Energising Australia's green bank

Australia will need an enormous amount of private investment to meet its ambitious target of net-zero emissions by 2050. 

The necessary investment has been estimated at AUD1.5 trillion by 2030 and potentially AUD7-9 trillion by 2060. To meet this demand amid a growing trend of domestic capital flight, Prime Minister Anthony Albanese recently hinted that a government announcement was imminent, signalling increased support for the nation’s energy transition by enhancing public finance programmes and implementing favourable policies.

Public capital will be crucial for several reasons. Promising decarbonisation technologies such as green steel and energy storage require large upfront funds to scale up and do not align with conventional financing models. There is also growing global competition to attract private capital through sizable public incentives, with Australian industry super funds indicating they may be drawn to initiatives like the US Inflation Reduction Act (IRA) in the absence of domestic alternatives. Finally, relying solely on markets may be inadequate to achieve Australia’s transition goals, especially given our lack of an effective carbon price.

However, Australia appears to lag behind other nations in providing support of a comparable scale and variety in our public finance mechanisms, raising the risk of a delayed transition and higher costs.  It is time to fully unlock public finance’s potential by mobilising the required speed and scale of investment.

The Australian Renewable Energy Agency (ARENA) and Clean Energy Finance Corporation (CEFC) have successfully channelled public capital into clean energy projects, but they represent opposite ends of the public finance mechanism spectrum, with significant untapped catalytic potential in between. IEEFA believes expanding the CEFC’s strategic role would address financial market inefficiencies, reduce risks and stimulate further private capital through new catalytic tools. It would also avoid Australia becoming drawn into a counterproductive dollar-for-dollar competition with other public capital schemes like the US’s IRA or the EU’s European Green Deal Investment Plan.

Capital flight can be expected to intensify unless the Australian government provides viable alternatives

The CEFC is Australia’s green bank, with a current capital base of AUD30.5 billion. Utilising debt and equity co-investment structures, it aims for a 2%-3% return across clean energy infrastructure. In the fiscal year 2022-23, it achieved an impressive private capital mobilisation rate of AUD5.02 for every public dollar, a substantial improvement from the previous year’s rate of 2.82. 

Despite this success, the CEFC’s capital strategy remains focused on returns from debt and equity investments. It may therefore struggle to attract major risk-averse institutional investors like industry superannuation funds, which possess AUD1.3 trillion in private capital. It also may not adequately address risks in sectors such as green hydrogen and battery storage, or uncertainties in the broader financial market. Consequently, there is a need to develop risk capital solutions beyond the capabilities offered by its existing equity structure alone.

While there have been many propositions to increase public funding to accelerate investment in energy transition, there has been little discussion on which kind of public capital offering would be most effective and catalytic. Ideally, it should be a portfolio of bespoke financing offerings that a public financing institution should provide. In IEEFA’s view, there is one major financial instrument in particular that is missing or has not been utilised in the current portfolio of government public capital offering, and that is the credit enhancement mechanism. 

Credit enhancement mechanisms represent a highly catalytic application of public funds. These can be offered in the form of loan loss reserves, loan guarantees, debt service reserves and subordinated debt, which strengthen debt repayment likelihood while de-risking investments for financiers. These instruments and structures can be pivotal in attracting private lending and investment to ventures with technologies that are proven but non-scalable. 

Furthermore, credit enhancement instruments can benefit matured sectors such as large-scale renewable energy projects, addressing market inefficiencies such as the lack of long-tenor debt capital in Australia. A green bank like the CEFC is better placed than private actors to underwrite such instruments and significantly reduce overall credit risk, enhance tenors from their current level of 5-7 years to 10-12 years. Additionally, the CEFC can also leverage upon the federal government’s forthcoming Capacity Investment Scheme to develop the long-tenor clean energy infrastructure debt markets that Australia is currently missing.

Internationally, several public institutions employ credit guarantees to support climate projects. The US Department of Energy commits more than USD25 billion through its guarantee programme for renewables. Under the EU Green Deal, the InvestEU fund is expected to mobilise at least EUR372 billion of public and private investment through an EU budget guarantee of EUR26.2 billion. In Europe, similar credit guarantees include the Swedish export credit agency supporting a green steel manufacturer’s EUR4.5 billion debt facility, and the Swedish debt office providing an 80% credit guarantee for a EUR300 million loan for a refinery expanding renewable fuel supply. Additionally, at the COP28 climate conference, the UAE announced the Alterra initiative, allocating USD25 billion for scaling climate investments and USD5 billion for risk mitigation, having already committed USD6.5 billion globally, including in developing regions. These initiatives showcase the significant impact of government loan guarantees in mobilising large-scale private capital for lower-carbon projects and technologies worldwide.

Risk mitigation instruments can significantly accelerate private capital mobilisation, particularly from Australia’s superannuation industry, which is projected to reach AUD3 trillion by 2030. The CEFC’s capacity, due diligence experience and oversight equip it to judiciously leverage its expertise in underwriting such instruments for eligible projects while avoiding issues like moral hazard.

Achieving net zero demands a radical broadening of the CEFC’s remit. Drawing from successful deployment globally, the CEFC must substantially enhance its strategic and technical capabilities by complementing current investments with a full spectrum of tailored risk tools and structures that are optimised for exponentially accelerating private capital mobilisation by mitigating financial uncertainties. The CEFC has the potential to power transition in a profoundly catalytic way. The time is right to channel established public capabilities in a more innovative, effective and streamlined way.

This is an abridged version of a new briefing note from Saurabh Trivedi. To read the full briefing note, click here.