This chapter discusses the main issues raised in submissions and also during the public hearing, regarding the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 (the bill). Due to the relatively short inquiry timeframe, the report focuses on the main provisions of the bill raised in submissions and evidence.
Firstly, it addresses the key provisions of the bill raised by submitters and witnesses, and particularly addresses several misconceptions regarding the operation of the bill. These misconceptions were addressed during the public hearing by Ms Jo Evans, Deputy Secretary, Climate Change and Energy Innovation from the Department of Industry, Science, Energy and Resources (DISER).
The key provisions discussed include:
the Clean Energy Finance Corporation (CEFC) ability to make independent investment decisions;
the expansion of the definition of 'investment' to allow investment activities that may not make a return on individual investments within the broader positively-performing Grid Reliability Fund portfolio;
the introduction of Grid Reliability Fund investments, with criteria for investments to be set out in the Investment Mandate;
the alteration of the definition of 'low-emission technology', together with the inclusion of the term 'low-emission energy system';
the Grid Reliability Fund's potential support for the Underwriting New Generation Investments (UNGI) Program; and
the exclusion of the Grid Reliability Fund from investing at least 50 per cent of its funds in renewable energy technologies.
Secondly, it considers the need for government frameworks that support investment and the need for greater electricity market certainty, and finally, it provides the views and recommendation of the Environment and Communications Legislation Committee (the committee).
Overall positions on the bill
Submitters expressed strong views both for and against the passage of the bill.
Mostly, arguments against the bill focused on its purported incompatibility with the Paris Agreement, concerns about investment in potentially non‑commercially viable projects, and concerns the bill would undermine the independence of the CEFC. Some argued that the bill is unnecessary, stating the CEFC can currently invest in technologies that improve the security and reliability of the grid. Many individuals objected to the possible use of tax‑payers' money to invest in technologies that support the burning of fossil fuels; and raised broader concerns about climate change.
Most arguments in support of the bill focused on the difficulties of integrating higher levels of renewables into the electricity grid. These submitters argued that the bill would allow flexible generation technologies to support intermittent renewable energy. Other positive aspects of the bill were the use of technologies including pumped hydro and batteries to support grid reliability; and the ability to invest in transmission and distribution infrastructure.
Success of the Clean Energy Finance Corporation
The majority of witnesses and submitters noted the tremendous success of the CEFC since its inception and were generally supportive of the CEFC receiving an additional $1 billion for investment. Evidence received by the committee highlighted the CEFC's ability to facilitate increased flows of investment into the clean energy sector and deliver a return on investments for tax-payers.
For example, the Climate Council of Australia (Climate Council) praised the CEFC as a 'world-beating institution'. It highlighting the CEFC's investments in '200 large scale clean energy projects and more than 18,000 smaller scale projects' and pointed out that the CEFC largely exceeds its expectations for high financial returns. Similarly, the Australian Industry Group (Ai Group) stated the CEFC has been a 'successful innovation in Australian climate and energy policy' and has 'leveraged public finance and private partnerships to crowd capital in to areas of great importance to Australia's future, while operating with strong governance and a net financial return'.
DISER also attested to the success of the CEFC stating it is 'well-placed' to deliver the $1 billion Grid Reliability Fund, 'having already made commitments of $8 billion to projects in the clean energy sector worth $28 billion since its inception'.
Much of the evidence put forward noted the important connection between the CEFC's success and its independent decision-making and governance. For example, Mr Tennant Reed from the Ai Group told the committee that 'the independence and the governance of the CEFC have been very important features of its actions to date. They contribute to the good reputation that it has'.
Perceived threat to the Clean Energy Finance Corporation's independence
Various submitters suggested that the independence of the CEFC would be undermined if the bill were to become legislation. Concerns about the CEFC's independence were noted in association with:
amendments to the definition of 'investment' to allow for additional types of investments prescribed by regulations;
the introduction of a new category – 'Grid reliability fund investments', which will be required to meet the criteria of the Investment Mandate; and
amendments to facilitate the CEFC implementing the UNGI program.
