Chapter 2 Issues in the Bills
Clean Energy Legislation Amendment Bill 2012
The Bill has five main sets of amendments:
n to bring gaseous
fuels into the carbon price mechanism;
n to ensure the
robustness of the processes supporting the Carbon Farming Initiative;
n to enhance the
security of the Australian National Registry of Emissions Units;
n to allow the
Australian Renewable Energy Agency and the Clean Energy Regulator to share
information with the Clean Energy Finance Corporation (CEFC); and
n to enhance the
operation of the National Greenhouse and Energy Reporting Act 2007.
The provisions in relation to gaseous fuels operate alongside those in
the Clean Energy (Excise Tariff Legislation Amendment) Bill 2012 and the Clean
Energy (Customs Tariff Amendment) Bill 2012. The excise and tariff Bills will
be discussed with the gaseous fuels provisions.
These provisions arise from a recommendation of the Joint Select
Committee on Australia’s Clean Energy Future Legislation (JSCACEFL) in October
2011. The Clean Energy legislation last year provided that gaseous fuels would
be subject to an equivalent carbon price through the fuel tax system. That committee
heard evidence from LPG Australia about the application of the mechanism to liquefied
petroleum gas (LPG), which appeared to assume the primary use for LPG is as
fuel for transport, despite the wide range of non-transport uses for LPG.
LPG Australia is the peak body for LPG suppliers in Australia. LPG Australia
stated at the Joint Committee’s hearings:
Our industry sector is a little perplexed as to why we are
not in the emissions trading scheme, and we welcome the opportunity today to
raise those concerns again. The industry is represented by a number of
petroleum and marketers in LPG. Our industry has two distinct market
segments—the auto gas market segment, where we service about 700,000 vehicles
and we also handle the stationary energy market. They are two distinct markets.
Those two markets are also serviced by electricity and natural gas.
LPG Australia indicated that the treatment of LPG under the scheme could
lead to distortions in treatment, which would leave the LPG sector
disadvantaged. Given LPG’s status as a cleaner fuel, this appeared to be
The gaseous fuels sector faces a number of problems with the current
legislation. Firstly, there are cash flow issues because firms have to pay an
excise on a regular basis, whereas their competitors in other stationary energies
do not have to pay their liability until the following February. Secondly, because
it is an excise, firms in that sector do not have the opportunity when we go to
a trading market in 2015 to purchase international credits and hedge their liability.
Further, LPG Australia stated before the Joint Committee that there are
significant compliance costs:
There is a flow-on cost that occurs in that exercise because,
while we are excluded from the litigation and controlling our carbon costs, the
complexity of us remaining in an excise scheme is that we are up for a massive
reconciliation program with the Australian Taxation Office to handle our
transport excise and then on top of that we have got a carbon excise that we
have to try to deal with. We deliver thousands and thousands of cylinders and
we would have to reconcile each invoice back. It just does not make sense. How we
operate in New Zealand is that when we purchase the product and we put it in
our storage we pay the carbon tax on that, so we already know what our
obligation is in terms of carbon. Under this current regime we would be doing
that and all we would simply do is we would adjust that balance with the
transport excise and deduct it from the carbon cost. They are the two main
things. What will happen is that by remaining in this current mechanism our costs
for our consumer will actually increase. So not only do we impair the original
consumer but I think we also impair the takeup of a fuel that can provide an
enormous contribution to abatement.
LPG Australia suggested that the matter could be dealt with in a
straightforward way through the new legislation:
I think it is a matter of clarifying the definitions. If you
look at the way that natural gas is going to be handled, the same approach could
be taken with LPG. It is just a matter of clarifying the definitions so that
you clearly identify the marketer and who has the obligation. The producer will
have the obligation. I do not think there are a lot of changes that need to
occur. I think the system is reasonably—well, I should not say simplistic.
Nothing is simplistic in the way the regulations have come about. But I do not believe
there is a great deal of complication there.
The Joint Committee recommended:
That the Government examine the proposals made by LPG
Australia concerning the treatment of LPG under the mechanism and, where appropriate,
refine the provisions to ensure that a carbon price is most efficiently applied
to all uses of LPG.
These points were confirmed in the Regulatory Impact Statement for this
Commencement of coverage and transitional arrangements
Non-transport liquefied petroleum gas and liquefied natural gas (LNG) will
have a carbon price applied under the carbon pricing mechanism from 1 July 2013
in place of the current arrangements. The current arrangements will apply from 1
July 2012 to 1 July 2013 and involve the application of an effective carbon
price to non-transport LPG and LNG through the fuel tax system.
Mandatory coverage of non-transport LPG and LNG under the carbon pricing
mechanism will begin on 1 July 2013. This allows time for transitional and
compliance arrangements to be carefully considered, developed and implemented.
