Inquiry into the Clean Energy Finance Corporation Bill 2012


Inquiry into the Clean Energy Finance Corporation Bill 2012

Introduction

1.1        On 19 June 2012, the Senate referred the Clean Energy Finance Corporation Bill 2012 to the Economics Legislation Committee for inquiry and report by 25 June 2012.

Overview of the bill

1.2        The bill proposes to establish the Clean Energy Finance Corporation (CEFC). The CEFC will be a $10 billion fund that will provide a new source of finance for the development or commercialisation of Australian-based clean energy technologies and projects, including renewable energy technologies, low-emission technologies and energy efficiency projects.

1.3        During his second reading speech on the bill, the Minister for Climate Change and Energy Efficiency argued that by facilitating increased flows of finance into the clean energy sector, the CEFC will remove 'barriers that would otherwise prevent the financing of projects'.[1] The Explanatory Memorandum provides further reasons for establishing the CEFC:

Australia is a late starter in the transformation to clean technology due to its access to low cost fossil fuels. This transformation will require substantial capital which the private sector alone may not be able to provide. Current global financial conditions, the complex nature of Australia’s electricity markets, the cost of renewable energy, and the preference of investing institutions for listed assets inhibit the financing of the clean energy sector.

The Corporation is a mechanism to help mobilise investment in renewable energy, low-emission and energy efficiency projects and technologies in Australia. The Corporation will finance Australia’s clean energy sector using financial products and structures to address the barriers currently inhibiting investment.[2]

Previous consultation and conduct of this inquiry

1.4        The proposal for the CEFC originated out of the deliberations of the Multi‑Party Climate Change Committee (MPCCC), with the MPCCC's Clean Energy Agreement released on 10 July 2011 including a commitment that a CEFC be established by legislation.[3]

1.5        Following this agreement, in October 2011 the government appointed Ms Jillian Broadbent AO to chair an expert review to advise on the design of the CEFC. The review considered arrangements to establish the CEFC, the investment and operating mandate for the CEFC and appropriate governance principles and mechanisms.

1.6        The expert panel received over 170 submissions from a wide range of stakeholders, including state and local governments, renewable energy companies, electricity retailers, infrastructure operators, financial institutions, other businesses, trade unions, environmental and climate action groups and individuals.[4] It presented its report to the government in March 2012, and on releasing the report in April, the government announced that it supported all of the expert panel's recommendations.[5]

1.7        The development of the CEFC has also been informed by the experience of similar financing mechanisms in other countries, 'particularly the United Kingdom Green Investment Bank and United States Department of Energy Loan Programs'.[6]

1.8        This bill, which gives effect to the MPCCC's agreement to establish the CEFC as well as the recommendations of the expert panel on how the CEFC should operate, has also already been scrutinised by a parliamentary committee. The House of Representatives Standing Committee on Economics recently conducted an inquiry into the bill. Submissions were received and a public hearing held with evidence taken from relevant departmental officials. A detailed report was presented to the House on 30 May 2012.[7]

1.9        Given the limited period of time available in which to conduct this current inquiry, this committee agreed not to conduct a further public hearing. The committee received 12 submissions for the inquiry, which are listed in the Appendix. The committee thanks the organisations which provided a submission to this inquiry.

Provisions of the bill

1.10      The bill establishes the CEFC and sets out the arrangements for how the CEFC will function. Key features include the following:

  • The CEFC will be established as a body corporate and Commonwealth authority under the Commonwealth Authorities and Companies Act 1997 (CAC Act).
  • A CEFC special account will be established. The bill proposes to appropriate to that account $2.0 billion per annum for five years, starting from 1 July 2013.
  • A board of the CEFC will be responsible for decision making and managing the corporation's investments. The bill outlines arrangements for appointing board members, including the experience or expertise the board members will be required to have.
  • The CEFC's responsible ministers (the Treasurer and the Finance Minister[8]) will be required to issue an investment mandate to the board about the performance of its functions. The mandate will be in the form of a non‑disallowable instrument, which the Explanatory Memorandum states 'is consistent with Ministerial directions issued to statutory bodies like the Future Fund'.[9]
  • The board will be required to formulate and publish policies relating to the CEFC's investment strategy, performance standards and risk management. The CEFC must also publish investment reports on a quarterly basis.
  • The bill requires that a review of the operation of the legislation be undertaken as soon as practicable after 1 July 2016.

