THE PRESENT DILEMMA
The renewable energy industry in Australia has taken more hits in recent years than a punch-drunk boxer. It may be uncharitable to say that Australia’s politicians were the only ones throwing the upper-cuts, but there’s little doubt they’ve played a significant role.
The current state of the renewable energy industry in Australia can be traced back to the repeal of the carbon price mechanism and has been further compounded by the prolonged political impasse surrounding the future of the Renewable Energy Target (RET).
Running parallel to the renewable energy sector’s struggles, is the pressure on governments to reduce spending in the face of an undiminished social imperative to service the energy (and wider infrastructure) needs of remote rural and indigenous communities across the country.
In light of technological advances, off-grid renewable energy should be a key part of the solution to energy security.
In funding such a solution, debt-funded models could be a more practical way for industry to raise the capital it needs than waiting for government funding.
For government, private capital investment has long been an attractive funding solution for infrastructure projects as it allows for the deferral of upfront capital costs.
Equally, financiers benefit from the certainty that comes with government-sourced revenue streams – in this way circumventing the uncertainty that has so severely hamstrung renewable energy investment in recent years.
If a debt-funded model is to be pursued, the real question then becomes: how to structure that funding to make it attractive for all parties concerned?
CLOSING THE GAP
Renewable energy sources (in particular, solar and wind) have a significant relevance in the off-grid setting of Australia’s remote rural and indigenous communities.
At present these communities are serviced almost exclusively by off-grid diesel and gas. While these traditional fuels haven’t yet become prohibitively expensive, they are subject to price fluctuations and, in the case of diesel, affordable only as a result of government subsidies.
Fuel subsidies are also regularly under threat of repeal; and yet renewable energy has made enormous progress in providing an environmentally-friendly alternative which is competitive in terms of price and efficiency.
Taking diesel and solar powered energy as examples: while the cost of diesel generation has remained stable at around the $220-$300/MWh mark, the cost of solar energy is now about $200-$240/MWh; drastically down from $600/MWh in 2008 and likely to get cheaper with evolving technology and economies of scale.
Combine the comparative cost with the obvious environmental benefits of solar or wind and the case for their adoption looks compelling.
‘DO GOOD AND DO WELL’
Despite advances in renewable energy technology, the potential upfront capital cost in deploying such technology to remote rural and indigenous communities poses a significant challenge to governments and local councils.
It’s here that debt-funded models can play an important role.
Financial institutions in Australia have retreated from renewable energy investment primarily due to the uncertainty surrounding future revenue streams.
Whereas, a few years ago, revenue could be predicted with some degree of certainty, financiers have seen modelling assumptions irretrievably broken down with the repeal of the carbon pricing mechanism, ongoing RET negotiations and the myriad of other renewable energy initiatives identified for further governmental review.
But what is being overlooked is the neat intersection between the interests of governments and financial institutions.
If financial institutions can be satisfied that a renewable energy project will generate certain and stable revenue (for example, by linking it to or deriving it from a government source), and governments see that deployment of such a project is available through a model that reduces upfront expenditure, the incentives for both parties to pursue investment really build.
POTENTIAL DEBT STRUCTURES
Assuming investors and governments are willing to get on board, what structures and solutions could most effectively be deployed to finance these projects?
A traditional loan agreement is a sensible starting point, and in this context its worth exploring how this might operate with local council involvement.
The council could borrow from a financier to fund the installation of a particular renewable energy technology to provide some or all of a community’s energy needs.
The council could then utilise funds raised from existing rates (or levy a new, “quarantined” rate for this specific purpose) in order to repay the loan provided by the financier.
Similarly, and perhaps even more appealing from a balance sheet perspective, would be to adopt an operating lease structure whereby the financier acquires title to the relevant infrastructure and leases it back to the council in a long-term arrangement that ends with either the sale of the infrastructure to a third party or acquisition by the council at the end of the term.
While each of the above examples involve the council procuring a loan or lease from a financier directly, the same principles would apply if a third party were to be used to fund, construct and operate the project so long as it received ongoing payments from the council.
Of course, these examples are only a taste of the variety of funding structures that are available in this context.
It is worth noting how products such as social benefit bonds and even US private placement (USPP) issues have been utilised in recent years to fund social and renewable energy projects – see for example the Hallett Hill Wind Farm USPP and the NSW/Treasury / Benevolent Society Social Benefit Bond.
WHERE TO FROM HERE?
Whatever the ultimate structure or approach taken, one thing is certain: debt-funded renewable energy is a sensible, cost-effective and environmentally responsible solution to meeting the energy needs of Australia’s remote indigenous communities.
Now that the distraction of RET negotiations has been dispensed with, local councils, State and Federal Government, and financial institutions should be better placed to redirect their attention on opportunities to collaborate in order to provide basic infrastructure and energy security to some of Australia’s most isolated and marginalised communities.