For years, QIC watched from the sidelines as Australia's government flip-flopped on its renewable energy policies. Meanwhile, AGL Energy Limited, one of Australia's oldest energy developers, began building a track record of completed solar and wind projects.
However, policies have stabilised in the last year under the leadership of Prime Minister Malcolm Turnbull and Australia has set a target to generate 10,000MW from large-scale renewables by 2020. With the timing right, QIC, the infrastructure investor, and AGL, the energy developer, have teamed up to help meet that goal.
The two have created a finance-and-build platform, the Powering Australian Renewables Fund, to connect capital to greenfield renewable projects in a market that until recently has been hard to predict. “This has been the historical challenge,” QIC's head of global infrastructure Ross Israel explains, “a commercial and governance framework that allows assets to be developed, built and ultimately operated and managed over a long duration.”
QIC, which manages A$75 billion ($57.1 billion; €50.36 billion), had been hesitant to enter Australia's renewables market. Its infrastructure programme has been around since 2006, when Israel joined the team, but the A$800 million it is committing to PARF, along with Australia's government-owned Future Fund, is its de facto entrance into the nascent sector.
Following many years of renewables and carbon policy debate about whether Australia would diversify its coal and natural gas-dominated energy sector, Israel says: “We're recognising that this market is moving and maturing to a point where we feel that the time is right to enter the large-scale renewables space.”
From AGL's perspective, what makes PARF unique is its ability to de-risk and draw capital into renewables projects. The 179-year old developer is one of Australia's oldest companies and has traditionally invested in the country's fossil fuel industry. However, renewables is a sector AGL has become increasingly involved in as well.
The problem, AGL's chief financial officer Brett Redman explains, has been allocating risk: “We've been at the forefront for a very long time, in both traditional and emerging technologies, when it comes to supplying energy for our customers. We've spent a lot of time thinking: 'How do we get investments up and running in this area?'”
The answer is PARF, AGL's first platform for renewables and QIC's first foray into the space. The platform has a 1GW pipeline and is seeded with a 53MW and a 102MW solar farm from AGL. The latter is also providing A$200 million.
Compared to Europe and the US, Australia has fallen behind in renewables installations. Completing PARF's pipeline would not only mean that AGL and QIC own 10 percent of Australia's 2020 large-scale renewables goal, it would be a road map for how to bring in private capital for future development.
Israel explains that the problem with attracting capital for greenfield development in Australia has been cashflow risk. Construction risk and power prices, along with fluctuating government support, has drawn investors to brownfield investments instead.
“It hasn't always been the case that there's been an acceptable framework to develop assets in this large-scale renewables space'” Israel argues. “What was needed to calm investors' nerves was a way to de-risk new projects by guaranteeing revenue could be generated,” he adds.
“Over the last 15 years, the energy market in Australia has been deregulated, such that government companies around the country have been separated – generation, network and retail – into different components and sold off to the private end,” Redman recalls. “We started to buy into the electricity retail business, and more recently, generation as well.”
This allows AGL to provide cashflow certainty by agreeing to serve not only as project developer, but also as the electricity offtaker through long-term power purchase agreements. De-risking renewables investments was part of QIC's “attraction” to the deal, Israel says. “The key element that AGL has worked through is obviously providing a power purchase agreement to de-risk projects. In this market, there are a small number of large generation retailers which can do that.
The structure of this market “and the ability to have an offtake partner who will contract that power [is] a key element in de-risking these projects and not being open to merchant risk 100 percent,” Israel adds. “Through this transaction, by contracting with a major owner who has a physical connection with customers and electricity, we're de-risking that parameter.”
Along with the two solar assets AGL brought to PARF, the two have planned to construct two wind assets in Queensland and New South Wales in the next two years. After those projects are complete, that leaves PARF around 200MW to 250MW short of its 1GW target. But both agree the partnership does not have to stop there.
“We're both optimistic that beyond this initial 1,000MW there will be opportunity and appetite from both sides to continue to build out and diversify the portfolio,” Israel says. “I think this probably won't be the last deal which gets consummated with institutional capital into the renewable, large-scale energy space in Australia,” Israel concludes.