Senators Penny Wong and Scott Ludlam quiz the CEFC on their activity to date and what the implications of Abbott's plan to shut them down.
Senate Estimates Clean Energy Finance Corporation
November 20th 2013 – Treasury
CHAIR: Welcome to the fiscal group, broadly, and the Clean Energy Finance Corporation. I invite either of you to make an opening statement if you so choose.
Ms Broadbent: No, we do not.
Senator WONG: Where you are at in terms of what you have lent and how much private sector financing you have leveraged? Can you give us an update about the work of the CEFC to date?
Ms Broadbent: We have invested $536 million. That has been matched three to one with private sector funds, so it has resulted in $2 billion of capital investment in the sector.
Senator WONG: Two billion?
Ms Broadbent: There has been $2 billion worth of capital expenditure in the sector, because, with every $1 we invest, we have mobilised $3 of private sector funds. We have comfortably covered the government's cost of funds and our own operating costs, so we are earning about three to four per cent over the government bond rate.
Senator WONG: Are you on track? Have you been more successful than had been anticipated?
Ms Broadbent: We have been very encouraged by the market response to this, both those in the industry and those in the finance sector. I think what we have found—and I will get the CEO to comment on this—is that there really is an appetite for progressing emissions reduction, but it does need an advocate and it needs an encouragement to get on with the job, because the market has been very immobilised by the lack of bipartisan policy in this space. Someone in the industry said to me that there has been more investment in this sector in the last six months than there had been in the last two years, and that is why we are earning a return on the government's cost of funds. It is not so much that the industry is looking for a handout; it is just looking for, almost, an advocate who says, 'Come on; get on with it,' because it has not been a bipartisan message. That is why we have been effective. Oliver, would you like to add something?
Senator WONG: Mr Yates, can you in your remarks include a discussion about rates of return and where you are? I would appreciate that.
Mr Yates: Sure. As Jillian was saying, we have been able to deploy effectively about $500 million worth of capital, and that has drawn an additional $1.5 billion into the sector. The average cost of government money that we use—because in essence we look at ourselves a bit like a bank; we look at the government's cost of funds and our benchmark, and the government's cost, which we benchmark ourselves against, is approximately the five-year rate, and that is around three to 3½ per cent. As indicated in our annual report, the average yield at which we are lending out to people is approximately 7.3, so the taxpayers are earning a solid return. More importantly—
Senator WONG: Can I pause on that point just before you go on. So essentially taxpayers are gaining a significant return over and above what the cost of your funds are, which is the cost of debt for the investment you are making.
Mr Yates: That is right.
Senator WONG: And that is consistent with your investment mandate?
Mr Yates: Yes, it is consistent with our investment mandate. When we were set up, our investment mandate had a very important word in it: we were to become a 'sustainable' institution. A sustainable institution, as far as the board was concerned, meant that we did not need ongoing taxpayer funding year after year and that we would sustainably operate as an entity that would cover its own costs and be able to achieve a public policy purpose. You would appreciate that the banking market is a very profitable business—the banks this year made approximately $27 billion. We are in essence a participant in that market, and we are benefiting and the taxpayer is benefiting from participating in the market.
Importantly, in relation to this, we actually provide targeted monetary policy. When the government normally wants to encourage activity in one sector, it uses a very broad tool such as overall interest rates. By having an organisation such as the CEFC, we are able to deliver a targeted monetary policy to the clean energy sector, including those people who want to take action to reduce emissions and become more efficient. We can ensure that they have access to capital efficiently and at a lower cost.
Senator WONG: I interrupted you; you were going through—
Mr Yates: Yes, I was going to talk about some of the other benefits that we provide. Obviously, one of them is just overall abatement. The projects that we have done so far actually achieve emission reductions of approximately four million tonnes per annum. That is in relation to the government's challenge. That already constitutes about three per cent of the government's challenge in meeting its negative five per cent baseline.
