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Environment and Communications Legislation Committee
18/02/2019
Estimates
ENVIRONMENT AND ENERGY PORTFOLIO
Clean Energy Finance Corporation

Clean Energy Finance Corporation

[17:26]

CHAIR: Welcome, Mr Learmonth. Do you wish to make an opening statement?

Mr Learmonth : I do. I have a brief opening statement, if that's okay by the committee. Thank you for allowing me to make an opening statement. I want to start by giving the committee a brief update with our recent deployment activity. As at 31 December 2018, the CEFC's current commitments stood at $5.6 billion. That is off a $10 billion appropriation. Our deployed capital stood at $4.1 billion. These commitments have helped to generate an additional $1.80 in private sector investment for every dollar committed by the CEFC. and have represented direct investments into more than 110 individual transactions. Of all our projects once constructed, we would look to abate something like 230 million tonnes of CO2. In addition to this, we have helped finance more than 8,000 smaller scale clean energy projects through our co-finance programs with banks and finance companies.

I'd like to draw the committee's attention to the statutory review into our operations, which was tabled in parliament on 14 December last year. That was after the most recent Senate estimates hearing. The review, which was undertaken by Deloitte, was a requirement under the Clean Energy Finance Corporation Act 2012. I would like to outline some of the conclusions that the review came to. The review found that, since inception in 2012, the CEFC has been effective in facilitating increased flows of finance into a range of clean energy projects across a number of sectors, utilising different financial products consistent with its legislated objective. Indeed, the review also found there is evidence to support a finding that in the absence of the CEFC, a range of projects we supported may not have proceeded. The review also found that the CEFC plays a leading role in developing debt and equity markets for clean energy investments here in Australia. It's particularly pleasing that the review took time to highlight the esteem in which the CEFC staff across the organisation are held by industry and how our involvement in a project can be argued to provide an element of comfort to other commercial financiers to come on board and play a role.

In late December, the Australian government issued a new investment mandate to the CEFC and directors to focus on technologies and financial products as part of the development of a market for firming intermittent sources of renewable energy generation as well as supporting emerging and innovative clean energy technologies. We welcome this new mandate and its direction, which formalises an approach that we have really already been focusing on.

I would like to also take the opportunity to acknowledge Jillian Broadbent, who has been publicly acknowledged. We would like to congratulate our founding chair, Jillian, on being appointed a companion of the order of Australia. The award serves as a reminder of the significant ongoing contribution that Jillian has made to the nation's corporate, financial, education, clean energy and cultural sectors as well as her significant achievement increasing the recognition of women in business.

Finally, I'd like to acknowledge that this is our first estimates since we tabled our 2017-18 annual report in October last year. That ends my statement, Chair. I will hand over to the committee for questions.

CHAIR: Thank you, Mr Learmonth. That's great.

Senator URQUHART: Thank you, Mr Learmonth. Are you aware of the government's plan to underwrite new generation investment?

Mr Learmonth : I am aware of that.

Senator URQUHART: Is the CEFC involved in this program? Are you advising on its design and administering its implementation?

Mr Learmonth : We're not currently involved in any of its design.

Senator URQUHART: In any of it?

Mr Learmonth : No.

Senator URQUHART: Is it the case that renewables base projects under the government's program will be able to be delivered through the CEFC?

Mr Learmonth : Well, it would depend upon the nature of that program. We are, of course, limited to only investing in renewable energy generation so it would have to comply with the act for that to be relevant.

Senator URQUHART: So is the CEFC able to fund specific projects that have been approved and given assurances of funding though a non-CEFC process?

Mr Learmonth : Sorry, Senator. I don't quite understand your question.

Senator URQUHART: Are you able to fund specific projects that have been approved and given assurance of funding though they're not a clean energy finance process?

Mr Learmonth : In terms of this new government program or proposed program?

Senator URQUHART: Yes.

Mr Learmonth : If it wasn't something that was eligible under our act, we would not be able to invest in it.

Senator URQUHART: So it has to fall within the act of the CEFC?

Mr Learmonth : It has to comply with the statute.

Senator URQUHART: Can coal based projects be delivered through the CEFC?

Mr Learmonth : No.

Senator URQUHART: Why not?

Mr Learmonth : Because they would not be renewable energy technologies. That is one of the three areas in which we are—

Senator URQUHART: And that is picked up in your act, is it?

Mr Learmonth : Correct.

Senator URQUHART: Are you aware of how the government plans to deliver support to coal projects under its underwriting scheme if not through the CEFC?

Mr Learmonth : I'm not.

Senator KENEALLY: I'm going to stick with my theme of the big stick legislation. Has the CEFC conducted any analysis of the proposed reforms, in particular with reference to any potential impacts on your portfolio?

Mr Learmonth : We haven't.

Senator KENEALLY: Why not, given the substantial financial interest the CEFC has in generation assets?

Mr Learmonth : We have, of course, a range of investments in renewable energy projects, some of which have offtake agreements with some of the generators. However, this proposed legislation or big stick legislation that you refer to today has not been something that we've felt is relevant to undertake an analysis of in the portfolio given the role that we've been playing with senior secured lenders in these projects. We feel very confident about the quality of those loans. This risk hasn't been one that we've felt necessary at this stage to incorporate in any of our analysis.

Senator KENEALLY: Thank you. That's all I have.

Senator HANSON-YOUNG: I have some questions on the limitations and abilities of the CEFC. Your act says that you can enter derivative contracts to offset your own risk and financial exposure. Is that correct?

Mr Learmonth : Correct.

Senator HANSON-YOUNG: Is it correct to say that you cannot enter into derivative contracts that would reduce the risk of counterparties but increase financial exposure to the corporation?

