Background and Role of the CEFC
The Clean Energy Finance Corporation (CEFC) is a fund that was established on 22 July 2012 by the former Labor federal government. Its primary aim is to catalyse and leverage investment in renewable energy, energy efficiency and low-emissions technology in Australia, by working with project proponents and private sector co-financiers to develop financing solutions. It offers a substantial funding pool, sector-specific expertise and flexible financing terms suitable to projects with longer investment horizons.
The existing legislative framework provides for a special appropriation to the CEFC of AU$2 billion of Commonwealth funds per year for the next five years. Rather than distributing these funds by way of grants, the CEFC has pursued a market-based approach; investment is targeted at projects in the later stages of development and loans are issued at commercial rates. CEFC loans generally involve a private sector co-financier to ensure that the risk profile assumed by the CEFC is broadly market-based.
Since becoming operational on 1 July 2013, the CEFC has provided AU$536 million in financing, which has been supported by AU$1.55 billion in private sector co-financing. According to its September 2013 quarterly report, the CEFC has generated positive returns, with an average return to taxpayers of 7.33% (almost 4% above the government bond rate).
The Clean Energy Finance Corporation (Abolition) Bill 2013
On 13 November 2013, the new Coalition government passed a host of bills aimed at abolishing Labor’s clean energy legislation, including the Clean Energy Finance Corporation (Abolition) Bill 2013 (Cth) (Abolition Bill) which, if enacted, will abolish the CEFC.
Shortly after the introduction of the Abolition Bill, the government called on the CEFC to cease its investment activities. In response, the CEFC stated that it would continue under its existing mandate until there was a change in the law. Given the political uncertainty surrounding the future of the CEFC, despite continuous active discussions regarding existing projects, no new investments have been made since 20 August 2013. According to the CEO of the CEFC,Oliver Yates, it is unlikely to allocate more than AU$1 billion out of its AU$2 billion annual budget as a result of the uncertainty.
Potential Impact of the Abolition
Although the explanatory memorandum to the Abolition Bill estimates that there will be substantial savings as a result of the abolition, recent submissions by the CEFC suggest otherwise. In its submissions, the CEFC argues that the estimates are based on the presumption that the CEFC does not make any further investments.
Based on the CEFC’s financial performance to date, an expansion of its investment base over the next five years would result in income generation for the government. Abolition of the CEFC would then be a cost, rather than a saving, for the government.
In its inaugural year of operation, the CEFC facilitated over AU$2.2 billion worth of investment into clean energy projects equating to AU$2.90 of private sector funds for each AU$1 of CEFC investment. That being so, the abolition of the CEFC would effect a significant reduction in the flow of investment funds into the clean energy sector, making it more difficult for project proponents to source capital.
On a practical level, the Abolition Bill provides for the Commonwealth government to assume control of CEFC investments and take on its contractual obligations. The extent to which the Commonwealth government will be bound by these commitments is unclear; the Abolition Bill gives broad powers to the Commonwealth to ‘manage and dispose’ of the investments of the CEFC as required.
However, in the Second Reading Speech of the Abolition Bill, Federal Treasurer Joe Hockey indicated that the government intends to honour all of the CEFC’s current commitments, which is encouraging for existing CEFC-funded projects.
It is difficult to predict how the Abolition Bill will proceed.The composition of the current Senate presents a significant obstacle for the Abbott government and the prospect of a double- dissolution election seems increasingly unlikely. When the new Senate commences on 1 July 2014, the passage of the Abolition Bill will likely depend on the support of a number of minor party members. In addition, in recent weeks, there appears to have been increasing support for the continuation of the CEFC from a number of independents.
It is uncertain what the future holds for the CEFC and the renewable energy market. In the meantime, existing CEFC-funded projects can take some comfort in the fact the governmenthas stated that it intends to honour existing CEFC funding commitments.