Submitters' interpretation of the bill's influence on the ability of the CEFC to remain independent varied. The Australian Conservation Foundation (ACF) argued that the bill gives the government and the Minister of the day additional powers to direct the CEFC's investments. Ms Suzanne Harter, a Climate Change and Energy Campaigner for the ACF, reaffirmed the ACF's concerns outlined in its co-authored submission:
Our second area of concern is the need to protect CEFC's independence and its ability to apply commercial rigour to its investments. This requires rejecting the bill's proposed changes that would provide additional powers for the designated minister to direct CEFC's investments—and this includes loss-making investments—and rejecting the bill's changes that would enable transfer to CEFC of the government's Underwriting New Generation Investments scheme.
Mr Kane Thornton, Chief Executive Officer of the Clean Energy Council, emphasised the importance of the CEFC remaining independent and free from government interference, stating:
…ensuring that the executive and board continue to have that independence is critically important. Frankly, Senator, particularly in the context where we have seen a lot of political chopping and changing of policy, a lot of confusion that comes with that, I think one of the strengths of the institutions in Australia that support the transition of the energy sector has been, if you like, their immunity from some of the very complex and difficult politics.
Other submitters argued the CEFC's independence would be preserved under the bill. For example, Mr Reed from the Ai Group stated that 'the CEFC would have greater scope to choose individual investments that might not in fact have a return, but the minister would remain unable to direct it to make particular investments'. Similarly, Mr Erwin Jackson, Director of Policy at the Investor Group on Climate Change (IGCC), expressed that the bill didn’t appear to undermine the CEFC's independence in decision-making, stating:
We had a good, hard look at this before we put our submission in and we are not hugely concerned about the independence of the CEFC, because, at the end of the day, the CEFC board has to satisfy itself that it is meeting the objectives of the Act. So from that point of view, we had a look at it, explored it, and the changes being proposed, to us, don't seem to have undermined the independence of the CEFC.
At the public hearing, to refute claims the CEFC independence was at risk, Ms Evans from DISER said that the bill does not interfere in CEFC independence:
…the bill does not remove any independence. The minister cannot direct the CEFC with respect to individual projects. Under the Act, as it stands now, the minister is able to give broad guidance to the CEFC about the areas in which he would like to see investment and this is unchanged by the bill. CEFC making a loss has created some concern, but again the explanatory memorandum to the bill is very clear that the GRF overall is expected to make a positive return to the government.
When asked whether the amendments would impact independent decision‑making by the CEFC board, Mr Ian Learmonth, Chief Executive Officer of the CEFC, advised the committee:
Absolutely not. The board operates independently of government. It's not directed to do deals or not to do deals by the government or the minister of the day, and this legislation doesn't propose to change that.
The committee acknowledges the concerns raised about the possible impact of the bill on the CEFC's independence. However, the committee is satisfied that the CEFC would remain accountable for individual investment decisions independent of government.
In the committee's view the bill would not impact on the capacity of the CEFC or the CEFC's board to make independent decisions about investments.
Expansion to the definition of 'investment'
The bill would expand the definition of 'investment' to allow, through regulations, additional type of activities that would qualify as Grid Reliability Fund investments. This could include individual activities that may not make an investment return within the context of an overall positive portfolio return.
Evidence presented to the committee argued that this definitional change would permit the CEFC to fund unprofitable activities at the Minister's discretion, which would be an inappropriate use of government funds and counter-intuitive to the CEFC's purpose. Concerns were also raised over whether the regulations that would expand the definition of investment for Grid Reliability Fund would be subject to the Parliamentary disallowance process.
For example, in its submission to the inquiry, the Climate Council argued:
There is no reasonable justification for allowing the CEFC to 'invest' in projects where no return on investment is anticipated. Through its references to potential 'revenue floor arrangements the explanatory memorandum is clear that the Government intends to direct the CEFC issue funds without any expectation of return on projects that would otherwise be uncommercial. The CEFC is not an appropriate vehicle for providing financial support to loss-making endeavours.
Furthermore, at the public hearing, Mr Andrew Stock, a Climate Councillor from the Climate Council, stated:
Once you start moving a government enterprise away from making an investment return and operating as a commercial enterprise to one that operates as not necessarily being expected to achieve a return, then you are changing the very nature of the role of the CEFC. The CEFC not only will need to become expert in just providing debt and limited equity and occasional concessional finance but will need to become expert in technology risk, grant-making—which is [the Australian Renewable Energy Agency's] current expertise—and writing, arguably, commercial but non-financial transactions, such as underwriting term agreements for gas power plants.