This aligns the treatment of non-transport LPG and LNG with the coverage of
liquid fuels by the carbon pricing mechanism. It is also consistent with the
Government’s original commitment on 11 October 2011 to examine coverage of
Under the carbon pricing mechanism, the point at which excise or customs
duty becomes payable (entry into home consumption, generally by the importer,
manufacturer or marketer of non-transport LPG or LNG) will be the initial point
of liability for emissions resulting from the use of these fuels.
Regulations made for the Clean Energy Act 2011 will be able to
specify situations in which a person can quote an ‘obligation transfer number’ (OTN).
This will allow a large end user of LPG, LNG or compressed natural gas (CNG) to
manage their own liability for emissions from these fuels in specified circumstances.
It will also enable businesses that use these fuels as feedstock to avoid
paying a carbon price in respect of fuel that does not result in emissions. To
bring about coverage of non-transport LPG and LNG under the carbon pricing
mechanism, these fuels will not have excise and customs duties applied.
Coverage of non-transport CNG
To correctly apply the carbon charge on non-transport CNG under the
Government’s Clean Energy Plan, the exemption from fuel excise or excise
equivalent customs duty for non-transport use of CNG needs to be restored from
1 July 2012. Non-transport CNG will instead be subject to the carbon price
directly under the carbon pricing mechanism.
Coverage of non-transport CNG from 1 July 2012 will occur because:
n CNG is produced from
natural gas that is already subject to an upstream price under the carbon
pricing mechanism. This allows coverage to be implemented relatively simply by removing
the requirement for producers of non-transport CNG to pay carbon price
equivalent excise duty; and
n some small
non-transport CNG producers are not currently required to participate in the
excise system, and would be required to install metering equipment to enable
their participation in the excise system.
The requirement for CNG producers to pay excise or customs duty on
non-transport CNG will be removed through legislative changes to excise
arrangements for CNG producers and the adjustment of administrative
arrangements by the Tax Office. The default point of liability for emissions
from non-transport CNG will then rest with the natural gas supplier that
supplies the gas from which the CNG is produced.
CNG producers will have the option of quoting an OTN to their supplier
which will enable them to assume mechanism liabilities for the natural gas they
use to create CNG. The natural gas supplier would not be able to refuse this
transfer of liability.
Off-road use in agriculture, forestry and fisheries activities
An equivalent carbon price is not applied to off-road fuel use by the
agriculture, forestry and fishing sectors. This policy will be continued by
allowing non-transport LPG, LNG and CNG users in these industries to claim fuel
tax credits which are equivalent to the amount of carbon price even when the
fuel is subject to the carbon pricing mechanism and no fuel tax has been paid.
Ongoing coverage of gaseous fuels under the fuel tax system
Non-transport CNG will be covered by the carbon pricing mechanism from 1 July
2012. From 1 July 2013 non-transport LPG and LNG will move from the effective
carbon price under the fuel tax system to being covered by the carbon pricing
Bringing about coverage of non-transport CNG, LPG and LNG under the
carbon pricing mechanism requires excluding non-transport CNG, LPG and LNG from
excise and customs duties and as a consequence excluding users of non-transport
CNG, LPG and LNG from being able to claim fuel tax credits (FTCs) for their use
of the fuels.
A new FTC will be available for the agriculture, fishing and forestry
industries. The FTC will be equivalent to the amount of the carbon price that
is embedded in the cost of gaseous fuels acquired for non-transport use. This
is consistent with the general policy that these industries should not be
subject to a carbon price on the fuels acquired for non-transport use.
Carbon Farming Initiative
The Initiative is a voluntary scheme. Participants are eligible to
receive carbon credits for every tonne of carbon pollution saved or stored.
These credits can be exported or sold to companies that want to offset their
emissions or to sell carbon neutral products.
The Bill seeks to maintain the integrity of the Carbon Farming
Initiative by requiring that projects have secured all required regulatory
approvals before they receive any credits. It simplifies the process of
finalising methodology determinations by clarifying the material to be used by
the Domestic Offsets Integrity Committee in making determinations.
The Bill provides more time to approve methodologies for existing
projects to facilitate the transition of these projects into the Initiative.
Methodologies submitted for assessment by the middle of 2012, and approved by
the middle of 2013, can be backdated to the middle of 2010 and that will
improve the operation of the Carbon Farming Initiative for project proponents.
Australian National Registry of Emission Units
The Registry underpins the Carbon Farming Initiative. The aim is to allow
farmers, landholders and other participants with offsets projects under the
initiative to receive, hold and transfer their carbon credits securely.
It is based on a previously existing registry that the Australian Government
established in 2008 to meet key obligations that Australia has under the Kyoto
protocol. Legislation introduced in March 2011 has put the Kyoto registry,
which was previously operating on an administrative basis, on a legislative footing.
Units held in the registry are to be treated as personal property for
the limited purposes of laws relating to bankruptcy, external administration,
wills, intestacy and deceased estates, and any other prescribed purpose. This
reduces any legal uncertainty surrounding the units in these circumstances. A
range of information in the registry will be made publicly available, including
the name of account holders, and the regulations may require publication of the
total number of specified Kyoto units held in accounts.
