Oliver Yates on the future of financing

From EcoGeneration on 10 July, 2013

Clean Energy Finance Corporation Chief Executive Oliver Yates explains the opportunities available through the Corporation, and the potential challenges awaiting developers.

The Clean Energy Finance Corporation has a big mandate and big decisions to make on future investment approaches and priorities. Its Chief Executive Oliver Yates explains the opportunities available, and the potential challenges awaiting developers.

Clean Energy Finance Corporation (CEFC) Chief Executive Oliver Yates is spearheading an investment fund with some seemingly challenging hallmarks. Though legislated and supported by the Federal Government, the CEFC has sometimes been politically controversial, and the Federal Opposition has pledged to dismantle it should the Liberal/National Coalition win office in September 2013.

The CEFC is designed to mobilise both public and private sector capital, merging opposite ends of the funding spectrum to catalyse and leverage an increased flow of investment for commercialising and deploying clean technologies.

If anyone is best-placed to handle these dichotomies, it's Mr Yates, who has spent more than 20 years unifying corporate finance and clean energy; with expertise in financial structuring, project finance, debt structuring, equity raising and listings, he has the know-how to work with private sector co-financiers of the CEFC.

"The CEFC will be investing alongside other responsible investors to help create depth in the Australian financing market for clean energy technology deployment, and lowering the financing cost of meeting the infrastructure needs for a low-carbon economy," Mr Yates explains to EcoGeneration.

During his previous role at Macquarie Bank, Mr Yates was involved in establishing new businesses and growing operations internationally, and leading the Bank's initiatives in wind, solar, biofuels, carbon credits and other renewable businesses. Mr Yates has played key roles in terrestrial and bio-sequestration, and has been an investor and board member for a number of energy ventures.

Progress thus far and the road ahead

The CEFC commenced investing its $10 billion fund from 1 July 2013; its investment activities will be funded through a special appropriation of $2 billion to a special account every year for five years. By working with private co-financiers, the CEFC aims to both leverage the total amount of funding available and to enhance the expertise and capacity of the financial sector to fund clean energy.

The CEFC will invest in organisations and projects, as well as manufacturing businesses that focus on producing the inputs required, and has pledged to make its investment decisions independently, based on rigorous commercial assessments.

"We've made great progress getting established and fully staffed," Mr Yates says. "We have released our investment policies and investment strategy, and now have a highly-experienced investment team which is actively engaged with the market."

The CEFC's 2018 portfolio vision provides direction for the market in terms of CEFC's investment approach and priorities. It will seek to make commercial investments in clean energy technologies and projects - and related suppliers of relevant goods and services - for areas that counter market failures, address financing impediments and generate positive externalities.

The CEFC recently issued a general call to the market inviting interested parties to bring forward investment-ready proposals. "There has been a resounding positive response to date from all segments of the market, demonstrating the positive role which the CEFC can play," Mr Yates notes. "The CEFC is working with a range of financial institutions, project investors and major corporates, building a pipeline of renewable energy and energy efficiency transactions."

How will the CEFC invest?

The CEFC will use several investment tools - including providing loans at commercial and concessional rates, equity and guarantees - but as a matter of preference, it intends to concentrate on debt finance at its early stage.

As it will invest commercially, the CEFC expects to earn a positive, risk-adjusted return for taxpayers from its portfolio of investments, higher than the Federal Government's costs of funds and the CEFC's portfolio benchmark rate, and intends to operate as a self-sustaining operation within a few years.

The CEFC is accepting new proposals on a continuous basis, such as through its website - www.cefc.com.au - which provides project proponents with the ability to submit proposals online; the website also contains the eligibility and evaluation criteria that the proposals are assessed against. The CEFC says it is looking for well-defined, investment-ready projects that have a co-financier, a solid business case and a particular role that CEFC financing can play in making an otherwise fully commercial project happen.

What will the CEFC invest in?

Prospective investments include renewable energy technologies, related enabling technologies, and hybrid technologies that integrate renewable energy - detailed definitions of suitable technologies are also available on the CEFC website. The Corporation is giving special focus to public sector entities seeking energy efficiency solutions, given rising energy operating costs and tight budget controls.

Its approach to investing entails establishment of whether a proposal is eligible, followed by evaluation of the commercial merits and relative investment attractiveness of the prospective investment. The ranking of particular investments is influenced by CEFC's risk management approach, and how each potential investment could contribute to achievement of its 2018 vision.

Potential investments are considered against a range of factors, including:

• Project and technology type
• Risk (technical, financial, delivery and implementation, credit)
• Life of the project
• Anticipated energy and carbon savings
• Amount of finance being requested from the CEFC
• Amount of finance sourced from parties external to the CEFC
• Positive external benefits to the sector generated by CEFC participation.

The actual return sought for any given investment will be a market based risk-adjusted return reflecting the individual characteristics of specific projects, the need to cover the operating expenses of the CEFC, the requirement to meet the portfolio benchmark return on a portfolio basis and other factors. Finance will be offered on terms at or as close to market as necessary for a given project to go ahead.

Under its investment mandate, the CEFC has been set a portfolio benchmark return for the performance of funds invested based on a weighted average of the five-year Federal Government bond rate.

What will the CEFC focus on?

Although it has flexibility in its mandate, the CEFC doesn't expect any early-stage or speculative technologies will suit its current risk profile, and says the Australian Renewable Energy Agency is more suited to providing funding for research, development, demonstration and deployment of these types of technologies.

With the integration of Low Carbon Australia (LCA) into the CEFC, it will provide finance for smaller-scale transactions in the energy efficiency and low-emission technology segments of the market through the programs established by LCA. These pooled financing and partnership strategies will leverage the larger market reach of financial intermediaries such as commercial banks and fund managers, and some of the facilities established by LCA will be expanded in scale and breadth to assist.

Legislation governing the CEFC provides that a minimum of 50 per cent of the CEFC portfolio must be invested in renewable energy technologies by 1 July 2018, or within five years of the first receipt of the Corporation's funding into the special account. The balance of funds will be directed to investments in energy efficiency and low-emission technologies.

Strengthening clean energy support

Mr Yates recognises that the investment climate for clean energy hasn't always been favourable, and points to the CEFC's ability to finance projects alongside the private sector- in addition to its ability to tailor finance under specific terms and conditions related to projects - as a big plus for organisations.

"Financing has continued to prove challenging for large projects, particularly when combined with the adverse competitive impact of the high Australian dollar on Australian manufacturers of sector inputs," he notes.

"The gaps in capital markets due to other global financial dynamics demonstrate the need for an institution like CEFC to play a role in providing continuity in the market and support growth of Australia's clean energy sector."

While the CEFC and Mr Yates aren't in a position to comment on the potential impacts on the Corporation of a change of Federal Government in September, they've noted that under the parameters and mandate of the Clean Energy Finance Corporation Act 2012 the Government will make $2 billion available per year over a five-year term, with a view to generating a long-term return sufficient to enable the CEFC to be self-sustaining.

"[The CEFC] represents a significant opportunity for the public and private sector to achieve the type of economic transformation required to achieve Australia's 2020 emissions targets, and competitive transformation at the lowest economy-wide cost," Mr Yates says.

"We are seeing exciting developments in this space with continued reductions in costs for renewables across all technologies."