Senator WONG: What is the price per tonne of abatement?
Mr Yates: Our price per tonne is actually negative $2.40. The reason it is negative is that when we lend we earn a profit on that lending activity. Corporations use that money that is lent to become more efficient by reducing their energy costs and by reducing their energy usage they actually reduce emissions. It works very well that we lend. The tax payer receives a return because we are running profitably on that money and the company receives a better return because they are actually becoming more efficient.
Senator WONG: Can you put that in layperson's language? How much is the taxpayer paying?
Mr Yates: It is actually earning for people to reduce emissions.
Senator WONG: Exactly. I understood that but I just want to make sure we put it very clearly. The taxpayer is getting the benefit of reduction of carbon dioxide and is actually making a profit from that through your process, as opposed to having to pay someone.
Ms Broadbent: We talk about it as a negative cost, so we say positive return.
Senator WONG: I know, but no-one else will. Not many people understand that.
Ms Broadbent: Instead of paying something, when you do a reverse auction you might say we are taking the lowest price, we move into the positive price. So for every tonne of emissions that we manage to encourage to be achieved, it has a return to the government of $2.40 per tonne.
Senator WONG: So the taxpayers are actually gaining money from reducing emissions?
Ms Broadbent: They have an earning from that reduction.
CHAIR: How is that returned to the taxpayers?
Ms Broadbent: It is returned to the taxpayers by accumulating returns in the Clean Energy Finance Corporation. The act was drafted such that returns to the Clean Energy Finance Corporation got directed into the Australian Renewable Energy Agency. So it was to be paid in dividends to ARENA.
Senator WONG: So onto budget?
Mr Yates: Yes.
Ms Broadbent: Yes, onto the budget. In a sense it saved the budget paying money into ARENA.
CHAIR: I presume that has not happened yet.
Ms Broadbent: No, it has not happened yet. We have only been going for six months.
CHAIR: Is it anticipated to happen at any time in the near future?
CHAIR: They are still operating at the moment. Do you foresee any plans to actually return any—
Ms Broadbent: If we continue at the pace of investment, we certainly would be paying dividends to ARENA.
CHAIR: Do you have any projections of when?
Ms Broadbent: Our projects were at the end of 2015.
CHAIR: What kind of range of quantum at that point?
Senator WONG: You are entitled to take it on notice, if you would like. If you are not able to give direct—
Ms Broadbent: We did do some estimates on that.
CHAIR: I am happy to take that on notice.
Ms Broadbent: We would be happy to come back to you on that because we have certainly done some estimates of where we would be.
Mr Yates: The best indication of that is the underlying cash balance forecast, which actually shows that the government would actually lose $80 million over the forward estimates period by closing the CEFC down, before we even get to any of the close-down costs of staff costs and everything else.
Senator WONG: Is that predicated on the current rate of return or what was projected, because you are above that?
Mr Yates: That is a good point.
Mr Powell: In relation to those estimates, they are based on what was done at PEFO. We have actually been outperforming against those PEFO estimates, so the $80 million is a conservative number. It is also only dealing with the forward estimate period before we get to critical mass.
Senator WONG: You are still ramping up at that.
Mr Powell: Correct.
Senator WONG: Is the rate of return that PEFO is predicated upon disclosed?
Mr Powell: It is not disclosed as an individual line item. Really that—
Senator WONG: Can you tell me?
Mr Powell: We were looking at a spread of really between one and 1.5 per cent, and on equity we were assuming a zero return. So we are actually performing significantly better.
Senator WONG: So you are at 7.3 per cent above three to 3.5 per cent?
Mr Yates: So it was about 300 or 400 points, which would be normal for banking activity. That is logical because, as you know, as one of its tools the Clean Energy Finance Corporation are able to use concessionality. So it says we are able to lend below market rates where we believe there is a real positive dividend to be obtained by the taxpayer or for the nation as a result of doing that. Out of the $300 million allocation we have had this year, I don't think we have used anything more than $14 million. That $14 million—just to be 100 per cent certain everybody understands—is not actually a cost; that is a measurement that we are still lending well above the government's cost to funds; but, for accounting purposes, we might be a little bit below the deemed market rate.
