Government dithering at the state and federal levels is hurting the renewable energy sector, with the net result being greater investment uncertainty, according to a panel at the Asia Pacific Impact Investment Summit held in Sydney last week.
The panel, which was chaired by Ian Learmonth from Social Ventures Australia, consisted of Carnegie Wave Energy (CWE) Managing Director Mike Ottaviano, NAB Director of Capital Financing Solutions David Jenkins and ClimateWorks Head of Implementation Services, Scott Ferraro.
Australia’s commitment under the Paris Accord agreed to at the end of 2015 is to keep emissions at 1.5 degrees above pre-industrial levels and to reduce current carbon emissions by 20% by 2020, with five-year reviews thereafter.
Australia’s Climate Change Authority, meanwhile, is calling for a reduction in carbon emissions in the range of 40-45% by 2030. Interestingly Samoa, one of those Pacific islands at the mercy of sea-level rises, has launched an initiative titled ‘1.5 to Stay Alive’.
Low renewable uptake
Ferraro said the emissions targets agreed to in Paris represented a “compelling need to mobilise global capital” and that ClimateWorks was engaged with state and federal governments to achieve the most tangible emissions benefits possible.
Australia’s renewable penetration rate is still extremely low, however, with wind and solar combined providing less than 15% of total electricity output. “Grand ambitions are not being matched by action. States have completely different targets to the federal government, which doesn’t even have a target beyond 2020. We need to have uniform policies, settings and guidelines before we can achieve anything meaningful.”
Some state governments aren’t waiting for Canberra to act. South Australia and Victoria have already set extremely ambitious zero net emissions targets by 2050, something which came under the microscope following the recent blackout in South Australia.
Debt capacity in the local market
Jenkins said NAB had witnessed a marked rise in demand for renewable energy investments and was encouraging more corporate and individual investors into solar and wind technology, adding that bank was now the leading debt financier of renewable energy in the country. He said the investment needed to achieve the 2020 carbon reduction target is about $8 billion and $2 billion a year thereafter, for which he said there is ample debt capacity in the Australian market.
The total cost bandied about for Australia’s total reductions commitment to 2050 is something around $50 billion, though the vagaries surrounding this number are considerable. Globally, the cost has been estimated at over $50 trillion.
Whether these figures are fact or fiction, it’s safe to assume that the final amounts will by necessity be gigantic, and that this money will flow to renewables through a combination of government and private spending on technology, building and modifying power networks and grid infrastructure, and modifications to commercial and residential properties through the use of technology such as solar panels.
Much of this investment will take the form of Green Bonds, of which governments, corporates and organisations such as insurance companies facing increased exposure to extreme weather events are likely to be the biggest supporters.
A long, slow wave to success
Carnegie Wave Energy is a good example of the difficulties faced by start-ups in the renewables sector. As a world leader in wave energy technology, and after 10 years in operation, CWE is still regarded as a minnow, with a share price hovering around the 4 cent mark and a market capitalisation of $80 million. Ottaviano said there is still a huge gap in the financing structure of the sector and the company’s travelled a long, hard road towards commercialisation. CWE would not have been viable at all without the $30 million in government funding it received through the ARENA programme and the enthusiasm of smaller investors.
“We were inadvertently one of the first to engage in equity crowd funding in 2006, not because we wanted to, but because we had no other options. Institutional investors and venture capitalists basically said to us, ‘come back in 10 years when you have a commercially viable product.’ We attracted a lot of small investors who weren’t going to bet the farm but had a genuine interest in us succeeding, and not just for financial gain. Ten years on, we’re finally beginning to attract interest from institutional investors.”
Ottaviano said the company had done much over the past decade to understand grid infrastructure and had recently branched out with the acquisition of local battery and solar engineering company Energy Made Clean, making CWE the only ASX-listed company with a dedicated renewable energy microgrid project delivery capability. The immediate beneficiaries of this technology will be remote communities that may not have ready access to an existing power network or grid.
He also said it was a tad ironic that those in the fossil fuel sector were criticising the subsidies offered to renewable start-ups at every opportunity. “We get admonished for supposedly sucking on the government teat, but that’s a bit rich coming from oil and gas companies, given that they were the beneficiaries of massive government subsidies for decades.”
Bad press and bad regulation
Regarding the fallout from SA’s grid disaster that left the entire state without power for several hours, much of which was blamed on the smallish wind component of the state’s power supply, Ottaviano said, “renewable energy technology is an extremely complex subject, especially when it relates to grid infrastructure. It’s easy to use renewables as a scapegoat when people have no idea what they’re talking about, but it’s virtually never the fault of the technology. South Australia’s renewable penetration is way below that of several states and countries internationally. In reality, the government failed to plan for the freakish storms that caused the blackout.”
There have also been some high-profile failures over the past decade that haven’t done much to enhance perceptions of the renewables sector. “Anyone who put their money into geothermal or hot rocks-related start-ups would have been extremely disappointed,” Ottaviano added.
Ferraro said certificates still prop up the sector to some extent, as do feed-in tariffs, though their effect is overstated. “We need a national price on carbon, pure and simple. This will remove any future uncertainty around what governments and businesses need to do now to fix this problem.”
Jenkins agreed that the uncertainty around emissions targets and the price of carbon is having a profoundly detrimental impact on the sector. “It’s frustrating, that’s for sure.”
Lack of will to invest
Ottaviano added that the industry is hampered by the lethal combination of a shallow venture capital market and capital-intensive technology. “Everyone’s looking for that next big market disruptor, but there’s a lack of will among decision-makers to invest. Sure there’s Uber and AirBnB that have had a big disruptive impact here but they’re not Australian companies.”
By way of example, Michael Glennon, the managing director of small-cap LIC Glennon Capital, said his fund had looked at adding renewables to its portfolio but he couldn’t find anything that met his investment criteria. “We need to see a clear path to stand-alone profitability before we take a position in a stock. Apart from that, I don’t know enough technically about the sector to make an informed judgement.”
The panel agreed it is particularly frustrating that in many parts of the world, solar and wind technology is now at least as cost-effective as fossil fuel-derived energy. In Chile, for example, renewable energy costs in the range of 3-4 cents per kilowatt hour, and they don’t even have a price on carbon.
Another major hurdle is Australia’s regulatory environment, which is often multi-layered and suffers from a total lack of co-ordination between state and federal governments, resulting in multiple networks across states with different energy mixes and the rules governing them.
Optimism abounds
When asked what excited them most about the future, Ottaviano said CWE’s looming trial at the Garden Island naval base off the coast of WA and the possibilities surrounding Energy Made Clean gave him much cause for hope.
Jenkins said the continuing decline in energy-generation costs in conjunction with the wave of capital expected to hit the sector was extremely encouraging, while Ferrero said he couldn’t wait for the federal policy review, slated for 2017, and the ratification of the Paris Accord in Morocco in a couple of months.
On a final note, despite the wealth of information on offer and the undoubted passion of the protagonists, I found it somewhat disconcerting that at a regional impact investment summit, where ideas are exchanged that supposedly lead to investment and outcomes that benefit the planet and its citizens, there were only about 30 attendees at this discussion, many of whom were from the speakers’ respective organisations.
Alan Hartstein is Deputy Editor of Cuffelinks and attended the event as a guest of the Impact Investment Summit.