The Bill amends the Australian National Registry of Emission Units Act
(ANREU Act) to enable regulations to identify Registry accounts that are
subject to restrictions or limitations in relation to the operation of the
account, including restrictions or limitations on the transfer of carbon units,
Australian Carbon Credit Units, Kyoto units or prescribed international units
to or from the identified account or the issue of carbon units to the account.
The Bill also amends the ANREU Act to increase the period within which
the Clean Energy Regulator can defer giving effect to an instruction from no
more than 48 hours to no later than the end of the fifth business day after the
day on which the instruction was received.
Providing information to the Clean Energy Finance Corporation
The CEFC will make decisions concerning investments in clean energy
technologies and projects. In making these decisions or concerning the ongoing
efficacy of investments, the CEFC may require information about specific issues
from the Australian Renewable Energy Agency or the Clean Energy Regulator.
The sharing of relevant and appropriate information between the CEFC and
the Australian Renewable Energy Agency and between the CEFC and the Regulator
is limited to the circumstances spelt out in the Australian Renewable Energy
Agency Act and the Clean Energy Regulator Act respectively and this is not a
general ability for the CEFC to obtain or request information.
The bill includes a new section 73A in the Australian Renewable Energy
Agency Act, which provides that the Agency may disclose information to CEFC if
the disclosure will enable or assist the CEFC to perform or exercise any of its
functions or powers.
The bill amends section 49 of the Clean Energy Regulator Act, to add the
CEFC to the list of bodies with which the Regulator may disclose ‘protected information’.
Section 49 specifies the circumstances in which the Regulator may disclose such
information and the manner in which this may occur.
National Greenhouse and Energy Reporting System
The System is the national framework for the reporting of information on
greenhouse gas emissions, energy consumption and energy production.
A person with ‘operational control’ of a facility is generally
responsible for carbon price liability and associated reporting obligations.
Where operational control is not clear, a nomination may be made. The Bill
streamlines the requirements for nomination. Annual nominations will no longer
be required and nominations may last for as long as required.
The Bill provides that the regulator only needs to publish a ‘net energy
consumption’. An additional requirement to publish ‘total energy consumption’
is removed. The ‘net energy consumption’ requirement is more appropriate
because it does not include the transformation of one energy commodity into
Clean energy customs and excise Bills
These Bills deal with the treatment of gaseous fuels and are linked to
the Clean Energy Legislation Amendment Bill 2012. They are discussed above.
Clean Energy Finance Corporation Bill 2012
The Clean Energy Finance Corporation Bill 2012 (CEFC Bill) gives effect
to the Government’s commitment to establishing a Clean Energy Finance
Corporation as part of its Clean Energy Future Package.
The Government appointed an Expert Review Panel (the Review Panel) on
12 October 2011 that was tasked with advising on the design of the CEFC.
The Review Panel members were Ms Jillian Broadbent AO, the Chair, Mr David
Paradice and Mr Ian Moore.
In addition to consulting with key stakeholders about the role of the
CEFC and its relationship with the Renewable Energy Target (RET), the Review Panel
received 151 public submissions, which are available on its website.
In its report, the Review Panel provided the Government with broad
principles to guide the direction of the CEFC, and proposed a ‘flexible mandate
for the CEFC to enable the corporation to respond to changing circumstances and
opportunities’. The Review Panel concluded:
The Review Panel believes that the CEFC will play an
important role in furthering Australia’s place in a cleaner energy world and
developing the technology, design, construction and operating skills to do so.
Australia requires these skills to integrate cleaner energy technologies with
our existing energy infrastructure and markets. Australia’s geography,
renewable resources and adaptive engineering skills are well suited to our
playing a significant global role in this sector.
The Government released the Review Panel’s report on 17 April 2012, and
supported the 26 recommendations. The CEFC Bill seeks to implement the
framework outlined in these recommendations.
Key features of the CEFC Bill
The CEFC will be a mechanism to help mobilise investment in renewable
energy, low-emission and energy efficiency projects and technologies in
Australia. The focus will be on technologies that are solely or mainly
The CEFC will receive $2 billion per year for five years from
2013-2012. However, it is the intention that the CEFC will become
self-sustaining. If the Bill is passed, the substantive provisions of the
Act will commence six months after Royal Assent. It is intended that CEFC
investment operations will commence on 1 July 2013.
In the second reading speech, the Minister for Industry and Innovation
and Minister for Climate Change, the Hon Greg Combet AM MP (the Minister),
described the CEFC as a key part of the Government’s plan to ‘build a clean
energy future which will strengthen the economy and protect our environment’.
In the Explanatory Memorandum, the CEFC was described as a fund dedicated to
investing in clean energy, it was stated:
The Corporation will supplement existing initiatives, such as
the Renewable Energy Target and the carbon price, to catalyse and leverage the
flow of funds for commercialisation and deployment of renewable energy, low-emission
and energy efficiency technologies necessary for Australia’s transition to a
lower carbon economy.
