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How to support investment in Australia’s future energy generation

How to support investment in Australia’s future energy generation

Michael Thorpe  ●   29 November 2016

Given some estimates indicate an investment challenge of up to $70 billion by 2030, who will be willing to invest in low carbon power? [1]

The Australian Academy of Technology and Engineering (ATSE) recently held its NSW Energy Symposium. The theme was “Beyond Coal – What will power NSW?” As part of our collaboration and lending support to a renewable future, I chaired a panel discussion on what will be required to support the investment required for a lower carbon future.

Collaboration is needed from investors…

Amy Kean, Renewable Energy Advocate, NSW Department of Industry, cited a survey showing that 91% of people in NSW want more renewable energy. [2] “People love renewable energy,” she said.

The shift to low carbon fuels is underway around the world. Amy believes new industries will emerge in the process. Already there is substantial global experience in understanding construction risk, operating risk and resource risk. This can help Australian investors gain comfort with renewable energy projects in Australia, commented Daniel Roberts, Executive Director, Palisade Investment Partners.

The low-risk, long-term and stable returns of infrastructure assets, including power generators and transmitters, typically appeal to superannuation funds. In the case of low carbon power, the government’s Renewable Energy Target (RET) provides visibility around supply and demand out to 2020. But there is less certainty around revenue in the medium- and long-term, which is critical to these investors.

“As we head towards the late 2020s, that can potentially be a risky time for those choosing to take merchant risk, particularly if there is over capacity built under the RET,” Daniel said. And beyond 2030, “all we know is there are many variables and unknowns that we need to price in terms of risk given the long payback periods of the assets. This is ultimately reflected in our required returns and appetite for long-term contracts.”

…and industry…

Luke Panchal, Director, Power and Utilities, EY, said one of the issues is the availability of offtake agreements and risk appetite of investors. Without long-term power purchase agreements (PPAs), equity investors are exposed to merchant price risk. Luke said currently many investors aren’t willing to take that merchant price risk. In fact, their investment mandates often prevent this.

In recent years many Australian corporates have locked in three- to five-year contracts with their retailers at slightly above the spot market prices. Those pricing dynamics are changing. In Luke’s view this will be the key driver to promote corporate or direct-to-end-user PPAs, in turn unlocking further investment in renewable energy.

“Preferably a retailer or someone in the middle mitigates the merchant price risk,” he said.

Luke noted that in the US around one third of all PPAs were written by direct end-users and in the UK a number of corporates were directly contracting with renewable generators. “Australia is a market where all the pricing circumstances are right,” he said. “Once you see two or three here corporate Australia will be ready to take on that risk.”

 …and government

The NSW Government announced a new climate change policy framework a few days before the Symposium. It has an aspirational long-term objective of zero net emissions by 2050. Amy noted the government is offsetting emissions in infrastructure projects such as North West Rail Link and is also using contracts-for-difference to achieve its target.

Luke said no one country has the perfect model. Each country must support the sector and promote it in the right way to get the best solution. He noted that capital is very mobile. “Policy that is comparable with the timeline of investment” will help attract that capital, he said.

To find out more about how we are collaborating with industry, investors, clients, consumers and government to contribute to a renewable future, contact michael.thorpe@cba.com.au. 

Michael Thorpe
Michael Thorpe

Managing Director, Global Head of Infrastructure & Utilities

Michael Thorpe is the Managing Director, Global Head of Infrastructure and Utilities, for the Commonwealth Bank. He is responsible for strategic advice, client relationships and financing across the utilities sector globally. This includes operations in Australia, Asia, Europe, the United Kingdom and the United States. Prior to CommBank, Michael held various executive and analyst roles in project finance at Lloyds Banking Group, Bank of Scotland and Westpac. He has worked in Sydney, Perth, Brisbane and London.

[1] Barry Murphy, ATSE Fellow, presentation, Is there a role for nuclear beyond 2030? www.atse.org.au/beyondcoal. [2] http://www.environment.nsw.gov.au/communities/community-attitudes.html