Eco Investor April 2016

Unlisted Companies

New Clean Innovation Fund Stirs Controversy

The Federal Government's new Clean Energy Innovation Fund has drawn both praise and criticism, but I think the Clean Energy Council (CEC) summed it up well when it said it is two steps forward and one step back for clean energy innovation. However a harsher critic could argue it is one step forward and one step back.

The CEC's two steps forward are the saving of the Clean Energy Finance Corporation (CEFC) and the new Clean Energy Innovation Fund; the step back is the loss of the Australian Renewable Energy Agency's (ARENA) ability to make grants. The earlier Abbott Government tried hard to abolish both CEFC and ARENA. The saving of ARENA is mostly in name only and the new fund is not new money, hence my own view that it's one step forward and one back.

But there is another positive. The resolving of the issue means there is now a chance to start rebuilding confidence in cleantech.

That CEFC and ARENA will now be allowed to continue, and with the CEFC intact, looks like a move that has come from the prime minister, Malcolm Turnbull. It is not what the conservative elements in the Coalition want and there is no doubt that if Abbott were still prime minister the moves to abolish CEFC and ARENA would still be in the Senate.

Mr Turnbull also linked their retention to Australia's efforts to tackle climate change, despite there being climate change doubters in the Government, and to Australia's transition from the mining construction boom to a new more innovative economy, where the clean energy sector knows it can make a big contribution.

The environmental movement and the cleantech sector can draw some comfort that the retention of the CEFC means Turnbull and his common sense and love of innovation have prevailed over the extreme elements of the Coalition. That's positive and an indication that the worst of the Abbott Government is over and that the Government has moved closer towards the middle ground. The move is not enough to reverse the billions in lost investment and undo the years of lost industry confidence inflicted by Abbott. But the ship of state has made a change in the right direction.

Barring further interference, there is now a chance for the CEFC to continue to grow and one day become the mega clean energy financial institution and perhaps future clean energy bank that the industry hopes it will.

Unfortunately the same can't be said for ARENA. While ARENA will remain in name and help manage the new Clean Energy Innovation Fund, it is losing $1.3 billion in undispersed capital and its ability to make grants for innovations. This is a big step backward. Grants are vital to support early stage innovations that cannot repay debt finance, and it is dishonest for the Government not to admit this.

These are the same MPs who under Abbott and Hockey wanted to put all of Australia's innovation funding in one basket and assemble $20 billion for grants under the mooted Medical Research Future Fund. Yet these same MPs couldn't leave in place $1.3 billion of existing money for clean energy grants. Nor is the $1 billion for the Clean Energy Innovation Fund new money. It comes from the CEFC's existing $10 billion. The anti-environmentalists in the Coalition are incompetent extremists and they make our ‘Innovation Prime Minister' look like a hypocrite.

The ending of ARENA's grants and the withdrawal of its $1.3 billion in unspent capital are clear wins for these Coalitionists. Mr Turnbull's overall package, with wins for both the pro and anti clean energy groups, looks like a serious political compromise. It tells us that the extreme elements of the Government have not gone away - and could one day return to the driver's seat - but for the time being they are prepared to deal with Turnbull and the Coalition moderates.

It leaves open the question of the upcoming election and whether a win by Turnbull would strengthen his bargaining power within the Coalition or whether it would give the conservatives another chance to wreck more havoc on the cleantech sector.

It would certainly help if an environmental activist were to put together a list of the anti- environmental and anti-cleantech members of the Coalition and their chances of re-election.

For cleantech investors and entrepreneurs, there is a small positive in the new fund. It will make available $100 million a year for ten years and these investments will only have to return their capital plus 1 per cent, which is a lower hurdle than for other CEFC investments which is cost of funds plus 4 per cent. The losers are very early stage innovations that need grants. The winners are more developed renewable energy projects that would not have met CEFC's otherwise higher return on investment criterion.

The $1 billion in capital will be invested as debt and equity to help emerging technologies transition from demonstration to commercial deployment. The Government said the sort of projects it will target are large-scale solar with storage, new battery technologies, off-shore energy, biofuels and smart grids.

The Government said ARENA will continue to manage the $1.1 billion it has invested in over 250 projects from research and development to demonstration and deployment, and that it will deliver the $100 million large-scale solar round. It will have an expanded focus beyond renewable energy to enable energy efficiency and low emissions technology. The later could be a reference to gas, in which case it would be another win for the conservatives.

But once the $100 million large-scale solar round is complete, debt and equity financing through the Clean Energy Innovation Fund will become ARENA's main activity. The Clean Energy Innovation Fund will be jointly managed by the CEFC and ARENA. The Government said this means it will draw on the expertise of both; but in effect ARENA's future and possibly its remains could one day be folded into the CEFC.

The changes to ARENA were heavily criticized by the Australian Solar Council, which said the Government is stripping $1.3 billion from renewable energy budget funding and that it was is a backdoor way to gut ARENA. The strength of feeling is clear in the comment of chief executive, John Grimes. "By its very nature early stage research is speculative. Almost no projects will be fundable under this model. This will cut the guts out of renewable innovation in Australia."

Political compromise can be a tough art.

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