Investment activities

1.11      Part 6 of the bill sets out the arrangements governing the CEFC's investment function, including the type of businesses or projects the CEFC may invest in and the criteria it must have regard to. The CEFC's investment activities will be guided by a number of broad principles:

  • the CEFC will be expected to require private co-investment in projects;[10]
  • at any time on or after 1 July 2018, at least half of the funds invested at that time will need to be invested in renewable energy technologies;[11]
  • the CEFC will apply a commercial filter when making investment decisions;[12]
  • the CEFC has the capacity to offer concessional finance, on a case-by-case basis but as close to market terms as possible.[13]

1.12      It is expected that the CEFC will focus on projects and technologies at the later stages of development.[14] Treasury explained the reasoning behind this approach:

When the expert review panel examined where the gaps are in the market, it was also cognisant of the fact that it was going to be primarily an investment vehicle. It saw the initial R&D stages as investments that are more likely to require grants because, at that stage, a project is unlikely to make a financial return into the future. By focusing on later stage developments and the commercialisation of the project, the commercial filter that they spoke about is about projects that have a real prospect of making a return. The early-stage R&D is more appropriate for grants programs such as [the Australian Renewable Energy Agency].[15]

1.13      As noted above, the responsible ministers are required to issue an investment mandate to the board about the performance of the CEFC's functions. In its evidence to the House Economics Committee, Treasury advised that the model for the investment mandate will be based on that used for the Future Fund.[16]

Independence from government

1.14      Another key aspect of the CEFC's design is its independence from government. This independence is expressed in the proposed legislation in a number of ways. While there is a role for ministers in appointing the chair and the board, the bill provides that Commonwealth employees and holders of a full-time office under a Commonwealth law are not eligible to be appointed.[17]

1.15      As noted above, the responsible ministers are required to issue an investment mandate to the board about the performance of its functions. The Explanatory Memorandum states:

It is appropriate that the Government, as manager of the economy and owner of the Corporation, have a mechanism for articulating its broad expectations for how the Corporation's funds will be invested and managed by the Board. This section establishes a framework that enables the Government to give strategic guidance to the Board while preserving the Board's role in making investment decisions independently from Government.[18]

1.16      However, clause 65 of the bill states that the responsible ministers must not give a direction that is inconsistent with the Act or has the direct or indirect effect of requiring the Board to make a particular investment:

This provision ensures the Board makes its investment decisions independently of the Government, while still allowing the Government to set broad policies for the Corporation.[19]

Funding

1.17      The funding for the CEFC to make investments is proposed to be appropriated by clause 46 of the bill, in instalments of $2 billion a year for five years from
2013–14. Annual appropriations will also be provided for the establishment and operation costs of the CEFC for three years from 2012–13.[20]

1.18      In his second reading speech on the bill, the Minister argued that the funding arrangements 'will provide long-term support and continuity to the clean energy sector'. The Minister also noted that:

The corporation is intended to be self-sustaining once mature—that is, it will not require further assistance from the budget. Rather, the corporation's profits and funds returned from its investments will be available for reinvestment.[21]

1.19      These arrangements, over the forward estimates, are summarised in Table 1 below.

Table 1: Financial impact over the forward estimates ($m)

2012–13

2013–14

2014–15

2015–16

Total

Special appropriations

nil

2,000.0

2,000.0

2,000.0

6.000.0

Annual appropriations

19.6

18.8

18.9

nil

57.3

Fiscal balance

–19.6

–466.8

–454.7

–405.2

–1,346.4

Underlying cash balance

–19.6

–168.8

–120.9

–11.9

–321.2

Source: Explanatory Memorandum, p. 11.