Australia is a late starter in the transformation to clean
technology due to its access to low cost fossil fuels. This transformation will
require substantial capital which the private sector alone may not be able to
provide. Current global financial conditions, the complex nature of Australia’s
electricity markets, the cost of renewable energy, and the preference of
investing institutions for listed assets inhibit the financing of the clean
The CEFC is designed to complement other Government policies and
programs, such as the Australian Renewable Energy Agency (ARENA), the Clean
Technology Investment Program and the Clean Technology Innovation Program. It
is planned that the CEFC will liaise with ARENA to form an ‘innovation chain’.
ARENA will focus on the early stages of development, for example by providing
grants and support for newer renewable energy projects. The CEFC will
concentrate its investments on projects and technologies that are at the later
stage of development and commercialisation. The aim is to assist commercially
viable projects which may be facing some barriers to obtaining solely private
A brief outline of key features of various parts of the CEFC Bill is
CEFC Board and staffing
Part 3 of the CEFC Bill establishes the CEFC Board and sets out the
appointment, termination, terms and employment conditions and process for Board
meetings. Part 4 establishes the position of Chief Executive Officer (CEO) an
sets out procedures for their appointment and resignation, and deals with the
recruitment of staff and consultants and committees.
The CEFC will be established as a Commonwealth Authority under the Commonwealth
Authorities and Companies Act 1997. The CEFC will be managed by an
independent board comprised of members who must have the ‘appropriate
reputation and expertise’ in a range of areas including: banking and finance,
investments, economics, engineering, energy technologies, government funding
programs or bodies, the environmental sector, financial accounting and law. The
requirements for appointment are outlined in proposed section 16 of part 3.
The CEFC Bill provides that the Board shall consist of a Chair and at
least four, but no more than six, other members. Board members are appointed
for a term of up to five years, but they can be reappointed for another term.
They are paid allowances determined by Remuneration Tribunal regulations.
The CEFC Board will be appointed by the Government. However, the
Minister highlighted the intention for the CEFC to operate independently,
stating that the Government will not be able to ‘direct the corporation in
relation to specific projects for investment’.
The CEFC Board’s function includes oversight of the CEFC’s investment
function to invest, directly and indirectly, in clean energy technologies. The
Board appoints the CEO, who will be responsible for the day-to-day
administration of the CEFC. This is a full-time position.
The CEFC will be staffed with experienced personnel to provide support
to the Board and CEO to ‘determine the best investments and manage taxpayers’
Part 5 establishes a CEFC Special Account and sets out the procedures
and payments to and from the Account. For the purposes of section 21 of the Financial
Management and Accountability Act 1997, a Special Account is a ledger which
records a right to draw money from the Consolidated Revenue Fund. The CEFC will
be able to draw on money when needed for its functions. The Minister explained
the purpose of this arrangement is:
To allow the corporation to focus on its primary function of
investing in the clean energy sector, a special account is being created to
manage surplus funds and limit the corporation's need to undertake a cash
It is envisaged that the CEFC will invest using commercial principles
and return a profit. The profits and returns on investments will be available
to reinvest. The CEFC may receive gifts of money or assets (with the written
approval of the nominated Minister) and will be exempt from income tax, in
keeping with the practice for entities in the government sector.
Part 6 sets out the CEFC’s investment function and performance criteria.
Proposed section 58 provides that the CEFC ‘is to invest directly, and
indirectly, in clean energy technologies’. The CEFC may do any or all of the
in businesses or projects for the development or commercialisation of, or in
relation to the use of, clean energy technologies;
in businesses that supply goods or services needed to develop or commercialise,
or needed for use in, clean energy technologies;
(c) giving guarantees in accordance with
The definition of investment in the CEFC Bill has been extended to include
giving a guarantee. However, guarantees are to be limited to the amont of the
uncommitted balance in the CEFC Special Account.
Proposed section 60 of the CEFC Bill outlines the nature of clean energy
technologies that the CEFC may invest in:
that are any one or more of the following are clean energy technologies:
(2) Energy efficiency technologies includes
technologies (including enabling technologies) that are related to energy
conservation technologies or demand management technologies.
(3) Renewable energy technologies includes:
(a) hybrid technologies that
integrate renewable energy technologies; and
(b) technologies (including
enabling technologies) that are related to renewable energy technologies.
(4) A technology is a low‑emission
technology if the Board is satisfied, in accordance with guidelines made
under subsection (5), that the technology is a low‑emission technology.
(5) The Board must, by writing, make
guidelines setting out the matters to which the Board will have regard in
satisfying itself that a technology is a low‑emission technology.
(6) The guidelines must not be
inconsistent with the Investment Mandate.
(7) The Board must publish guidelines made
under subsection (5) on the Corporation’s website.