Conversely, the Ai Group noted that it was appropriate for the CEFC to be able to make individual Grid Reliability Fund investments that do not make a return, stating:
The menu of tools to facilitate projects may include options like contracts for difference or guarantees of minimum revenue levels, which can ease projects by cutting their risks. Such tools can be designed to offer upside benefits to the CEFC (such as a symmetrical price guarantee, where the CEFC pays out a counterparty below a strike price or is paid out itself if final prices are above the agreed level), but the ability to offer one-sided support may be useful in supporting more innovative, and risky, projects. The continuing requirement to achieve portfolio returns serves as a firm constraint on the overall scope of risk and non-return arrangements that CEFC could contemplate.
Mr Oliver Yates, Director of the Smart Energy Council, raised concerns regarding the ability of the minister of the day to direct the CEFC on what investments to make and removing the requirement for Parliamentary oversight:
Though seemingly innocuous, those changes to the definition of investments insert a provision that allows the minister, not parliament, to change the way the CEFC invests its money by regulation. Senators, it removes your power. This simple change allows the minister to effectively play around with a billion dollars in this fund outside your oversight, including making loss-making investments.
In response to concerns raised regarding the ability to support individual investments that do not make a return, Ms Evans clarified the purpose of the proposed expanded definition, stating:
…the bill extends the current definition of 'investment' under section 4 to include financial arrangements that would allow the CEFC to fill a financial or risk gap that they can't do at the moment that would enable an important grid reliability project to proceed, even if that particular action or that particular project may come at a loss… [T]his expanded definition of 'investment' and the associated regulation-making powers enable the CEFC to offer a wider range of financial products than is currently the case… [T]his amendment is about the financial instruments available to the CEFC—not what the CEFC invests in but how it can invest in them.
Additionally, in its submission to the inquiry, DISER advised that the CEFC will determine whether to use the types of investments made available through regulation:
It will remain at the CEFC's discretion whether to use the types of investments prescribed by the regulations, with the proposed change simply increasing the number of support tools at the CEFC's disposal. Any costs associated with the use of such support mechanisms would be offset by the returns made across the GRF portfolio which is expected to make a return as a whole.
Ms Evans also explained that the Grid Reliability Fund will still be expected to deliver an overall positive return for the Grid Reliability Fund portfolio:
…the Grid Reliability Fund must overall return a profit to the government. While the expansion of the definition of 'investment' allows more flexibility for the CEFC so that there may be some probability of a loss on some projects under the GRF, at a portfolio level the CEFC must still show a positive return on the Grid Reliability Fund. This is a similar type of obligation that the CEFC holds for the $10 billion fund where the overall rate of return is specified at a portfolio level, not at an individual project level.
Ms Evans went on to explain that the regulations will be subject to the usual disallowance process:
The use of regulations that is also in the bill to prescribe the additional form of investment is subject to the normal disallowance procedures of each house of parliament under the Legislation Act 2003. There's been some misconception that there's no further control over the ability from parliament over the regulations that the minister might make under the amendments to the Act.
The committee acknowledges the concerns of some submitters that the bill will allow the CEFC to make individual Grid Reliability Fund investments that may not make a return. The committee notes however, that some of these investments may in fact be revenue-neutral due to the CEFC utilising underwriting arrangements that are not called upon. Importantly, the Grid Reliability Fund portfolio overall must provide a return to the taxpayer, as stipulated in the Explanatory Memorandum.
The committee recognises that the amendment to the definition of 'investment' would provide the CEFC with greater flexibility when making decisions on individual investments. This would allow more opportunities for investment, especially for grid reliability projects such as transmission infrastructure or the establishment of Renewable Energy Zones, which will encourage more renewables into the electricity network.
Furthermore, the committee notes that this approach to Grid Reliability Fund investments is not an unusual arrangement. This is because under the current Investment Mandate the 'Portfolio Benchmark Return target is expected to be earned across the portfolio of investments over the medium to long term, and individual investments can be made with expected individual returns above or below the Portfolio Benchmark Return'.
The committee also notes concerns that the expanded definition of investment will provide the opportunity for the minister of the day to direct the CEFC to invest in certain activities without effective parliamentary oversight. However, the committee does not accept this contention. The committee is satisfied that any regulations introduced to prescribe additional financial arrangements for the CEFC regarding Grid Reliability Fund investments will be subject to the usual disallowance process as confirmed by departmental officials.
