Australia’s CEFC should pursue more ‘catalytic’ forms of capital

An independent report claims Australia’s Clean Energy Finance Corporation needs to transform if it wants to mobilise the massive investment required to achieve the country’s net-zero goals.

Energising Australia’s Green Bank, a report by sustainable finance specialist Saurabh Trivedi of the Institute for Energy Economics and Financial Analysis, recommends that the CEFC become more “catalytic” in attracting capital for clean energy projects and technology.

The International Energy Agency estimates that by 2030, the world will need an annual investment of about $4.6 trillion in clean energy – triple the level of investment seen in 2023.

Meanwhile, a Net Zero Australia study suggests that by 2030, the amount of investment required in Australia alone will be A$1.5 trillion ($980 billion; €900 billion).

IEEFA’s report claims that the CEFC’s current strategy based on debt and equity co-investments may struggle to attract sufficient levels of investment, especially amid global competition fuelled by initiatives like the US Inflation Reduction Act and the European Green Deal.

It proposes innovative risk capital solutions, including “catalytic capital”, to accelerate the investment Australia needs.

However, the CEFC says it cannot pursue every option, and highlights other tools the government has to foster investment.

‘Untapped potential’

The Australian government established the CEFC in 2012 with A$10 billion to get it started.

The CEFC has a mandate to invest in clean energy technologies, excluding carbon capture or storage and nuclear technology or power.

It plays across sectors including renewables, property, infrastructure, agriculture, private equity and debt markets.

Among the CEFC’s recent investments is a A$100 million commitment to support the Waratah Super Battery in New South Wales – expected to be the largest standby network battery in the Southern Hemisphere – as part of a A$500 million fundraising led by BlackRock.

The CEFC pursues investments through debt and equity, green bonds, asset finance and unlisted funds, in a bid to mobilise further private investment.

However, the IEEFA report suggests the green bank could take on an expanded role and use catalytic capital to help facilitate investment.

By the report’s definition, catalytic capital can accept disproportionate risks or provide concessionary returns, potentially attracting more risk-averse investors.

“It has the potential to expedite innovative solutions to social and environmental issues, offering project developers greater freedom in shaping their business models, and attracting co-investors with diverse risk and return preferences.”

It notes that the CEFC has been successful in attracting private capital, with a mobilisation rate of A$5.02 for every dollar of public funds in the 2022-23 fiscal year.

“It is encouraging that even with a more profit-oriented, and therefore less catalytic form of public capital offered by CEFC, private investors have responded quite generously.

“It also indicates that if the CEFC provides more catalytic forms of public capital, we can expect even higher mobilisation of private capital.”

The report recommends that the CEFC’s role expands to make use of other mechanisms, including credit enhancement tools like loan loss reserves, loan guarantees, debt service reserves and subordinated debt capital – mechanisms that may be especially useful in attracting capital for sectors that face challenges in scaling up, such as hydrogen or large-scale battery projects.

Speaking to affiliate title Infrastructure Investor, report author Saurabh Trivedi acknowledged the CEFC’s progress in mobilising private investment toward Australia’s clean energy transition but said its mandated focus on returns limits its ability to make a larger impact.

“There is untapped potential in utilising various catalytic financial mechanisms, including those that absorb higher risks and address uncertainties such as refinancing risk for project developers in utility-scale renewables due to unavailability of longer-term debt.

“This may be limiting investments from risk-averse institutional investors, such as superannuation funds, who prefer longer-term commitments with lesser uncertainties.”

He said the CEFC should concentrate on providing additionality where private investors cannot.

“This may involve greater risk-taking, longer tenors that better match asset lifecycles, or de-risking tools like credit enhancement mechanisms.

“Ensuring its interventions genuinely help overcome barriers and stimulate investments at larger scales that wouldn’t otherwise proceed is key to the CEFC fulfilling its catalytic potential.”

Market-based return on the mind

The CEFC declined to comment on the IEEFA report, but chief investment officer for infrastructure and alternatives Rory Lonergan outlined the current strategy for Infrastructure Investor.

He said the purpose of the government’s original A$10 billion commitment was to help catalyse greater flows of finance into clean energy.

“The way we approach that is by asking, how can we use that as efficiently as possible to maximise the amount of leverage into the sector?”

As a starting point, the CEFC considers the “pie chart” of Australia’s emissions projections, which highlight the sectors emitting the most greenhouse gases.

“We look at how the sector works, who the participants are, who the leaders are, what their access to capital is, what the impediments to access to capital are, and then we right-size our effort.”

Lonergan said over the last 12 years, the CEFC’s participation in renewables has been almost exclusively through project finance debt, which it views as a shortfall in the capital market.

He said the CEFC aims to provide debt in a way that attracts other co-lenders to projects.

“If we’re not investing in a way that is attractive to the market, that won’t help them come in and we won’t get that acceleration of inflows of capital, and hence the greater buildout.”

Lonergan said the CEFC’s lifetime mobilisation rate of A$2.93 (to December 2023) fluctuates widely across its investments, with greater leverage likely to come from its equity investments.

He said rather than setting leverage targets for each investment, the CEFC assesses the value of each project for its ability to decarbonise a particular sector.

“We wouldn’t decline a project because it had a low leverage if we thought it was strategically important.”

Lonergan gave the example of a new hydrogen technology that might only require a very small venture investment but could eventually have an “enormous” impact.

“It can be very modest dollars but if ultimately it works, it’s a gamechanger for a whole industry.”

Rather than leverage rates, the CEFC’s investment mandate focuses on returns – although the latest update to this mandate decreased the benchmark rate of return from 3-4 percent to 2-3 percent above the five-year Australian government bond rate per annum.

“Whenever we try to support a project, we’re very mindful of the need to generate a market-based return, so that other investors will also invest, because if we invest in a way that doesn’t encourage other investors to come in, we aren’t achieving our policy objective,” Lonergan said.

He said the government has other mechanisms at its disposal, such as the Australian Renewable Energy Agency, the Capacity Investment Scheme, and Hydrogen Headstart funding.

“We’re not like the movie Everything Everywhere All at Once.

“Some people are better at doing things than we are, such as ARENA for providing grants, and capacity schemes where the government needs to support projects.”

In a speech last month, prime minister Anthony Albanese acknowledged the competition Australia faces in its energy transition, pointing to the “unprecedented investments the United States and the EU and Japan and Korea are making in their industrial bases”.

With the formation of a new Net Zero Economy Authority, Australia may soon have more tools available to rival the investment-grabbing policies of the Inflation Reduction Act and the Green Deal.