In determining investments the CEFC must apply a ‘commercial filter’ to
select viable projects. However, it was qualified in the EM that the standard
would not be as stringent as the private sector equivalent as it would also be
giving weight to the wider positive benefits of the project.
The CEFC will be required to develop and publish a number of policies on
its investment activities, which must cover:
n the investment
strategy of the Corporation;
n benchmarks and
standards for assessing the performance of the Corporation’s investments and of
the Corporation itself;
n risk management for
the Corporation’s investments and for the Corporation itself; and
n a matter specified in
The CEFC must publish on its website its first set of policies by the
time it starts performing its investment function on 1 July 2013.
Proposed section 63 sets certain parameters for the CEFC and its
subsidiaries’ investments, for example by prohibiting direct investment in
property or infrastructure. The Explanatory Memorandum stated:
The Corporation and its subsidiaries may only invest through
a broad range of financial assets. Allowing the Board to invest directly in non-financial
assets would be inconsistent with the Government’s broader fiscal policy and
budget management. It is intended the Corporation will facilitate finance for
clean energy technologies and projects through its investments, not build or
The CEFC will also be guided by an investment mandate, comprised of
directions in the form of legislative instruments, provided by the Government.
The investment ate is a mechanism for the Government to articulate its ‘broad
expectations for how the Corporation’s funds will be invested and managed by
the Board’. Proposed subsection
64(3) provides the directions may include:
limiting subsection (1), a direction may set out the policies to be
pursued by the Corporation in relation to any or all of the following:
(a) matters of risk
projects and businesses that are eligible for investment;
allocation of investments between the various classes of clean energy
investments on concessional terms;
(e) the types of
financial instruments in which the Corporation may invest;
(f) the types of
derivatives which the Corporation may acquire;
nature of the guarantees the Corporation may give and the circumstances in
which they may be given;
(h) broad operational
matters the responsible Ministers consider appropriate to deal with in a
direction under subsection (1).
The responsible Ministers are to consult the Board on the initial
investment mandate, and subsequent changes. The CEFC are to receive a draft of
new directions and be provided the opportunity to make a submission on the
changes. Directions under section 64(1) will be made legislative instruments
(non-disallowable) and registered on the Federal Register of Legislative
Instruments and tabled in parliament, along with any relevant CEFC submissions.
The investment mandate will also include the application of the
Australian Industry Participation Plans, to help ensure that the Australian
industry is afforded full, fair and reasonable opportunity to participate in
Part 7 covers miscellaneous matters including CEFC subsidiaries, the
publication of investment reports and annual reports, disclosure of
information, delegations and review of the Act.
Proposed section 71 provides that CEFC subsidiaries must not be
incorporated or formed outside Australia.
To help ensure transparency of CEFC operations, the organisation is
required to produce and publish annual reports and quarterly investment
reports. Proposed section 73
makes provision for protecting commercial-in-confidence information. However,
the onus is on the affected person to demonstrate that the release of the
information would be detrimental to their commercial interests.
Proposed sections 76 to 80 provide for the delegation of certain powers
and functions by the relevant Minister, the CEFC, the Board, CEO and officers.
A review of the operation of the CEFC Act will occur after 1 July 2016,
which is to include assessing the CEFC’s effectiveness.
Discussion on the CEFC
CEFC operating environment
The CEFC will have a commercial approach to its operations. The Review
Panel stated that the CEFC will finance Australia’s clean energy sector using
financial products and structures to address the barriers currently inhibiting
investment.’ The Review Panel
considered that an appropriate objective to be to:
...apply capital through a commercial filter to facilitate
increased flows of finance into the clean energy sector thus preparing and
positioning the Australian economy and industry for a cleaner energy future.
The Review Panel noted that the CEFC will be challenged in achieving
this objective because ‘there is a tension between funding the clean energy
sector, applying a commercial filter, and maintaining the financial
self-sufficiency of the corporation.’ In particular, the Review
Panel commented that the CEFC ‘will invest responsibly and manage risk so it is
financially self-sufficient and achieves a target rate of return.’
The EM stated that ‘it is expected that the Corporation will apply a
commercial filter when making its investment decisions, focussing on projects
and technologies at the later stages of development.
During the hearing, the committee examined the Treasury about the CEFC’s
operating environment, its investment mandated, target rate of return, and how
the CEFC may differ from a private sector equivalent. The committee sought
further information on the rationale for the CEFC concentrating its investments
projects and technologies that are at the later stages of development and
commercialisation. Treasury stated:
When the expert review panel examined where the gaps are in
the market, it was also cognisant of the fact that it was going to be primarily
an investment vehicle. It saw the initial R&D stages as investments that
are more likely to require grants because, at that stage, a project is unlikely
to make a financial return into the future. By focusing on
later stage developments and the commercialisation of the project, the
commercial filter that they spoke about is about projects that have a real
prospect of making a return. The early-stage R&D is more appropriate for
grants programs such as ARENA.
