Although much has been said and written over the last 10 years about the Australian federal government’s commitment or otherwise to fighting climate change, there was one initiative that has been an inarguable success story to date: the establishment of the Clean Energy Finance Corporation.
The organisation was launched following the passing of the Clean Energy Finance Corporation Act 2012 under the minority Labor government led by, at various times, Kevin Rudd and Julia Gillard. The act was passed following a period of consultation and a recommendation by an expert review panel that the CEFC be set up “to accelerate Australia’s transformation towards a more competitive economy in a carbon-constrained world, by acting as a catalyst to increase private sector investment in emissions reduction”.
The CEFC’s other goal was to achieve this while minimising the cost to the Australian government, which it has done by adopting a commercial approach to investments and minimising the amount of concessional investments it makes, in contrast to development finance institutions or development banks. The CEFC was allocated an initial A$10 billion ($6.7 billion; €6.7 billion) of funding to make its investments.
The organisation marked its 10th anniversary this past August, a milestone that has seen it commit A$10.76 billion of capital across approximately 265 transactions, drawing a net A$5.43 billion from that initial A$10 billion funding allocation.
The CEFC says that, together with institutional investors, industry and other businesses, its investments have catalysed A$37.15 billion in investment to lower emissions.
Focus on clean energy
There are now 12 broad areas of investment that the CEFC commits varying amounts of capital to: renewable energy, grid infrastructure, energy storage, waste and bioenergy, property, infrastructure, natural capital, industry and resources, debt markets, alternatives, cleantech and hydrogen.
Among its largest areas of focus are renewable energy and infrastructure, the latter of which covers the broader asset class as we know it outside of renewables.
The CEFC has financed 42 projects in the wind and solar sector, amounting to 2.1GW of solar capacity and 1.5GW of wind capacity, and has more recently invested in two battery storage projects. This is more than 20 percent of the connected renewable energy capacity in Australia’s National Electricity Market.
Monique Miller was one of the first employees at the CEFC in 2013 and is now an executive director with responsibility for its renewable energy investments. She says the CEFC’s focus initially was more on wind projects because those were more financially feasible at the time, but that solar soon caught up.
“We then worked with ARENA [the Australian Renewable Energy Agency, a government organisation] to stretch their grant programme for solar, which was excellent timing because the capital cost of solar reduced over the same period, allowing us to support much bigger projects than we had hoped with the same grant amount,” she says. “The solar industry came from a standing start, really, to become a meaningful player in the grid.”
“I’m delighted when we’re not needed in a particular year, because it means all the banks and equity sponsors are doing the heavy lifting. But there haven’t been a lot of those years in Australia”
The approach to investing in renewable energy has changed over the past decade as the wider market evolved, with the CEFC able to shift its focus each year based on where it is needed most.
“We’re constantly balancing the desire to contribute towards emission reductions with the desire not to do things that are too easy for the private sector to do and not crowd out the banks,” Miller says.
“For each transaction, we take a view on whether there is a need for us. That means that, in a market environment where there is a lot of certainty and very clear revenue arrangements, we may be less active. But in other years where there is need to build out a lot of capacity [in a sector] but there are headwinds, which can include a lack of offtake agreements, or higher capex costs, or higher interest rates, we can lean in and be more active.
“I’m delighted when we’re not needed in a particular year, because it means all the banks and equity sponsors are doing the heavy lifting. But there haven’t been a lot of those years in Australia.”
The CEFC was also largely a debt financing house to begin with but has begun to make equity commitments to funds “where we can make a meaningful impact”, Miller says.
“The main change that all investors in the renewables space have had to acknowledge is that, in the early days, the offtake agreements, pricing and tenor was sufficient to deliver an equity return and provide amortisation of the debt during the contract. They were seen as low-risk investments. Now, offtake terms are not that favourable, so investors are taking some amount of merchant risk.”
