As major economies agree on a deadline for decarbonisation investors are watching Canberra for a signal to commit, write Lane Crockett and Fergus Pitt.
Clean energy investors will have been encouraged by this month’s commitments from the leaders of the world’s seven biggest economies. Even Australian investors. At the G7 summit in June the US, Canada, France, Germany, Italy, Japan and the UK committed to achieving “an overwhelmingly decarbonised power system in the 2030s”. As soon as possible, they said, they’d phase out support for international carbon-intensive fossil fuel energy.
Australia isn’t a member but was represented by Prime Minister Scott Morrison, invited as a guest and looking – in our view – increasingly out of step.
As EcoGeneration readers will know, Australia has set no meaningful decarbonisation targets in the medium term and is refusing to stimulate decarbonisation in the way envisioned by that G7 announcement by those seven powerful economies.
How, then, should Australia’s clean energy industry interpret policies from federal and state governments and their effects on the market?
Starting at the national level, it’s important to note that the federal government has no co-ordinated emissions policy. It has instead continued to make unhelpful interventions, such as the decision to fund $600 million towards a gas plant at Kurri Kurri, NSW, against the logic of AEMO forecasts and statements from the Energy Security Board.
If this government’s economic and environmental negligence continues Australians will be left with a highly carbon-intensive economy, just when the world is valuing decarbonisation. Australians can expect stranded assets, trade tariffs, lower foreign investment and perhaps even punitive treatment at the hands of our most valued trading partners.
And while our federal government doesn’t appear to see the value in clean energy assets, international investors do. It was international investors who recently committed to pay a healthy $1.75 million per megawatt for New Energy Solar’s Beryl and Manildra solar farms. This investment is consistent with recent activity: the majority of recent solar and wind farms were built under international ownership.
It’s also worth understanding how other governments are planning to address the energy transition. State governments have stepped in to set science-based targets for decarbonising their parts of the energy system. And while the ambitions and direction are appropriate, particularly in supporting electricity grid augmentation, the policy to support investment in new generation is flawed. Supporting large volumes of new investment in power generation using contracts for difference and reverse auctions will distort the market, as Energy Security Board chair Kerry Schott has said.
Meanwhile, government bodies, such as the Clean Energy Finance Corporation, continue to play an important role supporting the energy transition but are more targeted to Australia’s transmission infrastructure, pumped-storage facilities and broadening into the agriculture and transport sectors. These are all crucial parts of the energy transition, but the CEFC’s support appears to be shifting away from directly funding renewable energy generators like solar and wind farms.
And adding to all this policy uncertainty are the major regulatory changes being considered, such as in the Post-2025 Market Design work underway by the Energy Security Board.
So, with all these mixed signals, there are several ways this puzzle might resolve.
The good and the not-so-good
The optimistic outlook says that – in line with the international investors’ relative confidence – Australia’s recalcitrant emissions settings will move towards international consensus; clean energy generation will be more valuable as penalties strike carbon-intensive plants. In this version, the certainty of direction will likely attract Australian institutional capital, which can help fund the gigawatts of new clean generation Australia needs.
The less optimistic outlook is that we’ll have to keep waiting for co-ordinated, rational policy. In that case the transition to a clean energy system will continue, but it will be uneven and inefficient. Opportunities for profitable investment do exist and will continue, but a lack of policy and economic predictability will likely deter large commitments from Australian institutional investors. The transition will be in bits and pieces; equity investments in the tens of millions, not tens of billions. There will be financial winners, but the overall transition will be more costly, ultimately to be borne by consumers.
At this time, it looks like the second scenario is more likely. Investors like us will still be able to find opportunities; there’s clearly a need for agile financiers who understand the clean energy system and want to help catalyse new projects. But as we know from the fall of the Berlin Wall, things can change quickly when the conditions are ripe.
We don’t want to predict what will be the final factor that would force Australia to become more aligned with major economies. But whatever happens, Australia needs to transition to clean energy as soon as possible, for everyone’s well-being.
Lane Crockett (far left) and Fergus Pitt are executives at Impact Investment Group.
Impact Investment Group has, with its community of co-investors, funded and managed the construction and operation of six solar farms and a wind farm, all in Australia. It has just announced a new line of business making short-term loans to catalyse new clean energy projects.