'Grid reliability fund investments' and the Investment Mandate criteria
Some submitters raised concerns regarding the insertion of the new category of 'Grid Reliability Fund investments' and the requirement for these investments to meet the criteria set out in the Investment Mandate. Their evidence suggested that this new category and its reliance on the criteria within the Investment Mandate provide the minister of the day the opportunity to direct the CEFC into specific types of investments.
For example, TAI stated:
The Minister has announced that, once this Bill is passed, the Government will prescribe a new Investment Mandate. 'It is intended that the Investment Mandate will provide detailed criteria for what will constitute supporting the reliability or security of the electricity grid and what investments should be prioritised'. This is poor process and of concern to government accountability.
Similar evidence also noted the concerns raised by the Senate Standing Committee for the Scrutiny of Bills regarding criteria for which investments can be funded under the Grid Reliability Fund to be set out in the Investment Mandate.
At the public hearing, Ms Evans specified that the Investment Mandate has always been a non-disallowable instrument (in contrast to the regulations noted above) and the bill continues this arrangement. Ms Evans stated that 'the minister cannot direct the CEFC with respect to individual projects' but that the minister 'is able to give broad guidance on the CEFC about the areas in which he would like to see investment'.
When asked at the hearing if the bill allows the minister to direct 'a certain percentage of the funds to go towards gas', Ms Evans advised:
Using the investment mandate, the minister can already give general guidance on how he would like the CEFC to invest its funding, so I suppose there is some prospect that it could, in the investment mandate, have some sense of a proportion of funding that it would like to put towards gas, but, even if that were there, the CEFC would still have to take each project on its merits and decide whether or not it was a worthwhile investment and whether or not it genuinely contributed towards a low emissions energy system. The minister cannot force the CEFC to invest specifically in any gas project.
The CEFC's operational independence is discussed further under the section 'Underwriting New Generation Investments program'.
The committee is satisfied the CEFC's independence will be maintained under this bill. The committee notes that the Investment Mandate has always been a non-disallowable instrument and the bill continues this arrangement.
The committee also notes that a key component to the CEFC's positive investment performance has been its ability to make independent investment decisions. The committee is confident the CEFC will maintain its independence upon passage of the bill.
Amendment to the definition of 'low-emissions technology'
The bill amends the definition of 'low-emissions technology' by including a list of technologies that the CEFC can invest in to support the achievement of a 'low-emissions energy system' in Australia. The bill's amendment of low‑emissions technology was a key focal point for submitters and witnesses.
Evidence received by the committee argued that the altering of the definition of 'low-emissions technology' to include the undefined term 'low-emissions energy systems' is vague and problematic. Evidence suggested the new definition could potentially apply to the wider CEFC portfolio, and that it has been included to allow the CEFC to invest in gas-fired power generation projects, which it would be unable to invest in under the current CEFC Act.
For example, at the public hearing, Ms Harter spoke to ACF's concerns regarding the definitional change, stating that the new definition is 'unnecessary' and that the current definition should remain, which allows the CEFC to specify 'low-emissions technology' through investment guidelines. Ms Harter went on to say:
We feel it's critical to uphold CEFC's core objectives by not using CEFC funding for gas or fossil fuel projects which are not clean energy and would be very inconsistent with CEFC's role in helping to reduce Australia's climate emissions.
Mr Stock from the Climate Council, stressed that the definition would impact the CEFC portfolio more widely, advising:
Importantly, that definitional change runs through the whole Act, so it applies not only to the Grid Reliability Fund investments but to the whole CEFC portfolio—over $10 billion. That's of considerable concern, and the reason why is that, in the explanatory memorandum, it states that this definition change will enable certain types of gas fired electricity projects to now fall under this definition if they support a low-emissions system in the market. It's not clear at all what a 'low-emissions [energy] system' is. It's not defined anywhere, and this definitional change applies to the whole portfolio.
The TAI raised similar concerns, stating by not defining 'low-emission energy systems', the bill resulted in 'an open-ended definition of "low-emission technology" that will enable the CEFC to fund gas-fired electricity generation, as made explicit by the Explanatory Memorandum and the Minister's second reading speech'.