The organisation also sees battery storage as a major potential area of focus in future. “There are a lot of credible sponsors looking at storage projects at the moment, and the offtakers, including the gentailers and others with exposure to high power prices, are looking really carefully at different models and how they can get a benefit from batteries. I really do think that will be a meaningful part of our business going forward, but everyone is learning as they are going.”
In infrastructure more broadly, which the CEFC defines as economic and social infrastructure excluding renewables and grid infrastructure, the organisation has made around A$900 million of commitments on both the debt and equity side.
The approach to this asset class has also seen a shift over the past 10 years, according to CEFC infrastructure director Julia Hinwood.
“We’ve found that we’ve had the most impact by making indirect equity investments into the large infrastructure funds,” she says, adding that infrastructure asset owners generally didn’t have decarbonisation on their agenda around six years ago when she joined the CEFC.
“They were thinking about physical risks from climate change and the capex spend [associated with that], but that was as far as they had gone. Some had set emissions reduction targets but there was no net-zero discussion going on at all,” Hinwood says.
Initially, the CEFC approached individual assets to see if debt facilities with emissions reduction incentives attached would work but found this was struggling to gain traction. It turned its attention to funds instead, making a cornerstone investment of A$150 million in Morrison & Co’s Growth Infrastructure Fund and another A$150 million in IFM Investors’ Australian Infrastructure Fund. “It’s worked well, because the fund manager can drive the strategy down through to the assets, so they can set KPIs around putting a sustainability agenda in place, and they can [have discussions] around capex and the direction of the company,” Hinwood says.
“To invest in another fund in Australia now, we’d probably be looking at a core-plus fund, because I think we’ve covered the main core infrastructure assets”
“That’s been much more effective than trying to work bottom up through an organisation that might not have had an ESG person, or if they did have an ESG person, they weren’t empowered to make investment decisions.”
Following those early investments, the CEFC deployed capital into two more Australian infrastructure funds: Macquarie Asset Management’s Australian Infrastructure Trust and QIC’s Global Infrastructure Fund.
The four fund commitments together mean the CEFC has exposure to 37 Australian infrastructure assets, including all the country’s major capital city airports and the ports on the Eastern seaboard that process freight (but not coal).
It’s no coincidence that the investments have been in Australian funds, too, given the CEFC’s rules around deploying capital.
“We have a requirement that investments are solely or mainly Australia-based, so we targeted funds that had an asset portfolio that fit that description,” Hinwood says. “To invest in another fund in Australia now, we’d probably be looking at a core-plus fund, because I think we’ve covered the main core infrastructure assets and we’re pretty much there on the economic infrastructure piece.”
Hinwood says the CEFC looks at the impact it will be able to make when it assesses potential fund commitments, as well as ensuring that the GP has the right mindset around wanting to work proactively with the organisation to reduce emissions in its assets. “There has to be alignment and you have to have a collaborative relationship to do this – and they have to be willing to challenge their investors,” she says.
“For example, with IFM, just after we closed that transaction they held a meeting with all their assets and got a consultant in, educating them on how to set emissions reduction targets and measure emissions, as well as holding open discussions across the assets around decarbonisation.
“The same thing happened with MAM, and they even invited the other asset owners, who might own say a 25 percent share in an asset, to attend and share that knowledge. Those were both powerful meetings because those assets had never got together in a room to talk like that.”
The CEFC has already achieved a lot and is only getting busier. In the 12 months to 30 June, 2022, the organisation committed A$1.45 billion to 29 transactions (excluding follow-on commitments to existing portfolio companies).
With a significant chunk of that going to renewables, grid infrastructure and commingled infrastructure funds, it has made the CEFC an investor to watch in the Australian market.
The organisation has also continued to expand its focus into new areas, including the battery storage sector, as well as investments in the nascent hydrogen sector, where it has committed A$23 million to date across three transactions.
“We see our role as helping to provide learning to the incoming, new investors in the space,” Miller says. “We’re delighted if the private sector can do things without us. But we would like them to be ambitious, and so we will deploy capital where we can to try and get that extra stretch from them.”