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Select Committee on Electricity Prices
09/10/2012
Electricity price increases in Australia

MCDONALD, Mrs Margaret, Chief Executive Officer, Low Carbon Australia Limited

CHAIR: The committee is reconvened. Welcome, Mrs McDonald. We have received your submission. Do you have an opening statement that you wish to make to the committee?

Mrs McDonald : I do. I thought it would be helpful to give senators a bit of background on Low Carbon Australia. We were very pleased to be able to give a submission to the committee and, as we are really a body that was set up to address energy efficiency, we want to take the opportunity to share with the committee a number of the benefits of the experience we have had since we were established.

Low Carbon Australia is a Commonwealth owned public company limited by guarantee, with the Minister for Climate Change and Energy Efficiency representing the Commonwealth as sole member. We have just passed our second year of program operations. We were previously known as the Australian Carbon Trust. The company runs two programs: the Energy Efficiency Program and the Carbon Neutral Program. The majority of our resources are in our Energy Efficiency Program, which constitutes 84 per cent of our funding. Essentially, the Energy Efficiency Program is a revolving loan fund. In simple terms, we loan money to the private sector and other government and non-government agencies for the purposes of undertaking energy efficiency projects and reduction in greenhouse gases. Loans are repaid back into the fund with interest. In return, the repaid principal plus interest can be loaned to other businesses for new projects, and so the revolving fund continues. It is somewhat similar to the proposed Clean Energy Finance Corporation, but we are on a significantly smaller scale, with only $84.6 million actually in our loan fund. We are also limited in scope because, under the terms of our funding from the Commonwealth, we can only invest in the installation of commercially available technology in commercial buildings and industrial processes for energy efficiency and for distributed generation.

Our operation is very different to grants. We do not give the money away for free. We charge interest on the money we lend on a risk weighted basis through a commercial filter and we have adopted a strategy of leveraging finance funding from the private sector as well to make our fund maximise its impact. So, to that extent, we do not set out to, nor do we, compete with the private sector but actually work to complement it. We have set about setting up financial structures with the private sector, with established partners, to address gaps in financing to help enable more private finance in the market for energy efficiency. In the case where we see that there is significant uptake and that the market is actually developing, that is the point at which we can exit and move on to another area. That is the basis of the partnerships we have developed with a number of other private sector financiers in really looking to develop new parts of this market.

Our funding criteria require us to mobilise private funding of at least one dollar for every dollar that we lend, and the projects we fund not only must be carbon abating but also must produce carbon emissions at less than the $23 a tonne economy-wide target. So, from a government perspective, our investment activities are a completely different way of delivering government investment, and in our view it is a better way to use limited public funds and is less market distorting than grants for tax breaks and other forms of intervention.

Our submission and our appearance today looks at some specific areas of the committee's broad terms of reference. Our area of expertise is on the demand side and the development of distributed generation, which is really developing as a demand side response. In our activity we are essentially exposed to the commercial, industrial, government, business and agribusiness sectors, as well as some limited areas of the residential sector—mainly multi-unit strata title.

Our finance is taken up through the full spectrum of businesses, from the very small to the very large, and we have a deep understanding of the pressures in the business community that are rising through rising energy prices. We have also developed strong experience in the areas of market failure from the points of view of the businesses that are experiencing the pressures in relation to energy efficiency, and that is really where our financial products have been structured around addressing some of those deficiencies.

Since we have been in operation the demand for energy efficiency has been sluggish, but it has definitely accelerated in the past six months as the impact of rising energy prices has hit home. Also, from a business point of view, since the carbon pricing scheme has become law a number of businesses are now feeling more clear about the fact that rising energy prices are a business fact for them, and some of them are now taking action to avoid liability, whether direct or indirect.

Working against this trend, and this is an issue in both large and small business, is the inertia that works against replacing old technology. This is particularly the case due to the generally subdued business investment environment. There is a proliferation of new technologies coming into the marketplace, and there is generally an unfamiliarity with a lot of those technologies on the parts of most businesses which then leads to inaction as businesses constantly evaluate whether that technology is the right one for them or whether they should continue using something they have been using for the past 20 or 30 years. That is in stark contrast to other areas of like equipment in their businesses, where they would not think twice about using a mobile phone of 20 years ago but they have no doubts about using lights or other equipment that is similarly old.