The Ai Group noted that not defining a low-emissions energy system in the bill, as well as not tasking the CEFC to define it, seemed 'excessively ambiguous' and stated:
The idea of the CEFC being able to support technologies, even those with some emissions, that support development of a low emissions grid is reasonable. A technology-neutral approach is sensible. However being neutral on technology requires a commensurate clarity about the outcome sought. CEFC needs to articulate, or be given, clear guidance on low emissions energy systems, and have access to analytical support to establish whether proposals really do contribute to achieving them.
Likewise, the IGCC highlighted the need for clarity around a low-emission energy system for transparency. It recommended the CEFC publish its criteria for a low-emission electricity system and for this definition to be consistent with the objectives of the Paris Agreement.
The Ai Group suggested three ways of clarifying what low-emission energy systems are:
the Commonwealth government adopt a long-term objective of net-zero emission by 2050 for the Australian economy to help guide the CEFC;
the bill be amended to explicitly task the CEFC with devising guidelines to define low-emissions energy systems as it does under the current CEFC Act; and
through the Explanatory Memorandum and Investment Mandate, encourage the CEFC to develop its guidelines in consultation with key stakeholders, particularly energy market governance bodies.
In response to questioning about why the term 'low-emission energy systems' has not been defined in the bill, Ms Evans advised that it has not been defined to allow the CEFC board 'to take its own view on whether or not those technologies would contribute towards what they consider to be a low-emission energy system'.
Additionally, DISER provided context on how low-emission energy systems will be achieved and that this will be further outlined in the Investment Mandate:
Low-emission energy systems are achieved through creating an interconnected network of energy assets, such as generation, transmission and distribution infrastructure, that operate collectively to supply low emission energy to consumers and includes a region of an interconnected network with security and reliability needs substantially independent of the network as a whole. This will be stipulated and explained in a CEFC Grid Reliability Fund Investment Mandate. What constitutes a low‑emission energy system will evolve as other efficiencies and technologies are deployed.
In its submission to the inquiry, DISER noted that the inclusion of the definition for grid reliability fund investments and the changes to the definition of low-emissions technology 'removes ambiguity as to whether the CEFC is able to invest in certain types of projects including gas electricity generation where this is contributing to a low-emissions energy system'.
DISER further advised that the low-emission technologies the CEFC will be able to provide support to 'enabling technologies, such as batteries, transmission upgrades and grid stabilisation technologies where it is the system benefits of these technologies that are relevant and not the operational emissions-intensity of the technology'. Relevant limits on the technologies will be 'imposed through the need for a connection with the achievement of low‑emission energy systems in Australia'.
Finally, DISER advised that the purpose of the changes would enable the CEFC to invest in a technology-neutral manner and 'across a wide range of businesses and projects, while retaining responsibility for investment decisions'.
Mr Learmonth from the CEFC explained during the recent Budget Estimates hearings that the absences of a definition of 'low-emissions energy systems' did not pose an operational challenge from the CEFC Board's perspective. Mr Learmonth elaborated on the approach the Board would likely take in these circumstances:
If there isn't a definition [of low-emissions energy systems], the board would come to its own conclusions about what those words mean. I imagine we would provide guidance to the marketplace in regard to that.
The committee appreciates the concerns raised regarding the amendment to the definition of 'low-emission technologies'. The committee notes, however, that this change has occurred to remove any doubt that the CEFC can invest in energy storage, electricity generation, transmission or distribution or grid stabilisation, as long as these technologies contribute to low-emission energy systems.
The committee also notes that the Explanatory Memorandum states that the amendment to 'low-emissions technologies' under the CEFC Act 'would not extend to coal-fired electricity generation technologies'.
The achievement of low-emission energy systems in Australia is expected to evolve based on the introduction of technologies and other efficiencies. Importantly, this amendment does not remove the CEFC's board ability to consider whether Grid Reliability Fund investments contribute to a low‑emissions energy system. Over time the committee expects the CEFC will develop guidance to industry on the parameters of low-emission energy systems.
Underwriting New Generation Investments program
Under the bill, the $1 billion Grid Reliability Fund may provide financial support to eligible projects shortlisted under the UNGI program and that are within the CEFC's Investment Mandate.