The EM noted that ‘by allowing the payment of profits from the
Corporation to ARENA to support projects and technologies along the innovation
chain, the Act recognises that the Corporation has a public policy purpose of
furthering the development of the renewable energy sector.’
A further area of examination focused on the CEFC’s investment mandate.
Clause 64 of the Bill sets out how the responsible Minister may, by legislative
instrument, give the Board directions about the performance of the
Corporation’s investment function. The EM stated that ‘it is appropriate that
the Government, as manager of the economy and owner of the Corporation, have a
mechanism for articulating its broad expectations for how the Corporation’s
funds will be invested and managed by the Board.’
The EM noted that ‘a direction from the responsible Ministers may also include:
matters of risk and return; eligibility criteria for investments; allocation of
investments between different types of clean energy technologies; the types of
financial instruments the Corporation may invest in; and broad operational
The investment mandate is made after the passage of the legislation.
Under the legislation the investment mandate is made by the
government with the board, so the investment mandate cannot be physically done
prior to the passage of the legislation and the board being appointed. The
government has publicly stated that the expectation will be around the
government bond rate, which is what was included in the expert review panel's
Treasury advised that the Corporation’s rate of return will be around
the government bond rate. The expectations will not be as great as a private
sector equivalent. The Review Panel stated:
The filter will not be as stringent as the private sector
equivalent, as the CEFC has a public policy purpose and values any positive
externalities being generated. Consequently, it has different risk/return
requirements. For a given return, the CEFC may take on higher risk and, for a
given level of risk, due to positive externalities, may accept a lower
The Review Panel noted that in achieving the target rate of return, ‘the
portfolio will need to earn a rate sufficient to incorporate a margin for
losses and operating expenses.’ The Department of Finance
and Deregulation (Finance) advised that ‘we have a fairly conservative estimate
that around 7½ per cent of its total capital each year will not be recovered.’
Finance noted that the budget includes a ‘provision for $150 million of
investments that will not be recovered.’
Some members suggested that this could mean that the Corporation could
lose $600 million over four years but Finance did not agree with this
conclusion. Finance commented that it ‘would not agree because the investment
mandate will set an investment return target for the body’, and you ‘would not
separate the investments from the returns, because it is a business.’
…that the impact on the budget will be driven by the target
rate of return, and that will be made up of, essentially, two factors: one is
the assumption of a default rate and the other is an assumption of a return
rate. With regard to how you get your target rate of return, there are an
infinite range of possibilities—from a higher default rate and a higher return
rate to a lower default rate and a lower return rate, from how the corporation
goes about its business to what risk profile it takes on its portfolio.
Treasury was asked on what evidence was the 7.5 per cent default rate
based. Treasury stated:
The assumed rate for the purposes of the forward estimates
for the investments of the Clean Energy Finance Corporation (CEFC) is 7.5 per
cent of the additional invested funds each year. The rate of 7.5 per cent is an
average across the portfolio of CEFC investments and is based broadly on
expected performance of the corporation, noting the risks of the industry in
which the CEFC will invest, particularly the potential for higher risk in
renewable energy sector.…
The 7.5 per cent rate represents an initial assumption and
will be reviewed as necessary following experience with the operation of the
A final point of examination focused on Clause 61 of the Bill relating
to Australian-based investments. The EM notes that ‘in making the Corporation’s
investments, the Board must also be satisfied that the investment is solely or
mainly Australian‑based.’ The Board will determine
guidelines setting out the requirements of Australian-based investments which
can only be done after the passage of the legislation and the creation of the
Board. Some members raised questions about whether the potential
Australian-based investments might be overseas owned. Treasury advised that ‘we
are talking about where the assets would be located and not the ownership.’
This focus on Australian-based investments stems from the Clean Energy Finance
Corporation Expert Review. The Review Panel stated:
The Panel regards it as paramount that CEFC investments must
be principally located in Australia. This requirement would not exclude foreign
participation in projects operating in Australia.
Financial barriers to investment in clean energy
One of the key topics discussed in the hearing was the barriers that
exist to companies being able to raise finance to make substantial, long term
investments in clean energy. Currently in Australia, there are a number of
institutional and economic impediments to the sort of investments that
Australia needs to make to establish a robust clean energy industry. Such
investments will provide jobs and wealth for Australians and reduce the impact
of climate change, which has potentially catastrophic costs.
The committee accepts that government intervention in an economy should
not be taken lightly, but it is widely recognised that market failure can occur
and that governments have a role in correcting these failures. The discussion
in this section picks up on these market failures and explains the fundamental
reason for the CEFC. In short, there is market failure in the finance sector
and the CEFC will address this in a way that minimises market distortions and
Tenor of Australian debt markets
The length of time until a debt matures is sometimes referred to as its
tenor. In Australia, the tenor of Australian debt is approximately five years.