Senator WONG: I am conscious other people want to ask questions. First, you said $536 million land leveraging a total of $2 billion—so three to one. How many projects?
Mr Yates: At the moment there have been 11 investments made by the CEFC. In addition, we benefit from years of work that have been spent, which was originally started as the 'Carbon Trust' and then became 'Low Carbon', so we have a good track record and a solid understanding of what we need to do.
Senator WONG: Yes. I am just trying to work out what the $536—
Mr Yates: There are 47 projects in total.
Senator WONG: Thank you.
Ms Broadbent: Senator, some of the facilities we have set up have been specifically directed to small and medium enterprises.
Senator WONG: I was going to ask about that. Do any of them include SMEs?
Ms Broadbent: Yes, within the $536 million, there are facilities set up with co-financiers, some of the major trading banks or the energy retailers, to facilitate their support for energy efficiency across the small and medium customers that we would not have access to—or it is not economic for us to consider smaller transactions—but they have an interface with those companies every day. One of the objectives of the CEFC that we have been very conscious of is not just covering our costs and being financially self-sufficient but tyring to develop the financing market for energy efficiency. While, as I said, there is an appetite to do so, it does need an advocate, and you have to use partners to do that; and the co-financiers are very good in that way, because they have a much wider reach to customers who would be prepared to adopt these programs. Every investment that we make and every projectthat progresses, does bring us down the cost curve for a replica project, because there are learnings and even the financiers feel more comfortable with it.
Senator WONG: What sort of partners are you talking about?
Ms Broadbent: We are talking about the major trading banks, the Commonwealth Bank, the ANZ; with Origin, dealing with their retail customers.
Mr Yates: I think that is a very important point. In relation to most of the loans, we make them in conjunction with the major trading banks, who in most cases are taking exactly the same risk profile as a CEFC—sometimes they don't, but in most cases we are a catalyst, we bring them to the transaction and we hope that they participate equally alongside us. Our core job to enable people to move transactions forward and then attract capital to get the deals done.
Senator WONG: In terms of your experience through this process of engaging with SMEs, what do you think the hurdles would be for them for participating, for example, in a reverse auction type process?
Ms Broadbent: It is hard to see small and medium enterprises entering into it. There are a lot of upfront costs in participating in a reverse auction process. It is going to be far easier for larger corporations than for small and medium enterprises. They need someone holding their hand and, in some ways—not with really small companies but with medium sized companies—we have been an advocate and a hand-holder in working with them to get the banks to support them in financing transactions. But when you get down to smaller companies, it is much harder for them to think about even approaching us to fit that.
Mr Ray: I just wanted to add to something Mr Yates said. The explanatory memorandum for the Clean Energy Finance Corporation (Abolition) Bill 2013 includes the financial impact of abolishing the CEFC. As Mr Yates said, the impact on the UCB here is negative $82.1 million across the forwards. Below that it says:
These estimates do not make any allowance for the costs of shutting down the CEFC, such as employee redundancies and contract termination costs, nor do they make any allowance for the lower public debt interest costs …
I think that last bit is quite important.
Senator LUDLAM: I will carry on in a similar vein. Where would we find approximate estimates of what those additional costs are likely to be for closure—your wind-up costs, your staff entitlements?
Mr Powell: At this stage, we have not been requested by Treasury to do those estimates. Certainly at a board level we do make sure we understand what liabilities are being incurred by the corporation that would have to be incurred in the event of a wind-up. At the moment we have back-of-the-envelope estimates only and they are somewhat confidential because they do affect staff and what that means in terms of timing.
Senator LUDLAM: You cannot table the envelope?
