“We need everyone to step back for a minute…to try to forge a pathway to give us some certainty and clarity around the next decade. State governments are looking to go their own way on a range of different areas, which would just be catastrophic for the system as a whole.”
These comments were made by Innes Willox, chief executive of the Australian Industry Group and a director on the board of AustralianSuper, at the Investor Group on Climate Change Summit held in Sydney this week.
Willox was referring to the state of the energy market on the east coast of Australia, ahead of the meeting of state energy ministers at the Council of Australian Governments next month, highlighting the differences in policy between the states themselves, as well as between the federal and state governments.
He is just one of several people from industry, government and the investment community to speak out on energy in the last fortnight or so, with the energy policy debate rising back up the agenda.
At another conference this week hosted by investment bank Citi, Energy Security Board independent chair Kerry Schott, who is in effect the chief advisor to the federal government on the energy market, said investors are “really lacking in confidence”.
“There’s been a lot of government intervention that hasn’t helped – Snowy 2.0 is a big overhang on investment decisions,” she said. “If you were thinking about a gas peaker, you’d be looking at cashflows that will change – in New South Wales and Victoria in particular – after 2025, and you wouldn’t have a lot of confidence that the government is going to stick with the policies that it’s currently announced.”
Schott also recently butted heads with federal energy minister Angus Taylor, calling his push to extend the life of coal generators “ill-advised”.
Separately, and away from the spotlight of COAG ministerial meetings, campaigning by investors around Marginal Loss Factors is ramping up.
The MLF rules that determine how much generators are paid for the power they produce have begun to negatively affect many renewable asset owners – to the point where John Laing, for example, announced it was freezing investment into new renewables due to the lack of certainty.
The firm – along with multiple other infrastructure investors, including most of the biggest names in the sector – banded together under the umbrella of the Clean Energy Investor Group in a submission urging the Australian Energy Market Commission to alter the rules.
Rob Grant, an advisor to John Laing and spokesman for CEIG, told us the problem for investors isn’t MLFs per se – it’s the uncertainty that surrounds them.
“The issue they’ve got is being able to put a number in their model and within a couple of basis points be reasonably correct in what comes out in the future,” he said. “Existing assets will have suffered some sort of revenue-related diminution in value and that will be affecting capital structures. Fortunately, institutional investors have got equity to be able to manage getting those structures back to levels that are appropriately geared, but that obviously brings down equity returns.”
CEIG estimates that around A$1 billion ($674 million; €611 million) of value has been lost across the entire distributed generation fleet – both old and new – because of the MLF changes, and that only some of this could be forecast and none of it hedged.
The risk isn’t that existing projects might fall over, Grant says, but rather that future investment appetite will just fade away as returns get lower. “What you’ll get is an investment strike until the issue is resolved,” he said.
The industry will be watching the AEMC decision on MLFs on 21 November and the COAG meeting on 22 November with great interest in what is shaping up to be a pivotal week for Australian energy investors.
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