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INDUSTRY INSIGHTS: RENEWABLE ENERGY

Overview

In 2010, the Federal Government outlined an amended structure to the Renewable Energy Target (RET), a scheme that was initially legislated in 2000 to ensure that 20 per cent, or 41,000 GWh, of Australia’s electricity comes from large-scale renewable sources by 2020.

In February 2014, concerns regarding rising energy prices and the role of renewable energy led to the commissioning of a review of the RET by an expert panel. The review subsequently recommended that the 2020 target be reduced from a fixed target of 41,000 GWh of renewable electricity, to 27,000 GWh. However, following protracted negotiations, it was not until May 2015 that the Australian Coalition and Labor parties achieved bipartisan agreement to a large-scale RET target of 33,000 GWh which is expected to equal around 23-24% of Australia’s forecast generation.

Investment in the renewable energy sector

The RET has supported investment in the renewable energy sector, as Renewable Energy Certificates generated under the scheme subsidise and assist to offset the higher cost of development and production of renewable energy when compared with traditional coal and gas power generation. This allows commercial scale solar energy and wind farm developments to obtain sufficient financial support to proceed to production phase.

It is estimated that the level of capital required to meet the revised RET target by 2020 is around $5 billion, and a strong appetite exists amongst financiers and investors to gain exposure to the sector. For this appetite to materialise, the sector requires long term visibility of the RET so debt and equity investors can model the opportunity and provide the necessary funding.

Alternative models to stimulate investment

Whilst uncertainty surrounding the RET subsisted, alternative models emerged to stimulate investment in the renewable energy sector and provide longer term certainty for investors and financiers. For example, in 2014 the ACT Government announced the first wind power reverse auction feed-in tariff process.

Through this process, 18 proposals were received, with three wind power development proponents announced by the ACT Government in February 2015. According to the Government, these developments represent a $50 million direct investment into the ACT economy.

This followed a similar process also run by the ACT Government in the solar energy segment, where the first solar development proponent was announced in late 2012, and development subsequently completed in 2014.

Funding the investment

The RET has stimulated greenfield development of renewable energy projects, most of which are funded by project finance provided predominantly by financial institutions operating in the Australian debt markets. In fact, there are many project finance debt facilities provided by banks like the Commonwealth Bank which currently finance operating renewable energy projects; and significantly more financing is now required to support ongoing project development following the bipartisan support for a continuing RET scheme.

So like investors and developers, banks look for certainty. There is a lot of appetite and willingness from investors to develop projects, and by financiers to bank them, but the environment requires continuing long term stability and certainty in order for investments to be made. The bipartisan support of the RET, including the removal of two yearly statutory reviews of the RET, is expected to re-invigorate the renewable energy sector and stimulate further investment in renewable energy generation in Australia.

Nick Sankey
Managing Director - Utilities
Commonwealth Bank

16 June 2015

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