Mr Powell: No.
Senator LUDLAM: Just to come back to where Senator Wong was—
Mr Ray: Sorry, Senator Ludlam. It would be one of the first things that we looked at once the bill received royal assent.
Senator LUDLAM: We will see how that goes.
Mr Ray: Should the parliament pass it.
Senator LUDLAM: Yes, and there is no guarantee that it will, but, by the time that it does—
Mr Ray: That is a matter for the parliament.
Senator LUDLAM: I am not clear: regarding the dividends that you were expecting to pay back by 2015, are they completely hypothecated into ARENA or do they just go back into general revenue?
Ms Broadbent: They are streamed into AREA. We have not put too much thought into that because we have been busy building up our investment portfolio and managing our own costs and our commercial practices. Nigel might—
Mr Ray: The way the accounting works is that the interest that the CEFC earns comes to us and goes into the CEFC special account.
Senator LUDLAM: So what is the tie-up with ARENA, then?
Mr Yates: The minister, to the extent that there are surpluses, can ask from time to time for those surpluses to be provided to ARENA.
Senator LUDLAM: Because ARENA is depleting the finite pool of capital, isn't it? It is not expected to make a return in the same way as you are?
Mr Yates: No, and that is a very fundamental point. We are not a grants organisation and we believe very strongly in the discipline of debt, as we call it. We do think that participants who borrow money are going to be very cautious about applying that money to achieve the objective that they set out to achieve, whereas, in certain circumstances, grant programs, because there is no obligation to pay the money back, may not involve the same level of—I cannot say the word 'responsibility' but the same level of requirements as what would be happening to loan borrowers who have a long-term obligation to continue to pay that loan off back to us.
Senator LUDLAM: I take your point. Of the roughly three to one ratio, as far as I can tell, of private capital that you have mobilised, do you have a rough idea of how much of that is domestic and how much is foreign investment?
Ms Broadbent: That is an interesting question. I can take it on notice, but it was encouraging through this, in syndicating some of these transactions, that we have had three totally new foreign financial corporations coming in to participate. They were out of China and Singapore. They felt a certain encouragement to enter because there was a government owned financier at the table.
Senator LUDLAM: I am sure. So it is a confidence-building measure apart from anything else?
Ms Broadbent: Yes.
Senator LUDLAM: I hope you are taking notes, Senator Sinodinos.
Senator Sinodinos: I have my pen poised, Senator Ludlam.
Senator LUDLAM: What happens? Because you are able to borrow at lower than the market rate—and I guess that is what gives you your advantage, as well as the fact that presumably your specialty will be in assessing risk in renewable energy projects, which does not exist in the commercial banks—what would happen if you disappeared from the landscape? I presume the government is going to make an argument that you are unnecessary, that the market will deliver. But just spell out for us what happens if you disappear.
Ms Broadbent: I can only say that we would probably go back to where we were, as I mentioned when someone in the industry said there has been more capital investment in this sector since we have been going than before we were there, so I am only assuming we go back to what it was before we were there.
Senator LUDLAM: You have only been operating, really—you have only been signing cheques and assessing projects—since 1 July?
Mr Yates: We have been assessing projects for a longer period of time. We have only had the money to be able to release, really, since the beginning of July. But the impact of the shutdown of the CEFC would actually be quite broad at this stage. There is considerable uncertainty in the market, and the CEFC is playing a very active role in trying to enable people to continue to pursue transactions in an environment of uncertainty. So, for many project participants, this will continue a trend which will probably see them not be able to finish projects that they would have liked to have finished.
Senator LUDLAM: That is my real concern, I suppose. I do not completely understand how you are able to offer loans. I understand from your report that there are 179 proposals for projects in the pipeline to an estimated total value of $14.9 billion. Stop me if these figures are unfamiliar.
Mr Yates: No, they are correct.
Senator LUDLAM: What happens to those 179 projects if you disappear sometime in the next six months? How many of them will actually get built?