Mr Learmonth : Well, the act says that we can't enter into derivatives for the purpose of speculation or leverage. We can hedge investments that we've made through derivatives, interest rate or foreign exchange contracts. Yes, that's the position.

Senator HANSON-YOUNG: So there are limitations?

Mr Learmonth : There are limitations in the use of derivatives by the CEFC.

Senator HANSON-YOUNG: Is it accurate to say that the CEFC is unable to enter into reverse contracts to encourage renewable projects?

Mr Learmonth : Well, it's something that we have been looking at—whether the CEFC, standing in the marketplace and writing, for example, contracts for difference would be a natural outcome of a reverse auction and whether that would cut across the act. We are still receiving advice around that. There's certainly a concern that it may not be compliant with the current section 70 of the act.

Senator HANSON-YOUNG: And is the advice you are receiving through the government solicitor, or do you get your own independent advice?

Mr Learmonth : We are seeking independent legal advice.

Senator HANSON-YOUNG: If the alternative government had pledged an increase in your debt facility of $10 billion to sign up reverse contracts, what you are suggesting is you don't know whether you're legally able to do that?

Mr Learmonth : I think we still need to do some more on that. It would depend upon how we were directed to do that. At this stage, it's something that is under consideration.

Senator HANSON-YOUNG: Is that policy position driving the desire to get that advice pretty quickly?

Mr Learmonth : No. As you would expect, we are sensibly looking at all the policies of respective parties and researching what that might mean. We've got some preliminary advice. But there are still so many unanswered questions of exactly how we would be directed to do this and how we might do it, such as entering into power purchase agreements or more classic CFDs or other mechanisms. Remember to date that we lend to lots of projects that don't have any offtake agreements. Historically, we've been lenders to projects. We haven't stood in the marketplace and entered into power purchase agreements or power offtake agreements. So it's a new area for us. We would have to research that properly both commercially and legally.

Senator HANSON-YOUNG: The biggest constraint to rapidly deploying renewables is the need for new transition zones to open up renewable energy zones. The grid, as we know, is increasingly problematic and outdated. Is the CEFC working on how it can help hasten the building of this network infrastructure?

Mr Learmonth : In short, yes. We have for some years now been working on how we might be able to facilitate improvements and finance the grid to help the uptake of renewables. I agree with your comment that the grid needs to be augmented and improved to facilitate the greater penetration of renewables. Yes, we are working hard on that. We talk to all the transmission companies, technology companies and AEMO. We are working hard to see what we could do to help finance improvements to the grid, noting that there are some challenges with that.

Senator HANSON-YOUNG: Have you had conversations, and are you looking at the whether there is a potential role—I'm not sure; it's a genuine question—in relation to increasing the interconnection between South Australia and other states?

Mr Learmonth : We have had conversations about that with transmission providers. As I say, we do with many of those companies looking at investment opportunities.

Senator HANSON-YOUNG: To finish up, what is the CEFC's retained surplus?

Mr Learmonth : My CFO is here.

Senator HANSON-YOUNG: The right person to answer the question. That is good.

Mr Powell : At the end of December 2018, it was $271 million.

Senator HANSON-YOUNG: What plans do you have for that money? Are you planning on reinvesting that into new projects? The last time we spoke at the last estimates, I was asking questions about working with ARENA, for example. Do you have any plans for what you will do with that remaining surplus?

Mr Learmonth : The current plan would be to continue to redeploy it into the clean energy sector. Today we don't have any immediate plans to make distributions to ARENA.

Senator HANSON-YOUNG: So there haven't been any formal conversations between you or the leadership at ARENA about it?

Mr Learmonth : No formal conversations to date along those lines.

Senator HANSON-YOUNG: Have you received any advice as to whether you're able to do that?

Mr Learmonth : Well, certainly under the act we are able to pay a dividend or distribution to ARENA. So it specifically refers to that. It would require our board to initiate, I believe.

Senator HANSON-YOUNG: So it would be a board decision? It doesn't require a directive from government?

Mr Learmonth : I believe the board needs to initiate that decision, Senator.

Mr Powell : That is correct. It starts with the board. However, it does require authorisation from the nominated ministers.

Senator HANSON-YOUNG: So the minister would have to effectively sign off on it or initiate the process?

Mr Powell : The board initiates the process and then it goes to the nominated ministers for authorisation.

Senator HANSON-YOUNG: For authorisation. Does that mean the minister has a veto?

Mr Learmonth : We might have to take that on notice.

Senator HANSON-YOUNG: Thank you. An authorisation is one thing. But whether there is an appeal process or an ability to—

Mr Learmonth : It doesn't appear to provide the minister with a right of veto.

Mr Powell : Section 51 is the relevant section there. The nominated minister must determine whether the request is in accordance with the agreement under section 52. And then if he is satisfied, he will give written authorisation.

Senator HANSON-YOUNG: Of course, the obvious reason I'm asking is because I'm worried that ARENA has had so much money gutted from it. So whatever we can do to make sure the money we do have is being used for renewables, the better, as far as I can see. But there is no active consideration at this point about doing that?

Mr Learmonth : Not at this point.

Senator HANSON-YOUNG: Thank you.

Senator URQUHART: In relation to the underwriting, I seek some clarification. Isn't it the case that there are restrictions in the act on the minister's ability to direct the CEFC to support specific projects?

Mr Learmonth : That's right. The minister cannot direct the CEFC to do a transaction or to refrain from doing a transaction.

Senator URQUHART: Thank you.

CHAIR: Thank you, Mr Learmonth and Mr Powell. We'll now move to the Clean Energy Regulator.