CHAIR: Sorry to interrupt you, Mrs McDonald. Could I just ask how much longer you have? We have questions, and there might be other senators joining us in a moment.

Mrs McDonald : Two seconds.

CHAIR: That is good.

Mrs McDonald : We have concluded that there is no silver bullet for demand side energy efficiency, and that it needs quite a comprehensive end-to-end service. A number of the finance products we have established in developing the market are attempting to do that and we are starting to see take-up of those by businesses. We think that is an important area for the committee to take note of—businesses are looking for a chain of assurance, not just a single vendor in the marketplace.

The other thing we would like to register is that in industry the Clean Technology Investment Program grants are really stimulating a lot of businesses to make some step changes in their energy efficiency. Some have examples of 50 per cent gains in their energy efficiency, and that is something which is really going to feed through to industry into the future. I am happy to take any questions.

CHAIR: I found your submission quite interesting. In particular, your submission detailed some of the overseas programs that are in place to reduce peak demand. You have explained the on-bill financing program that is a feature in many US states, but are there any legislative or rule impediments to those programs being implemented in Australia at the moment? If not, why have some of the network or retail businesses not offered these programs?

Mrs McDonald : In fact we do have an on-bill financing product which we have developed with Origin Energy. We went to the marketplace with a request for proposals in July last year really seeking interest from utilities to provide this sort of service for their customers. The examples we talked about briefly in the submission include that in many US states it is mandated for utilities to provide this to their residential customers, but many of the utilities also offer this to their industrial customers as a way of providing a value-added services, so retaining customers and being able to develop long-term relationships with those customers.

The program we have with Origin Energy is purely for commercial and industrial customers. There are some 16,000 that they targeted around that. It requires being able to develop quite a sophisticated ESCO service for those customers and then being able to identify energy-saving options for them and repayment options for them and to satisfy them that they are getting a good deal. The biggest impediment there is the question of the relationship between energy retailers and their customers and the general sense of trust that there is. Certainly our partnership with Origin in developing the on-bill finance product here has meant that we are able to verify the energy savings. Our technical evaluation gives the customer an assurance about the nature of the deal and an assurance around the fact that the finance is not going to be exorbitant in cost because of our government ownership.

The issue for most retailers is that they would be required to find a way of financing this which is not on their own balance sheet. A number of the large retailers do do these sorts of projects for major users, but finance them themselves. I think those sorts of days are over, so being able to do this in partnership with a financial institution as well as having an assurance for the customers that they can trust the equipment and finance deal is the whole chain that needs to be provided. In our submission we provide a couple of diagrams showing the number of stakeholders you need to have involved in these sorts of programs in order to get customers to have rapid take-up. While the US cases show that can be achieved through mandating, you would still have to have capability on the part of the retailers to provide that sort of service and that is no small investment on their part.

CHAIR: You said that you targeted 16,000 customers. How many took up the offer?

Mrs McDonald : The take-up to date has been relatively slow. In the last couple of months we have experienced a more accelerated take-up of the Origin customers. I believe we have about five in the pipeline ready to announce. Those range from some small projects like IGA supermarkets in Brisbane which did a lighting retrofit for $5,600 up to some major retrofits of office building in the order of half a million dollars.

CHAIR: Some submissions have made the case about some impediments to connecting trigeneration and cogeneration to the grid. You point to that on the last page of your submission where you say that projects require considerable cooperation and support by state and local governments, businesses, residents and network owners and wherever possible legislative impediments to the adoption of such cooperative schemes ought to be removed or streamlined. Have you identified any legislative impediments?