Concerns were raised about the bill, in particular the purpose of the UNGI program. In its submission to the inquiry, DISER advised that the bill would expand the functions of the CEFC to allow it to assist Commonwealth agencies in the development or implementation of polices or programs that support grid reliability, including to allow 'the Government to draw upon the CEFC's expertise when structuring finance or setting terms and conditions in relation to any shortlisted UNGI projects not taken on by the CEFC.
The TAI countered that the UNGI program is 'controversial' and stated it 'has no legislative basis, no formal guidelines or criteria for project selection, and is following no clear process'. According to legal advice commissioned by the TAI in early 2019, the UNGI program would require, among other things, amending the CEFC Act, which the TAI believes this bill now confirms.
The TAI argued that the main reason for the bill was to ensure the 12 shortlisted UNGI projects received financial support and stated, if adopted, the bill 'will allow the CEFC to shift from an explicitly profitmaking investor of renewable energy projects for the Australian people, to a potentially loss‑making underwriter of fossil fuel projects'.
At the public hearing, Mr Richie Merzian from the TAI elaborated on this point. He stated 'of particular concern is that of the five gas projects that have been shortlisted from the 12 the government has already taken the efforts to progress negotiations on two of them'. Mr Merzian further suggested the bill's amendments and Explanatory Memorandum showed 'a very clear direction' for the CEFC to consider underwriting the five gas projects.
In support of the argument that the bill's amendments are primarily to support funding of the UNGI program, Mr Stock from the Climate Council advised that, although it is possible for the CEFC to invest in gas projects, the current definition for 'low-emissions technologies' would exclude open-cycle gas projects, which the five UNGI gas projects are.
When asked if the purpose of the bill is to secure support for the shortlisted UNGI gas projects, due to no alternative funding option, Ms Evans stated to her knowledge that was not the case. Furthermore, Mr David Blowers, Acting General Manager of the Electricity Branch at DISER, advised that 'under existing legislation, the government will be able to maintain authority to deliver UNGI projects if or when, or even before, they go to the CEFC'.
Similarly, at the public hearing, Mr Simon Every, Head of Government and Stakeholder Relations at the CEFC, clarified that it would be the CEFC who would undertake its own due diligence and decide whether to support an UNGI project:
…the particular project would go through the normal processes of an eligibility screening to determine that it could be financed by the CEFC under the terms of the amended act. Then they would go through a commercial assessment as to the viability of the proposal. And then they would go through assessments of the particular attributes of the investment proposal, such as the extent to which it provided a grid-firming aspect, the public policy benefits, the type of investment return the CEFC could be expected to make.
The committee notes the concerns raised regarding the UNGI program, however, the committee understands that the overall purpose of the bill is to encourage investment to support grid reliability and security.
The committee acknowledges that the CEFC will have the opportunity to consider the shortlisted UNGI projects and notes the CEFC will assess each project on its merits. The CEFC will make its own decision as to whether it is a worthy investment and contributes to a low-emissions energy system.
The committee is satisfied the CEFC will retain its independence around investing in individual projects.
Exemption from investing at least half of funds in renewables
Since 1 July 2018, the CEFC has been required to invest at least half of the CEFC's investment portfolio in renewable energy technologies. According to the bill, the Grid Reliability Fund will be excluded from this requirement. This will ensure the Grid Reliability Fund is 'technology-neutral' and the CEFC can focus on the best investments to improve grid reliability.
Some evidence questioned why diverting funding away from renewables was necessary through the lifting of this restriction and questioned whether it would impact CEFC investment portfolio more broadly.
For example, the Australian Council of Social Service recommended the CEFC retain its existing requirement to invest at least half its funds in renewable energy and to extend this requirement to the Grid Reliability Fund. Dr James Prest noted that one of the most concerning aspects of the bill was the watering down of the 'at least 50 per cent requirement' by excluding the Grid Reliability Fund.
During the public hearing, Ms Evans advised that the bill does not remove or alter this requirement for the CEFC's original $10 billion investment portfolio. The CEFC original investment portfolio will still be required to invest at least 50 per cent of its funds in renewable energy technologies. Ms Evans advised:
There has been some concern in the submissions about a perception that there's a removal of the requirement for 50 per cent of the CEFC investments to be in renewables. The bill does not remove this requirement for the existing CEFC funding. What it does is allow for the new $1 billion in funding to be unconstrained by the type of technology that it needs, so long as it's contributing to a low-emissions energy system.
