Clean machine

Monday, 01 August 2022

Susan Muldowney photo
Susan Muldowney

    The Clean Energy Finance Corporation is spearheading Australia’s push towards net-zero emissions by 2050 — and its success is encouraging private sector investment.

    Where the Clean Energy Finance Corporation (CEFC) invests, the private sector will follow. That’s the aim of its CEO, Ian Learmonth, who is leading the government-backed green bank’s mission to accelerate investment in Australia’s transition to net-zero emissions by 2050. But what its chair Steven Skala AO really wants is for the green bank to be beaten to the punch.

    “My colleagues probably won’t like me saying this,” says Skala, “but every time the team walks in and says, ‘We spent two years working on this deal and some bank just got in first’, the board congratulates them. Our job is to convince the private sector that this is a great deal and they should be taking it away from us. Then we move on to the next thing.”

    By all accounts, it’s going to plan. Since its establishment by the Gillard Labor government in 2010, the CEFC has committed more than $10b in investments toward the country’s clean energy transition, and each dollar has been matched by $2.50 in private sector capital.

    While its early investments focused on solar and wind projects — or what Skala describes as “the flow-hanging fruit” — the CEFC has shifted its gaze to the hard-to-abate sectors, such as industry, transport and agriculture. It is also directing $300m to support the growth of a competitive Australian hydrogen industry and is investing in innovative businesses whose activities can lower Australia’s carbon emissions.

    “There’s never been more attention directed to the use of capital to address climate change,” says Learmonth. “And we’re aiming to lead that in Australia at the forefront of investments.”

    Green bank on a mission

    Last year’s COP26 Glasgow climate summit brought a sense of urgency to the cause. In the six months to December 2021, the CEFC made almost $1b in new investment commitments across 20 transactions and deployed a record $1.1b in capital across the economy. It has a further $4.6b in capital from the Commonwealth to invest and its current portfolio of investments will yield an estimated carbon abatement of more than 8.7 Mt CO2-e (metric tons of carbon dioxide equivalent) per annum, on average.

    For an organisation once on the chopping block, the CEFC’s future looks bright. In 2014, Liberal Prime Minister Tony Abbott vowed to abolish it, but was stopped by the Senate.

    Climate policy is again on the front foot, with the new Labor government setting a target of 43 per cent reduction in domestic emissions by 2030 — up from the previous government’s 26–28 per cent target. It also aims to increase renewables penetration to at least 80 per cent by the same year. CEFC investments will be instrumental to the achievement.

    “We need to invest in the grid and related technologies to ensure we have a stable and reliable energy system that is essentially decarbonised,” says Learmonth. “That’s been a huge focus of ours over the past seven or eight years, and there’s a lot to be excited about with the new government.”

    Skala describes the CEFC as an “emanation and an implementer” of government policy. “Because we’re a standalone organisation, our job is unconstrained in trying to produce a sensible rate of return for the risks and the kind of capital that we have,” he says. “We’re at no cost to the taxpayer, while providing a very significant reduction in carbon CO2 equivalent and encouraging very significant investment from the private sector. The numbers say it all — the amount of capital we’ve committed and the amount of capital that’s been committed by others is pushing towards $35b. That’s pretty powerful.”

    Crowding in the market

    The CEFC is not a grant-giving organisation and applies a commercial lens to its investments. “We want to make sure they stack up commercially, and we’re going to get our capital back eventually and make an appropriate return,” says Learmonth, adding that the CEFC does not wish to replicate investment decisions of the private sector.

    “There’s no point in the CEFC joining an oversubscribed syndicate of banks coming to invest in a well-contracted wind project, for example, because that’s something that Australian banks or investment houses can do. We’d be more inclined to invest in an unproven hydrogen project or even a wind or solar project that doesn’t have any contracting yet for its electricity.”

    Through its Clean Energy Innovation Fund, the CEFC is providing seed funding to innovative businesses — and other investors appear keen to follow. Examples include CEFC’s investment in bio sequestration company Loam Bio, which is trialling a microbiome-based seed coating that helps plants store more of the carbon they extract from the atmosphere in the ground. The CEFC committed $5.8m to Loam Bio through the Clean Energy Innovation Fund in 2020. Last year, the company raised $40m in a Series A round led by TIME Ventures.

    “There might be risks around some investments that others are unsure about, but because the CEFC is in there for a substantial amount, or we’re providing a particular slice of capital, like first loss or mezzanine or subordinated debt, for example, that allows us to crowd in other lenders or investors by taking that leadership role,” says Learmonth.

    The CEFC’s capacity to convert assets back to cash also supports its continued investments. In 2020–21, it received $823m through debt amortisation and repayments, together with bond and equity sales, achieving a lifetime figure of almost $2.5b.

    “We actually have a lot of firepower,” says Skala. “We can always create more money by selling and securitising assets, so we’re actually much larger than you may realise. And the private sector is recognising that we have investments that are good and are profitable — so we either get refinanced or bought. That’s a pretty good measure of the success of this as an enterprise.”

    Leaving politics at the door

    Learmonth, a former Social Ventures Australia and Macquarie Group executive, joined CEFC as CEO in 2017, the same year Skala came on board as chair.

    A former solicitor, Skala has more than 30 years of directorship experience, including current roles as vice-chair Australia of Deutsche Bank, chair of the Heide Museum of Modern Art and non-executive member of the Foreign Investment Review Board, among others. Their relationship operates on a “basis of no surprises”, as Skala describes it.