Mrs McDonald : To be honest, no, because it varies state-by-state and, for any of the distributed generation projects that we are involved with—from the larger ones, such as the City of Sydney trigeneration system that is proposed, down to individual cogeneration and trigeneration systems, of which we just announced one last week with the Wagga aquatic centre, for instance—every single case really involves quite a complex regulatory set of approvals for every proponent, which does act as a detractor for a number of the operators. It is the same for any of the large manufacturing plants that are putting in biogas operations, for instance. These approvals really do need to be streamlined, but we have not documented individual cases; we just know that it adds significantly to the cost and also to the project time lines around getting approvals to install and connect, let alone actually being able to feed back into the grid.

CHAIR: So are you talking predominantly about local government approvals, or are there also issues with the transmission—

Mrs McDonald : Network—

CHAIR: Network businesses?

Mrs McDonald : Yes. And that is whether it is gas and/or electricity.

Senator EDWARDS: As to your $100 million, was that your seed funding? Was that something that was rolling and that is what you started with and you have been getting more money as you have required it? I am trying to get a handle on how you operate your business, how you measure your success, and what penetration you have. I mean, who qualifies for you to be targeting them for a loan? How do you go about your business?

Mrs McDonald : We were set up initially with $100 million in total but, of that, $84.6 million is actually our loan fund. Of that, we have contracted $37 million to date, and most of that is with vehicles with other bodies. I have mentioned the Origin on-bill finance vehicle. We have contracted with National Australia Bank and Eureka Funds Management to set up the environmental upgrade agreement fund. We have contracted with Macquarie to set up a fund with them to offer leases. And, of that, we have had $5.3 million draw down through those projects.

Senator EDWARDS: But how do they qualify? Why did you award them $37 million, and the National Bank and Eureka Funds? Did they apply for funding under your charter?

Mrs McDonald : We went out to the market asking for proposals from both individual projects and the financiers who wanted to develop the market for energy efficiency, and we talked with them about the impediments to them offering particular services to their customers. Mostly, the way in which our finance works is that a customer will come to those financial institutions looking for finance for, let us say, a cogeneration system. They might want to do an operating lease for that cogeneration system. Banks typically will only lend for five years. Yet the payback periods for a cogeneration system, depending on where it is, will be anywhere from five to 10 years, just depending on its use and the gas prices. Then, if they cannot get anything longer than five years from their bank, what we can do is, by partnering with the bank, to offer finance which actually extends the term and, in simple terms, what we look to do is to match the repayments to the energy savings so that a customer is able to finance a project at no penalty to themselves.

Senator EDWARDS: So, given that you have not expended your $84.7 million or whatever it was, is the program behind schedule?

Mrs McDonald : No. In fact, we have contracted that $37 million. We have $33.9 million of projects which are actually at contract stage, and we have another $10 million of projects that are at negotiation that have been board approved and which we are just moving towards contract stage on. But I should stress that those vehicles are really set up to get private sector finance into the market and then be offered out to individual customers.

Senator EDWARDS: But what are you funding in the main—cogeneration?

Mrs McDonald : Cogeneration; lighting; power factor correction; and building upgrades, which involve putting in new chillers in buildings.

We have financed a couple of refrigeration projects in industry—an abattoir in Cootamundra, a cogeneration system in Wagga, lighting upgrades to a number of buildings in Wagga. It runs across the whole spectrum of energy efficiency.

Senator EDWARDS: So how do you measure your success? You are the CEO of a public company. You are answerable to who?

Mrs McDonald : The Minister for Climate Change and Energy Efficiency. We actually have a private sector board. It is an independent board.

Senator EDWARDS: No problem. So how do you measure your success?

Mrs McDonald : We measure our success according to the rate of actually getting that finance out to the marketplace, the degree to which we leverage private sector finance alongside us. So at the moment, for every one dollar we are putting into the marketplace, that is leveraging two dollars of private sector finance. We have already created $115 million of new finance that would not exist if we were not actually involved in developing those products.

Senator EDWARDS: You are saying that these products would not have not been able to be funded, they would not be in place on the ground if you had not been the white knight coming in. The risk profile would have been too high for the banks and Origin Energy and Eureka Funds management, and alike. You are taking the risk away.

Mrs McDonald : In part. We are also providing funds at a lower rate of fund than they would be able to get in the marketplace for that asset. As well, we are able to lengthen the term.