In its submission to the Expert Review, Royal Bank of Scotland stated that bank
finance has a typical loan tenor of seven to nine years, and ANZ stated that
the wholesale Australian debt markets have a tenor of one to five years.
This compares with the much longer periods involved in these
investments, which ANZ pointed out can be up to 25 years. Therefore, longer
term projects face greater risk, either due to the possible need to refinance
or through the need to amortise debt more quickly.
The general lack of funds available for clean energy investment was a
common theme in the Expert Review. In its submission to the
review, Acciona Energy referred to this as ‘timidity in the capital market’.
Treasury gave an overview of this problem at the hearing, noting that
Australia’s lack of experience in the sector creates difficulties at a
financial level, as well as operational:
Importantly, there is really a limited track record of
dealing with these projects within the financial sector, which means that
financial corporations add a risk premium because of the uncertainties. That is
important for renewable energy projects because of the high upfront capital
costs imposing a high risk premium on them. The benefits from the investment
come from very long investment periods, so the returns are highly discounted.
Under traditional financing mechanisms, that tends to mean that they do not get
over the hurdle rates of return.
A further factor is that assessing energy projects needs to be done on a
case by case basis, which makes due diligence expensive. The Expert Review
discussed this as follows:
A number of submissions cited the costs associated with
conducting due diligence on renewable energy projects and the lack of
standardisation of projects. Assessment of the quality of the resource and
potential production variability are central to the due diligence process.
However, the cost of undertaking these assessments can be a deterrent. In addition,
unique factors in clean energy projects do not lend themselves to a standardised
assessment and approval process. Without these economies of scale, the financial
sector underinvests in its capacity to service the industry.
Treasury advised the committee that the Global Financial Crisis has
compounded this effect because banks in other countries, which have more
experience in the due diligence of these projects, are concentrating on
Westpac gave some practical examples of how clean energy projects in
Australia can miss out on financial support in its submission to the Expert
Review. For instance, most solar projects in Australia have a capacity of 5MW
and require $10-15 million in funding. This financial scale puts them at the
level of commercial banking, but the technology risks and the complexity of the
project require a (higher) institutional banking level of due diligence.
In the current climate, and given lenders’ level of expertise, this sort of
project will find it difficult to obtain funding.
An important goal for the CEFC will be to secure positive externalities
for Australian industry and the Australian community. These externalities are
expected to be in making clean energy cheaper and innovations in processes.
Treasury summarised this as follows:
The CEFC in making its investments will look to the externalities
from each project. Those externalities relate primarily to moving along the
innovation chain and down the cost curve. Those benefits are not captured
directly by the proponents of a project but subsequent proponents of other
projects and ultimately in cheap and marginal costs of production of renewable
For example, there may be a project that is potentially valuable to
Australia in terms of the innovation it may generate amongst the clean energy
industry or its ability to push down prices. If that project cannot clear
current funding hurdles, given the lack of expertise and increased risk in
Australia currently with these projects, then it would be to Australia’s
advantage to ensure that the project is funded and goes ahead through other means.
The CEFC will allow such a project to proceed, by taking into account
Australia’s best interests, rather than the more traditional, narrow approach
through a private bank.
As the Review Panel noted, the goal is for the clean energy industry to
Beyond the spillover effects to subsequent projects and the
potential for knowledge sharing, as the CEFC’s investments are made and
projects progress, the sector will mature. This progress to maturity is
critical if Australia is to develop the skills and expertise to capture the
employment and industry opportunities available and ultimately to provide us
with a range of real options for energy production in the future.
As the industry matures, private sector lenders will have a greater
level of expertise and the technology will also become more established. The
risks in lending will reduce, thereby reducing the need for the CEFC. One
matter that the Government may wish to consider is whether an exit strategy for
the CEFC, or Government involvement in it, is required. This would be a
suitable matter to consider in the review of the operation of the CEFC,
envisaged in clause 81 of the Bill.
Minimising market distortions
The committee notes two features of the CECC and its operations that
will minimise market distortions. The first is that, as recommended by the Expert
Review and confirmed by Treasury in evidence, the CEFC should only offer
finance on the least generous terms that will enable a project to proceed.
Treasury described the effect of this in evidence as, ‘that means we are not
providing supernormal profits to those corporations, simply because they get
The second is that the CEFC will apply a commercial filter to its
investments, which will often result in it co-investing with a commercial
partner during the early stages. The Expert Review discussed this and it was
confirmed by the Department of Climate Change and Energy Efficiency at the
The CEFC is being established to address market failure and generate
positive spillovers. It would not be appropriate for such an organisation to
then create substantial negative externalities or market distortions in another
way. The commerciality and ‘least generous’ requirements for investments will
minimise the chance this occurs.
