Investor group warns of project default risk in Australia due to MLFs

The group, which counts BlackRock, John Laing and Macquarie among its members, says that the current MLF regime can ‘materially impact’ investor returns in unforeseen ways.

A group of 20 renewable energy investors has warned that “immediate changes” to Australia’s Marginal Loss Factors regime are required to avoid negative impacts on investment.

The group, which includes BlackRock, Foresight Group, Infrastructure Capital Group, John Laing, Macquarie and Palisade Investment Partners, said “the current MLF methodology results in revenue that is highly volatile and increasingly difficult to forecast”.

It also counts the Powering Australia Renewables Fund as a member, a fund run by AGL Energy to which QIC has committed A$800 million ($540 million; €493 million) on behalf of its managed client the Future Fund and investors in its Global Infrastructure Fund.

The 20 investors made their views known in a submission to the Australian Energy Market Commission, a body that sets and revises rules in Australia’s National Electricity Market and provides policy advice to governments.

The AEMC was due to publish its draft determination on a request to change the rules on transmission loss factors on 26 September but has delayed the publication to 21 November “due to the complexity and volume of issues raised by stakeholders in submissions and discussions”.

In the submission, the investor group said the current framework impacts investment through “long-term MLF reductions which materially impact the revenue of projects, many of which were commissioned or committed to many years ago, when such reductions were unforeseen”.

It said that short-term volatility and MLF reductions have also affected recently developed projects that have entered construction or operations, resulting in “materially lower” MLFs than had been forecast by industry experts just a few months prior.

The group said that several existing generators are “likely to be suffering a level of financial distress” as a result of the volatility which could result in project defaults and disruption to electricity supply. In turn, this uncertainty “has already, and will likely continue to, lead to a material reduction in existing asset values and therefore require an additional risk premium to be applied to any new investments”.

It proposed moving to an Average Loss Factor, calculated as the square root of MLFs, which it said would reduce volatility by half and increase project certainty and bankability.

MLFs determine how much of an asset’s output will be credited by the Australian Energy Market Operator, so that a wind farm with an MLF of 0.80 will only receive payment for 80 percent of its output. Similarly, a rating above 1.0 will see the asset credited for more than its output.

The figures effectively represent the percentage of electricity that AEMO predicts will be lost between the generator and the end user, so assets located in remote areas, or in areas with many other generators, often have a lower MLF.

John Laing, which submitted the response on behalf of the group of 20 investors, put renewable investments in Australia on hold in August after booking a £66 million ($82 million; €75 million) write-down on projects due to Marginal Loss Factors. At the time, the firm said that the final MLFs for 2019-20 had produced “unfavourable results” for three of its assets in the country, whose value together represented 11 percent of its total investment portfolio at 31 December 2018.

Foresight Group, another of the investors in the group, saw its Longreach Solar Farm MLF drop from 0.8934 to 0.8729, while its two Oakey Solar Farms saw slight increases.

David Scaysbrook, managing partner of Quinbrook Infrastructure Partners, which is not part of the new investor group, told Infrastructure Investor earlier this year that he believed “there’s a lot of naïve investing” in Australian renewables because of MLFs.

Another member of the investor group is Partners Group, through its Ararat Wind Farm that it co-owns with Canadian pension OPTrust.

Speaking at the Australian Investment Council Conference in Melbourne this month, Partners Group co-founder Urs Wietlisbach reiterated his firm’s bullish position on Australian renewables, despite seeing its Murra Warra Wind Farm de-rated by more than 6 percent from 0.9549 in 2018-19 to 0.8852 in 2019-20.

In response to a question from Infrastructure Investor about how Australian energy policy affects investment, Wietlisbach said that the firm had made a “substantial” investment in the country’s renewables sector through its Grassroots Renewable Energy Platform. In response to criticism of federal energy policy, he added: “The relative value can always be better, but here actually in Australia it’s not so bad.”

30/9/19: This article was amended to reflect that Partners Group is a member of the Clean Energy Investor Group through its part-ownership of Ararat Wind Farm.