Mr Yates: Naturally, market forces will eventually take their shape, but the CEFC was set up to deal with the market imperfections, following about three years of work. I guess the reason it was set up is that it was felt that there was a real market imperfection here that needed to be fixed, and the CEFC was the mechanism to fix it. So, by removing us, effectively the industry will go back to where it was before, and projects that may have been developed may be delayed.
In an environment where many economies around the world are now taking positive steps to move from a high-carbon economy to a low-carbon economy, potentially new industries that could have been built in Australia will not be built in Australia because they will find themselves falling behind other countries which are currently establishing institutions just like the CEFC. Bloomberg New Energy Finance, I think, indicated that there is $58 billion being lent by equivalent agencies like the CEFC this year alone on the renewable energy sector and about $109 billion in the energy efficiency sector. Countries from the UK, as you know, through to Japan, Malaysia and the US are all setting up similar institutions as they understand that this transition is coming and they want to position their own industry and their own economy to make the most of a transitional change.
Senator LUDLAM: That is a sector-wide view and that is fairly dramatic, but what about the projects themselves? Of the investments that you have made and the private capital that you have mobilised, is that enough to get all 179 of those projects built? Or, if you disappear sometime in the next few months, what actually happens to that portfolio?
Ms Broadbent: One of the objectives of the CEFC was to develop the financial market for financing these transactions, not just renewable energy but energy efficiency, renewable energy and lower emissions. Both the employees and the board have been involved in a lot of financial market developments. You just know they take a lot of time and you have to have very patient capital. Sometimes some of the private financial institutions do not have that patient capital and do not want to keep whole teams of people and build up the skills while they do not think anything is happening in the next three years. So that is the danger of discontinuity of public policy, in a sense: you start building things and the market gets a bit of confidence and it starts thinking, 'Maybe we'll put people on and maybe these projects will proceed'—and with those projects you do come down the cost curve because the constructors learn how to do it better. So it is starting something that then you stop, and exactly when it starts again through market forces could be quite a long time, but that is very hard to estimate.
Senator LUDLAM: Can you explain for me—and forgive me if this is your report—the time frame of the projects? Are most of them in the distant future? How many of those 179 in your portfolio are actually in the construction phase?
Mr Yates: I think the best way to describe it is that, in relation to the 11 projects that we have funded, they are all funded and, if they are not in construction, they will be going into construction within the next 12 months. So that is of the money of those ones that we have.
In relation to the other projects within the pipeline, not all projects, obviously, within our pipeline are likely or are going to receive funding. We obviously are quite selective in how we go about choosing projects. But at the moment, if I were looking at our pipeline, there are about 37 projects which are undergoing reasonably detailed scrutiny, which would involve about $2 billion. None of those are in construction at the moment because they do not have finance, and obviously they will not enter construction until such time as they have finance.
Senator LUDLAM: How many of those projects are at risk—let us be blunt—if you disappear from the market?
Mr Yates: I cannot precisely give you that figure.
Senator LUDLAM: An order of magnitude? Half of them?
Ms Broadbent: I think it is a timing issue. It is this market development. When you have got the market developing and you are coming down the cost curve and you have the banks participating, then they stop doing that. They might stop doing it. They will certainly go a lot more slowly. Will they stop for a few years? It is very much a matter of the signals and the strategy set by government in both energy and environment policy, and I think they take the signs from that.
Senator LUDLAM: I understand. I feel as though we are having two related conversations. One of them is about the sector-wide impact, and it sounds very, very dramatic—that it really will throw the brakes on. But I am also interested in the project-by-project dynamic: you have people lining up, or you are in the process of lining up and building that bridge, as you have explained, between the proponent and the private capital.