Benefits to the community
As discussed earlier, an important goal for the CEFC will be to secure
positive externalities for Australian industry and the Australian community. In
its review, the Review Panel stated:
While each investment will individually support the sector,
it is the cumulative impact of the positive externalities of expanding the
sector experience, moving down the cost curve and creating third party
benefits, which are essential to positioning Australia for a cleaner energy
future. These strengthen the foundation for the ultimate goal to create a
vibrant Australian clean energy sector with real options for future energy
generation and, in the longer term, the jobs and export opportunities it
The Review Panel envisaged that:
Positive externalities will flow from each CEFC investment.
These positive externalities are necessary if the CEFC’s objective is to be
achieved. They flow initially as spillover benefits to subsequent projects.
Over time, they will have a broader cumulative impact across the sector, on
carbon emissions and contribute to the task of preparing and positioning the
Australian economy for a cleaner energy future.
In its evidence to the committee, Treasury reiterated that in addition
to the financial return, positive externalities—the wider benefits to the
Australian community—would be taken into account in the CEFC’s determination of
its investments into clean energy projects.
Treasury indicated that the CEFC will operate to reduce barriers to
renewable energy investment, and so bring in renewable energy earlier and
reduce the cost of production of renewable energy.
In essence it is allowing movement down the cost curve so
that renewable energy projects are more efficient and, therefore, their costs are
cheaper to implement.
When questioned by the committee on whether these cost efficiencies
would directly benefit households, Treasury responded:
I do not know what goes through to households. But my point
was that it would result in more efficient or cheaper production of energy. How
that cheaper production goes through to the household is another matter,
allowing for the competitiveness of the retail sector and whether or not they
pass it on. By having more efficient renewable energy generation with lower
marginal costs into the future, that should reduce costs.
The Department of Climate Change and Energy Efficiency confirmed that
electricity prices were expected to increase by 10 per cent as a result of
emissions pricing. In response to similar questioning on what benefits the CEFC
might deliver to households, the Department commented:
...if the Clean Energy Finance Corporation reduces the cost
of investing in renewable technologies, then you would expect that to result in
lower wholesale electricity prices and, potentially, lower large-scale
renewable energy certificates. So you would expect both of those to come down
if the cost of actually financing these investments was lower.
The committee supports the passage of the package of Bills. The Clean
Energy Legislation Amendment Bill 2012 contains a range of amendments, the most
important of which is to bring non-transport gaseous fuels into the emissions
pricing mechanism. This has been requested by industry and was also a
recommendation in 2011 by the Joint Select Committee on Australia’s Clean
Energy Future Legislation. The amendment will mean that it will be easier for
industry to manage its cash flow, firms will have more flexibility in managing
their carbon liabilities, and compliance costs will be reduced.
The Bill also makes other amendments to improve the operation of the
emissions pricing framework. They include:
n requiring that
projects under the Carbon Farming Initiative have secured all required
regulatory approvals before they receive any credits;
n enabling regulations
to be made to identify accounts under the Australian National Registry of
Emissions Units that are subject to restrictions or limitations; and
requirements for nominating a person with ‘operational control’ of a facility
under the National Greenhouse and Energy Reporting System.
The provisions of the Clean Energy Legislation Amendment Bill 2012 and
the associated excise and customs bills are non-controversial and were only
briefly covered during the hearing.
The hearing concentrated on the Clean Energy Finance Corporation Bill
2012. The Bill reflects the design of the Expert Review chaired by Jillian
Broadbent AO, which consulted extensively with the finance and clean energy
sectors. Its recommendations comprise a way to bring the two sectors closer
The committee heard evidence that there is a significant shortage of
funding for clean energy projects due to market failures. In particular, there
is a lack of expertise in the financial sector about the clean energy sector,
making it difficult for banks to accurately assess and price risk, with the
consequence that many projects are not going ahead. Overseas banks have this
expertise, but they are not engaged in international loans following the Global
Financial Crisis. Further, Australian debt markets operate on much shorter
maturities than those involved in energy infrastructure projects, which again
The CEFC will take a broader view of these investments and will provide
finance to projects that demonstrate positive spillovers, such as through
industry-wide effects such as reducing costs or enhancing innovation. The whole
community will benefit from these projects proceeding.
The CEFC will apply a commercial filter to its decisions. Although the
Government will set the broad directions, individual decisions will be made
separately from political influence. The CEFC will aim to deliver a positive
return on its investments, most likely around the Government bond rate.
Therefore, taxpayers’ funds will be properly managed and adverse effects on the
economy through market distortions will be minimised.
The CEFC will be an effective means of encouraging private sector
investment in clean energy. It will not replace the private sector or deter the
private sector from making commercially sound investments. What it will do,
through co-financing initially, is increase private sector involvement in a
high-technology sector with a growth outlook. The Bills should pass.
||The House pass the Clean Energy Finance Corporation Bill
2012, the Clean Energy Legislation Amendment Bill 2012, the Clean Energy
(Customs Tariff Amendment) Bill 2012, and the Clean Energy (Excise Tariff
Legislation Amendment) Bill 2012.
Julie Owens MP
30 May 2012