    “We probably speak at least twice a week,” he says. “Sometimes more often if there are any issues that need resolving. If there’s good news, Ian rings me. If there’s bad news, he rings me.”

    Most CEFC board matters are resolved with unanimity and Skala says any disagreements with management are never about personalities.

    “They’re always about proof and evidence,” he says. “We operate like a bank, so the appropriate confidentiality is maintained on client matters and on personnel-related matters, but there’s a pretty free flow of ideas. This is an organisation full of very bright people and you have to work in a very collegiate way to get the best out of bright people. That doesn’t mean we don’t take the governance obligation seriously. But we have gone out of our way to make sure there’s very sound interaction. Everyone on the board knows it’s important to stop and have a conversation with people — because you can get good ideas from all over the place — and it’s very important that the culture of the organisation be shared from the top down and from the bottom up.”

    The CEFC is subject to both the Clean Energy Finance Corporation Act 2012 and the Public Governance, Performance and Accountability Act 2013. While Skala describes the board as “rigorously independent”, he notes that it remains mindful of the will of Parliament.

    “We all have views, but you need to leave them at the door when you arrive at work and get on with doing the job at hand. We don’t engage in public debates about what’s a good or bad idea, or whether one target or another target makes sense. The polite expression is, ‘it’s above our pay grade’.”

    Energy for the future

    If Australia’s clean energy problems are to be solved by 2050, will there be an end date for an organisation such as the CEFC? Will we reach a transition point where the green bank’s services are no longer required?

    Learmonth sees no end on the horizon. “When you hear the government talk about the National Reconstruction Fund, for example, they talk about it being modelled on the CEFC, so there’s general acknowledgement that the way we’ve been configured and the way we’ve operated has been very successful,” he says.

    “The important thing for us is to stay relevant and to use our capital increasingly to invest at that front end of the clean energy transition,” he adds. “There’s a whole new series of problems and areas — such as hard-to-abate sectors — and there are no overnight solutions for those. The great thing is the CEFC Act isn’t finite, so I would see at least another generation of life, if not more, for the CEFC.”

    The chair sees considerable export potential for the CEFC green bank model.

    “People ask how the CEFC achieves public policy objectives and makes a profit, which is a pretty attractive proposition for most governments,” says Skala. “The answer is that it’s very carefully operated and properly governed with the right people. I would not be averse to us exporting the way we run clean energy. We’ve got a model in the CEFC that works for us in Australia. It might not work everywhere, but at least we can tell you what we are doing here, and you can draw from it.

    “Whether or not the CEFC lives on into the future if our clean energy problems are solved, again, that’s above my pay grade,” adds Skala. “But I expect it will live on for a long time, because the model is pretty good.”

    Green bank funding

    CEFC investments in Australia’s clean energy transition include the following projects.

    Advancing hydrogen

    In 2021, CEFC set up the $300m Advancing Hydrogen Fund after analysis of the commercial viability of green hydrogen market and the economic, technology and infrastructure factors that will underpin the green hydrogen economy. The fund’s investment recently committed up to $12.5m to help Ark Energy Corporation build five zero-emissions trucks, along with the hydrogen production and refuelling infrastructure to fuel them.

    Abating nitrous oxide emissions

    In its first major direct investment in the manufacturing sector, the CEFC committed $25m to enable manufacturer Orica to upgrade processing plants used in the production of ammonium nitrate with technology designed to abate nitrous oxide emissions.

    The manufacturing sector is responsible for 11 per cent of Australia’s carbon emissions. This project will eliminate more than 567,000 tonnes per annum of CO2e through the abatement of nitrous oxide with new technology installed in three nitric acid plants at Orica’s Kooragang Island, NSW, facility this year. This is the first time tertiary nitrous oxide abatement technology has been used in Australia.

    “Interestingly, Orica is now looking at potentially tapping into hydrogen through a very large electrolyser that’s been proposed to be built in the same precinct,” says Learmonth.

    Accelerating the coal exit

    Manildra Group, Australia’s largest wheat processor and ethanol manufacturer, is drawing on an $85m CEFC investment to exit coal at its primary manufacturing plant in regional NSW. The investment will finance two behind-the-meter, high- efficiency, gas-fired combined heat and power plants — replacing the coal-fired boilers and the existing gas boilers currently used to generate steam.

    “We hope that Manildra will then transition from gas to green hydrogen, and that’s certainly part of the opportunity for us,” says Learmonth.

    Tracking climate transition

    In 2020, French banking group BNP Paribas issued $140m green bonds linked to a new equities tracker, the Australian Climate Transition Index, which is the first of its kind in Australia with a specific focus on climate transition and decarbonisation. Developed in collaboration with ClimateWorks Australia, ISS ESG and Monash University, it included a $60m investment from the CEFC, as well as cornerstone investments from Aware Super and QBE Insurance.

    Skala describes the investment as a “cleverly structured financial instrument”.

    “The CFC will make a profit, because the better the index performs, the better we do,” he says. “There’s a natural incentive for many large corporations to want be part of that index. Once you’re there, your incentive is to remain and to do what the index requires of you, which is to demonstrate that in real numbers you’re a business that is abating carbon and producing good returns. Which makes you look like a pretty successful place for investors to put their money.”

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