Ms Evans explained that the bill exempts the Grid Reliability Fund from the requirement to invest at least half of its funds in renewables, to provide the CEFC with investment flexibility to support grid reliability. Referring to a key finding of the Statutory Review of the Clean Energy Finance Corporation (the statutory review) from 2018, Ms Evan advised:
It pointed to a couple of restrictions that the CEFC had in the way that it's able to use its funding. It particularly pointed to the constraint that the 50 per cent renewables imposes on the way that it uses its $10 billion fund. It also pointed to the ability to only use debt and equity as the forms of finance, and that statutory review indicated that there'd be some benefit in creating some more flexibility around both of those points. So the shaping of the bill and the proposal has come from saying, 'To avoid that 50 per cent requirement for the $10 billion, it needs a separate pool of funding that can be used in an unrestricted way'.
In its submission to the inquiry, the CEFC pointed out the administrative and compliance challenges it faces regarding the minimum 50 per cent rule:
The reality of managing the…must ensure, that at any time…'at least half the funds invested' formulation found in the current sub-section 58(3) is that the CEFC must target a renewable energy threshold of 55% in order to be certain it stays above 50% at all times. This is because the CEFC's portfolio of investments is fluid. Many individual investments exit the CEFC's portfolio after the project is constructed, derisked and earning stable proven revenues.
The CEFC has no way of knowing in advance whether the projects that will refinance at any given point will be renewable energy technologies or other technologies. In addition to targeting a 55% threshold to meet the requirements of sub-section 58(3), the CEFC must occasionally slow or cease investing in non-renewables, or sell current non-renewable investments down, just in order to maintain the threshold. In this way, the subsection 58(3) requirement may impact the CEFC's ability to invest in energy efficient and low emission technologies that would otherwise be eligible for CEFC investment.
Ms Evans explained why the minimum 50 per cent requirement would be a significant limiting factor if applied to the Grid Reliability Fund:
Some of these [Grid Reliability Fund investments might be quite substantial. Say you made an investment in … a transmission line … if that had to be matched by the same amount of investment in renewable energy to meet the 50 per cent, you might not have enough projects coming forward on the renewable energy side to be able to do the one [transmission project]…for the purposes of grid reliability and stability.
The committee is satisfied that the bill does not withdraw the requirement for the CEFC's original $10 billion investment portfolio to invest at least 50 per cent of its funds in renewable energy technologies.
The committee acknowledges that there is a benefit to not requiring the $1 billion Grid Reliability Fund to invest at least half of its funds in renewables. The removal of the restriction on the Grid Reliability Fund will ensure the CEFC is able to invest in a broad range of technologies, such as generation, energy storage and transmission projects, to improve grid reliability and better enable the grid to support growing renewable capacity.
Government frameworks to support investment
Evidence presented to the committee emphasised the need for the bill to ensure it is 'crowding-in' private investment and for strategic policy and regulations from government to support investor confidence.
In its submission to the inquiry, the Australian Pipelines and Gas Association stated:
A high level of industry investment is critical to cost effectively increase the reliability of the electricity grid – and successfully achieve the goals of the GRF. At the same time, it is vital that government recognises the role it plays in ensuring a stable policy environment that encourages rather than presents a barrier to investment. Maintaining a technology neutral approach to achieving clean energy policy goals – as the proposed Bill seeks to do – is one way to achieve this.
At the public hearing, this view was supported by Energy Networks Australia Chief Executive Officer Mr Andrew Dillon:
One of the challenges we have…with new infrastructure is that it is critical that the energy regulation and policy framework we have around this supports investment confidence so we can access low-cost finance. Reducing regulatory risk helps networks continue to be considered low‑risk investments, and that means they can access low-cost debt and equity and these low-financing costs are passed on to customers.
Likewise, Mr Jackson from the IGCC argued the need for a safe investor environment to unlock capital for a broad range of low emissions technologies on a scale required to support the energy system:
We can have very important policies like the CEFC…[and] ARENA, but without a long-term policy direction, investors are going to continue to struggle to find projects at scale, and to invest in country and large-scale renewable energy and other emission reduction projects. We are already seeing, based on the surveys and the engagements we are having with our members, that policy risk and regulatory risk are very big concerns for them and they are actively seeking opportunities in other markets in response.