Ms Broadbent: While we have been building that bridge and we have been very encouraged by what we have been able to achieve by establishing that bridge, it is also very hard. We did not know when we started how receptive the market and the financiers would be to participating with us, and we have been very encouraged to find that receptivity. How it will continue when we are not there, it is very hard to say, but we are certainly conscious that being an advocate and being a trusted financier with the project owners has been very effective. When we are not there—how much market development we have been able to achieve in our existence that is sustainable it is hard to say.
Senator LUDLAM: That is hard to put a metric to, I guess.
Ms Broadbent: Yes.
Senator LUDLAM: I appreciate your candour. Following legal advice that you have received—I am not asking for you to table a copy of it—are you operating just as you would have without the hostility from government? You have both observed up to now that that lack of a bipartisan consensus or cross-party consensus is problematic. Are you operating as you would otherwise have, or has this actually slowed or modified your activities?
Ms Broadbent: No, we have had an open discussion with the government about this, and they have recognised our public responsibility and duties and that we are going to continue investing the way we have. But, just with the message that the market is getting about the interest in this sector, the market is not so receptive as it was before. I suppose that is both the co-financiers and the industry. We are certainly consistent in everything we are doing, but the market itself is stepping back a little bit and reassessing, I suppose.
Senator LUDLAM: Understandable. Your act provides $2 billion for you to commit each financial year. How much will be available to you in the months after 1 July 2014? Maybe you could take that in two parts. How much of that $2 billion is committed? And what would be available to you post 1 July 2014?
Ms Broadbent: Of the $2 billion, we have committed $536 million.
Senator LUDLAM: That was that figure at the outset.
Mr Powell: Just let me check that, Jillian. I might just correct one thing there. Some of that $536 million actually came from Low Carbon Australia, so, of the $2 billion, $482 million has actually been committed by the CEFC.
Ms Broadbent: We have access to $2 billion per annum. You asked how much would be available?
Senator LUDLAM: I am just interested in the 2014-15 financial year.
Ms Broadbent: In 2014-15 a further $2 billion would be available because the design under the act was that $2 billion per annum would be available for investment in this.
Senator LUDLAM: On 1 July?
Mr Powell: In addition to any moneys that are unspent and remain in the special account held by Treasury.
Senator LUDLAM: Do you have to have committed the $2 billion, or are you able to carry over?
Mr Powell: We do not have to commit the total $2 billion. In fact, in all of our forecasts we were forecasting less than a $2 billion per annum commitment and less than a $2 billion per annum draw-down. The reality is that it takes time in this market, and we are investing very prudently and making sure that the taxpayer is looked after here, so we do not want to just throw money at all investments.
Senator LUDLAM: Does it carry over, though?
Mr Powell: It does carry over.
CHAIR: I will just ask a quick question. Mr Ray, you mentioned those factors in terms of the costs of the abolition bill, and that last paragraph you mentioned was quite important—that is, those calculations do not include the defraying of interest costs, effectively. Is there any indication of or any ability to calculate what the savings would be from the interest? What would the factors be that would feed into that?
Mr Ray: The factors that would feed into that would be the yield curve at the time that payments were made into the special account.
Mr Ray: The yield curve at the time that payments were made into the special account would be the factors that would feed into it.
CHAIR: And the outstanding amount advanced to the CEFC, presumably, at that point?
Mr Ray: Yes.
CHAIR: How much has been advanced up to now?
Mr Ray: About $2 billion has been put into the special account, but the CEFC has not drawn it all down yet, so it is about—1½?
Mr Yates: No, we have drawn about 800, I would imagine.
Mr Powell: $811 million.
CHAIR: But the $82 million in savings does not include the offset of—
Mr Ray: In a way, we credit the special account. When the CEFC draw it into their bank account, that is when we need to finance it.
CHAIR: Yes. As I say, it is like an overdraft, in a sense, that they have not drawn down on.
Mr Ray: Actually, it is not an overdraft, but it works in the way that—
CHAIR: In a layman's mind it is—
Mr Ray: They have a facility that is sitting there that then they can draw down upon.
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