Senator EDWARDS: I have got it. Say the abattoir at Cootamundra—as a nameless company, let's say Ace Meats—goes broke?

Mrs McDonald : We have a credit process in the same way that we are a normal commercial lender. We are not going to make loans deliberately to a company we do not think merits our finance because we are there to actually get repaid, make a profit in the sense of being able to get that repaid at interest so we will be able to maintain the core of the fund.

Senator EDWARDS: So part of your charter is to be profitable?

Mrs McDonald : Yes. We are required to achieve sustainability which at a fund our size is impossible, but we only lend or deviate from commercial terms to the extent possible that we judge necessary to make a good project go ahead to overcome the barriers in the marketplace.

Senator EDWARDS: So when you said it is impossible to be self-sustaining, was it intended from the start to be self-sustaining?

Mrs McDonald : We have a goal of achieving self-sustainability but anybody in the finance world will tell you that a fund of our type will need about $300 million, depending on the rate of return that you can get, to be develop a critical mass to get the velocity through to be able to be self-sustaining. We have $100 million.

Senator EDWARDS: So your organisation is effectively being subsidised.

Mrs McDonald : We received our capital from the Commonwealth from the outset, so yes.

Senator EDWARDS: So $15 million or so. Of the $100 million, you said that there is $84.6 million which is allocated for lending and the other is for administration, I presume.

Mrs McDonald : Yes.

Senator EDWARDS: For a period of x, y, z.

Mrs McDonald : Till 2015, actually.

Senator EDWARDS: But in your own words, you said that you cannot sustain yourself. I have been involved in funds and funds management over the years and I know that an $84.6 million fund is tiny. Even the compliance costs for a public company are substantial and you have not got enough money. So where is the money is coming from to subsidise your organisation to provide these loans? General revenue, I guess.

Mrs McDonald : Well, we have the capital from the Commonwealth.

Senator EDWARDS: But you will run out of that.

Mrs McDonald : We will run out of that. In fact, we are at a point where our fund is out there in the marketplace and there will be no new funds. The intention—

Senator EDWARDS: So do you go back to the minister and then say, 'I need some more money to sustain this very tiny green fund because this is the pilot program for what we should have down the track,' or do you say, 'Give me half a billion dollars and I will give you a self-sustaining green fund'?

Mrs McDonald : We were always intended as a pilot. We think that we have proved up a successful model. Right now our future really is that there is not any more money for us. So the government is in discussion with the Clean Energy Finance Corporation around what role we might play with the Clean Energy Finance Corporation in being able to be a deployment vehicle for some of their funds or whether our loan book should get wrapped into the Clean Energy Finance Corporation.

Senator EDWARDS: Have you told the minister when you are likely to run out of funds?

Mrs McDonald : We are not actually going to run out, because the finance is actually still available in the marketplace and we are helping place a number of those projects and negotiate the structure under those vehicles that we have set up.

Senator EDWARDS: That is your loan book moneys, but you have an office and people and—

Mrs McDonald : Yes. We have administrative costs that are covered to administer that until 2015.

Senator EDWARDS: So you have got money until 2015. You are a private public company, not a listed public company.

Mrs McDonald : We are not listed, no. We are limited by guarantee.

Senator EDWARDS: But you are bound by the same ASIC rules so you as the CEO and the directors have a responsibility to be liquid—

Mrs McDonald : Indeed.

Senator EDWARDS: So there must be some ministerial guarantee that you are. You are not insolvent.

Mrs McDonald : You can read about it on our website. We have made it very, very clear that, should we fulfil our mandate and get our fund fully committed, which we certainly will be doing in the next six months, and there are no further funds available to us, then the company will be forced to scale back to be able to continue to administer its accountabilities under the funding deed with the Commonwealth. But in order to remain solvent, yes we will have to do that.

Senator EDWARDS: That will be disappointing because the whole point of this is obviously to grow this fund to help industry, to help people convert. If we have to scale back your company in light of no more funds coming forward, that is a failure, isn't it?