Greater electricity market certainty
Submitters and witnesses supported the need to improve Australia's grid reliability and security, as well as using the CEFC to leverage private sector investment to address grid reliability issues and investment in renewables.
The Clean Energy Regulator stated:
The ability of Australia's electricity grid to transmit renewable electricity from production to areas of demand is currently the major limiting factor to further growth.
Mr Dillon stated that the need for investment in transmission infrastructure to support the grid and renewables is critical:
…transmission infrastructure and better interconnection between states are essential to support renewable power generation, keep our electricity supplies reliable and link markets to keep customer costs down. The reality is renewable generation is often built in remote locations and new transmission is essential to enable the clean energy produced to get to market and be delivered to customers.
Mr Stock cautioned the government over too much intervention with the CEFC and warned it would detrimentally impact the electricity market:
If the government continues to act in a way that intervenes in the market, one thing you can guarantee is that the rest of the market—the private sector—will sit on their hands and wait and see what happens. That's probably the worst outcome that Australians would expect out of this, because it will guarantee underinvestment when investment is required. It will virtually ensure high prices for electricity, because we will get underinvestment ahead of closures, and that will almost certainly bring future price shocks.
Mr Jackson from the IGCC cautioned that private investment in gas to support the grid may be risky as global investors are moving away from fossil fuel energy:
…institutional investors view gas much like any other fossil fuel: it's still high emissions. It still carries the same risk that any other fossil fuel has over a long period of time—over 40-50 years—in terms of the assets and whether they will become stranded. So what we are actually seeing globally is investors increasingly scrutinising gas investment in the same way they had recently been scrutinising coal assessments. Their appetite would be more towards renewables, because the risks are probably lower in the long term for those investments.
Mr Thornton from the Clean Energy Council expressed a similar view:
We see a whole wave of projects coming down the pipeline, supported by private sector investors in renewable energy and energy storage. Any efforts by government in that context to underpin new coal- or gas-fired power stations really only does one thing—that is, confuse investors and force them to look at taking their capital, their expertise and ultimately their investments to other countries at a point in time when Australia needs to be accelerating commitments to new generation in this country… It [market uncertainty] would have a negative impact on investment, and the obvious flow-on from that is that less new investment will mean higher power prices and less reliability in the context of the inevitable phase out of our coal generation in years to come.
However, the APGA expressed the view that gas will have a strong role to play in supporting intermittent renewables, stating:
The flexibility of gas-fired power generation (especially fast-start gas-peakers) makes it an ideal complement to intermittent renewable sources of energy like wind and solar. It keeps the electricity grid stable both during short term fluctuations in output (measured in seconds and minutes) and longer-duration periods where the wind doesn’t blow and/or the sun doesn’t shine. It is this role – supporting intermittent renewables in the electricity mix and thereby enabling higher renewable use overall – that represents the future of gas in the electricity system.
The committee recognises that Australia's electricity system is facing challenges coping with the high penetration of renewables, and urgent investment is needed to improve grid reliability and security.
The committee notes that the Grid Reliability Fund would allow the CEFC to focus on investment in new generation, storage, distribution and transmission infrastructure which is critical to support a firm, reliable and secure energy grid. It would also create further opportunities for the greater penetration of renewables to support Australia's transition to a lower emissions electricity market.
The committee notes the concerns raised about the potential for the CEFC to invest in gas-fired generation, where its position in the market supports the achievement of low-emission energy systems. However, the committee also notes that the existing CEFC Act and guidelines allows the CEFC to invest in non-renewable fossil fuels such as gas-fired generators where they can achieve an emissions intensity of less than 50 per cent of the current National Electricity Market average.
The committee also notes that the bill is focused on the CEFC investing in grid reliability technologies, which are far broader than gas-fired generation, and include energy storage such as pumped hydro and batteries, transmission and distribution infrastructure and grid stablishing technologies.
The committee is conscious of the need to ensure Australia can provide energy that is reliable, affordable and secure, and support the transition to lower‑emission technologies. The committee also notes that the Grid Reliability Fund supports the objectives of the Technology Investment Roadmap, which is part of the Government's long-term emissions reduction strategy. The committee believes that the bill strikes an appropriate balance in supporting vital grid stability technologies while at the same time encouraging the continued large-scale deployment of renewable energy technologies.
The committee recommends the bill be passed.
Senator the Hon David Fawcett