Views on the bill

1.20      The submissions that the committee received all supported the creation of the CEFC. In its submission to this inquiry, the Clean Energy Council suggested that the challenge of developing new energy technologies is not unique to the clean energy sector. The Council argues that:

... other technologies such as coal and gas generation have enjoyed decades of public support to get to where they are today. Some level of government support is warranted when long-term investments requiring large amounts of capital are needed to kick-start promising first-of-kind technologies.[22]

1.21      In the clean energy sector specifically, the Clean Energy Council considers that:

To overcome current market constraints and accelerate commercialization and deployment of low carbon technologies, support is needed in the construction of financial transactions in a way that will enable use of conventional capital markets products such as debt financing, private equity, venture capital and capital from longer term equity investors (like superannuation funds) at an affordable cost.[23]

1.22      While the evidence received by the committee supported the concept of the CEFC, Treasury acknowledged to the House Economics Committee that there are a range of views on the need for the CEFC. Nonetheless, Treasury stated that it was not aware of concerns from either the finance sector or the green energy sector about how the framework for the CEFC, as contained in the bill, has been designed:

There is a spectrum of views: 'We need to do it now and we need to do it quickly' to 'We should do more' to some sectors that question the need for the corporation. So there is a broad spectrum of views, but the bill ... reflects the findings of the expert review panel into the Clean Energy Finance Corporation, which was chaired by Jillian Broadbent. Also on that panel were Ian Moore and David Paradice. All three members have extensive experience within the financial sector and the corporate sector.[24]

1.23      Some specific issues were raised in this inquiry from organisations which support the creation of the CEFC. The Australian Conservation Foundation (ACF) submitted that, in its view, there are two issues with the drafting of the bill. First, the ACF queried the definition of renewable energy contained in clause 60 of the bill, arguing that the definition is 'very broad, and could include storage and forecasting technologies, hybrid plants and possibly investment in grid'.[25] Beyond Zero Emissions also commented on this definition.[26]

1.24      Secondly, the ACF and WWF Australia argued that CEFC investments must be above and beyond the renewable energy target (20 per cent of Australia's electricity supply coming from renewable sources by 2020).[27] In its evidence to the House Economics Committee, however, Treasury noted this is not the policy intent behind the CEFC:

The purpose is to overcome the financial barriers. The renewable energy target affects the pricing of renewable energy and what can be achieved, but the individual projects themselves may still have barriers which inhibit investment. The purpose of the CEFC is to address those barriers and not the target itself.[28]

Committee comment

1.25      The committee notes that the creation of the CEFC is supported by a number of organisations. The committee is of the view that the specific issues which some submitters have raised, including the role of the CEFC and its relationship with the renewable energy target, have been adequately considered through the expert panel consultation process. The future review of the legislation required by the bill will also provide an opportunity to ensure that the CEFC is operating as intended.

Committee view

1.26      The commercialisation and deployment of clean energy technologies can be restricted by difficulties in accessing finance. Although such technology is needed to enable the transformation of the economy towards cleaner energy, particularly for the electricity generation sector, the private sector alone may not be able to provide the capital needed. Access to finance in the current global economic climate is already difficult, and certain investments in the clean energy sector, while having broader economic benefits, may not be attractive to private financiers.

1.27      The CEFC will facilitate increased flows of finance into the clean energy sector. Its investment activities will address the capital barriers which are currently inhibiting the development of clean energy technologies. The activities of the CEFC will also encourage greater private sector investment than would otherwise be available.

1.28      The design of the CEFC outlined in the bill is appropriate; the committee notes in particular the commercial filter that the CEFC will apply when making its investment decisions, the requirement for the CEFC to be financially self sufficient following initial appropriations and the independence of the CEFC from government. The review of the legislation after 1 July 2016 provided for in the bill is also appropriate to ensure the arrangements are functioning as intended.

1.29      It is important to note that the design of the CEFC has been the subject of extensive consideration and consultation through the expert panel chaired by Ms Jillian Broadbent AO. The bill, which will enact the legislative framework for the CEFC and implement the expert panel's recommendations, has also already been scrutinised by this committee's counterpart in the House of Representatives, which recently released a detailed report.

1.30      The CEFC will play a key role in ensuring the development and use of the technology, skills and projects needed for Australia's clean energy future. The committee supports the bill.

Recommendation 1

1.31      The committee recommends that the Senate pass the bill.

Senator Mark Bishop
Chair

Navigation: Previous Page | Contents | Next Page