Mrs McDonald : We would hope that the finance would be able to continue, and that is one of the reasons why the negotiation with the CEFC is quite important to us, so that we would be able to use the coming into being of the CEFC to help scale up the things that we have piloted.

Senator EDWARDS: Are you pushing their door down?

Mrs McDonald : We are indeed.

Senator EDWARDS: Because it is very important, isn't it—

Mrs McDonald : To maintain that momentum we are building in the marketplace, yes.

Senator EDWARDS: When do you think is the drop-dead point before you have to scale back your organisation?

Mrs McDonald : We have a requirement in our funding deed with the Commonwealth to have our funds fully applied—that is, out in the marketplace—by the end of this financial year. As I said, I think we will hit that beforehand. We do have enough funding to maintain ourselves for another year, although we did tell the government that, once we had hit the availability of our funding and we could not see that there was going to be further funding, then the board would be required to start to scale back.

Senator EDWARDS: Is it the case that you are not likely to get any funding beyond this financial year?

Mrs McDonald : We expect that to be the case given the budgetary circumstance.

Senator EDWARDS: So you are faced with scaling back the operation of what is an ideal policy position of taking this whole green initiative—cogeneration and all of that—and trying to facilitate change in the marketplace on energy generation; it is going to stall.

Mrs McDonald : That is why we are in intensive negotiations with the CEFC around the ability to be able to—

Senator EDWARDS: Building the loan book.

Mrs McDonald : yes, helping build a further loan book. We have got quite a building pipeline of projects and financial—

Senator EDWARDS: People, expertise, relationships.

Mrs McDonald : Yes. We have got a core of expertise in our own organisation now which is really set up to do exactly that.

Senator EDWARDS: When is the board going to start reviewing this? Just prior to Christmas, I would suspect—six months out.

Mrs McDonald : We are now in this negotiation with the CEFC and, as I said, we still have the capacity to be able to do this up until the end of the financial year. It is at the point at which we have fully contracted our fund.

Senator EDWARDS: Finally, if I can just take you to your conclusions in here. Your first point in your conclusion is:

NEM rules to provide further incentive for network owners to strategically manage demand growth, for example creating incentives to help them identify and target areas where they could offer users low-or-no-cost appliance upgrades on the basis of reaping the efficiency benefit.

That is the biggest no-brainer going around. How do we do it? We have heard for the last three weeks in this inquiry in every state and every capital city that we have been to that that is the issue. What is the solution?

Mrs McDonald : As I indicated earlier, we have included a couple of diagrams in the submission, because what we have actually found is that every one of the circumstances where we have set up a vehicle has required very particular circumstances. There are just not simple answers here to this. Therefore, we have taken an approach of running with people who want to actually try to resolve some of these issues and demonstrate that in the marketplace. We think that there will be a lot of fast followers in a lot of these examples where people are able to demonstrate the business case around making a market here for energy efficiency. That has certainly been the case in the United States; it has certainly been the case in Europe as well. But you have to try a lot of things and not all of them work. It does not mean that you are going to make huge losses; it is just really that you have got to find the thing that overcomes the decision-making inertia in the marketplace. That is not simple. We have seen quite a number of the energy retailers actually trying things. We have seen some of the network providers trying things as well. It really does require quite a chain of businesses involved, not just them alone actually doing so.

Senator EDWARDS: Hang around. They are in the room. We might hear from them later.

CHAIR: A lot of your work will be similar to the Clean Energy Finance Corporation, would it not?

Mrs McDonald : As has been set out in the Clean Energy Finance Corporation review, yes it would in the clean technology and also in the distributed generation area. The sorts of projects that we have been doing would be very similar to the sorts of things that we think they would be doing, but they would be able to do things at a much greater scale—much larger projects than we have been able to do.

CHAIR: What is their funding backing, do you know?

Mrs McDonald : In their legislation it is $2 billion per annum over five years. So that is $10 billion in total. $5 billion of that has been earmarked for renewables and the other $5 billion can be for energy efficiency and renewables, if they wish.

CHAIR: Okay. Thank you. There being no further questions, thank you, Mrs McDonald.