clean energy industry that attracts you?
Yates: It's the next big transition that you need to make. If you look at the where the opportunities are going to come up, people have been hoping for a faster move towards some of the clean energy sectors, and I think the time is right. You've got the right policy settings, you've got ARENA (Australian Renewables Energy Agency), you've got the carbon tax, the CEFC to complement that. We are at the point where you can clearly see Australian making all the right steps towards the important transitioning towards the low carbon economy. I think climate change is an important matter and making sure that the company is prepared for the changes that climate change brings with it is an important matter.
RE: Garry Weaven said last week that vested interests were winning out in the argument and that investors acting as though nothing would change. Do you agree with that assessment?
Yates: I didn't quite hear all the question, but I don't agree with the idea that nothing will change. Sooner or later, investors are going to realize that if they are not investing in clean energy sector then they are making a terrible mistake. We will get to a stage where there will be a tipping point, where investment in clean energy sector will be almost compulsory, so that those people who aren't doing will be the odd ones out, rather than those people who doing it. It is a matter of changing the risk. At the moment, people still feel that investing in this sector carries higher risk. I don't think it will be too long before people turn around and say that that is the sector I need to be investing in, and the traditional high carbon sector is actually the sector that is going to carry those risks. Making the clean energy sector an investment universe that is essential for all investors and individuals and institutions is an important role that I hope to be able to play.
RE: How far away is tipping point?
Yates: You could look at people changing energy consumption at the moment and we are seeing a change in patters. We are seeing renewable energy closing in on carbon-based energy, we've seen improvements in efficiency, you're seeing technological developments, you're seeing a greater world emphasis on climate change. It's like anything, if I could pick the timing of anything, I'd be a very wealthy man. It cannot be that far away. The more and more governments that set the right policy directions, and have the right institutions, are going to be in a much the better position to act. And being prepared is what every institution should do, every government should do, and what every country should be preparing for.
RE: What are your first priorities going to be?
Yates: Right now we have a staff of one, which is me. So the first priority is to make sure we have the best team available. I'm definitely after a strong investment staff, and a strong legal staff that want to work together with the industry.
RE: What sort of size team are you going to be building up?
Yates: I'm anticipating that we will be partnering with other institutions, but to be able to do justice to the role, to make sure we invest the funds appropriately and diligently, in a way that we don't cost taxpayer money - we need the appropriate staff.
RE: When do you expect to make the first investments - as soon as possible after July 1?
Yates: That is definitely the aim. In fact, I'd be hoping to have a pipeline of transactions identified before then.
RE: What is the budget in the first year that you can spend?
Yates: $2 billion.
RE: What sort of projects are you thinking about?
Yates: We've got to work our way through that. I've got to talk a lot to industry participants, you've got to see what the potential transactions are coming through the pipeline, where they are having difficulty with those, the challenges they have, whether it be duration risk or cost risk. I haven't got to that stage yet. ARENA has been looking at projects, Low Carbon Australia has been looking at projects. I know some people are having problems with PPAs (power purchase agreements), people are facing challenges out there. What we ought to be doing is being able to support them as soon as possible.
RE: And in what way will you be supporting them. You are not going to be doing equity investments, are we looking at loan guarantees or other measures?
Yates: It is a little bit early for specifics. The act limits us to financial assets, which means we will not be building out own solar projects ourselves. We are here to leverage our capacity or to be a catalyst, we would be working with other intermediaries, other financial institutions. But I don't have specifics. Tomorrow (Monday) will officially be my first day.
RE: Do you believe that projects assisted by the CEFC should be additional to the RET (renewable energy target).
Yates: That is a policy issue for the government. But i think we - and ARENA - will be conscious of the impact on the RET as part of how he manage those decisions.
RE: What sort of leverage do you think that $10 billion, or $2 billion in the first year, can get on private investment?
Yates: As much as possible. If we can demonstrate and expand the investment universe so the financial community understands this asset class and understands why it should be in this asset class, I'd like to see that volume be unlimited. At the moment people are resisting. There are issues inside the financial markets which are making it difficult to take duration risk. There has been policy uncertainty in the market to attract investment. I'd be delighted that effectively there won't be any barriers about there are important issues where we can play a big role.
RE: The overseas experience seems to suggest a ratio of around 1:10, is that the sort of ratio you think is possible.
Yates: I don't want to be specific about. That depends on the sector you are talking about. We are more of a conservative lender here. We are a commercial lender, we will be following commercial principles, and that will be worked out in the wash.
RE: The Opposition has threatened to close the CEFC. Are you concerned you may not have a long tenure?
Yates: I know what Mr Abbott has stated and we understand what the Liberal Party policy is, but the country needs a transitional institution such as the CEFC. I think the legislation provides a high degree of certainty. In a relation to our role here, I think we will be welcomed by industry and we will be around for a while.
RE: There is a certain rhetoric about clean energy in this and other countries. We have seen it with the Renewable Energy Target here, and this is proposing to invest in more "out there" technologies.
Yates: The answer is to make sure that these are not "out there" technologies. We are not stretching too far here. You've got ARENA to provide grants, we are here to provide commercial finance. We are not beholden to renewable energy in any way - 50% of this portfolio is probably going to end up in energy efficiency projects, and we can lend to manufacturing sector which can get involved in developing assets as required, we can participate in the transmission sector, if the transmission lines are put in place to release some of Australia's best resources. We've got a wide area to participate in.
RE: Will there be lessons from the Loan Guarantee programs in the US, the fact that may be not all these transactions will be successful. We've seen what happened with Solyndra, for instance.
Yates: They held equity. Those type of pointy end investments are in the realm of ARENA. We are looking at putting money to work in a way that will not cost the taxpayer money. It is off balance sheet, it's not designed to be a draw on the taxpayer, so we will have to look in a conservative framework.
RE: So what is the rate of return you will be aiming for?
Yates: That was set out in the act, and it will be the government cost of funds. Fortunately in Australia we have a government with a premium credit rating that can borrow 15 years for 3.5 per cent if it wanted to. So we've got that asset. The country faces a challenge of a transition to a low carbon economy, if that's the cost of funds that the government can bring to the table, then that's a huge advantage for the industry and can help Australia down the low carbon path. Some of the investments we make will be above that benchmark and some below.
In the news, 2012