Investability of Australian large-scale renewables remains low
In a briefing held today by David Scaysbrook, co-founder of renewable-energy specialists Quinbrook Infrastructure Partners, the long-term industry investor named the US as the most investable market for renewables, and solar and batteries as the technologies to back.
In the meantime, the Clean Investor Energy Group last week released its inaugural Clean Energy Investment Confidence Survey, which shows that Australia’s net-zero by 2050 commitment had not shifted the dial on a now long-term malaise in investor confidence in the Australian renewables landscape.
CEIG CEO Simon Corbell summarised results of the survey saying “Investor confidence remains stalled, with a deterioration in terms of the cost of equity and risk… Investors consider there remains a lack of sufficient scenario planning in the NEM [National Electricity Market] around coal closures and emissions targets.”
Scaysbrook said that Quinbrook, an investment manager that specialises in new asset creation — infrastructure and business development — as opposed to mergers and acquisitions, was never expecting anything to come out of COP26 that would heighten the investability of renewables in general.
But he says that other countries’ commitments made at COP26 — such as the UK going for zero coal within two years and for zero carbon in its power sector by 2025 — “stand in very stark contrast to what we’re going to see, at least with this current government, in near-term propulsion of new investment activity in the Australian market.”
Themes to watch in Australia’s renewable-energy landscape
Quinbrook has about 20% of its portfolio in Australia, including two 30 MW plants producing biogas from sugar cane waste in Byron Bay; a specialist green energy retailer called Energy Locals that provides businesses with the tools to set up their own energy plan and is also partnered with Tesla in the SA VPP; Energy Trade, one of Australia’s largest behind-the-meter, community energy network businesses; and APAC Green Data, a developer of data centre campuses — so far one in Queensland and another in New South Wales — which deliver low-cost 24/7 renewable power to help customers meet their carbon-reduction targets.
Its investments reflect Quinbrook’s identification of two strong themes: that Australia’s vast and growing number of distributed energy assets in the form of rooftop solar and battery energy storage create a compelling environment for the development of energy-management technologies; and that industry decarbonisation, where switching to renewably generated electricity is the first step towards company net-zero targets, is a “systemic driver of more interesting investment opportunities”.
But he describes the United States as “the most opportunity-rich market in the energy transition” with the UK running a very close second, whereas “Australia is really a bit of a non-event in terms of the scale and volume of investment opportunity, particularly for institutional investors”.
Part of this assessment is due to the level of transition achieved in the US relative to its carbon-reduction ambitions. Scaysbrook describes the US as so far behind in decarbonising its power sector that the funding required to repower with renewables is “staggering”; as for the UK, an island that has chosen to totally eradicate coal-generated electricity by 2024— “that naturally creates new opportunity.”
In comparison, the CEIG survey identified that “Australia is not planning for a fast enough transition to clean energy”, which makes it “a risky destination for investors focused on net-zero outcomes”, says Corbell.
Federal Government action needed to unify and plan the flow of renewable energy
Both Quinbrook and CEIG acknowledge the leadership of Australian state governments in accelerating policies that support decarbonisation, but, says Scaysbrook, “You can’t ignore the Federal Government because the National Electricity Market is a confederation of interests, but the Federal Government has the constitutional power to regulate interstate power flow.”
He adds, “You can have as many renewable energy zones as you like, but if we’re all investing in an integrated and interconnected power market, the power has to go somewhere; f you flood or saturate that market with power, investors are going to lose a lot of money. We’ve already seen that in Australia and we’re going to see more of it.”
The CEIG survey reveals that among the organisation’s 18 members, which have combined operational portfolio of 11 GW of renewable energy across 70 power stations, only two new projects — wind farms with a total of 553 MW capacity — have achieved financial close in the first quarter (July-September) of the new financial year.
How risk and uncertainty increase the cost of equity
CEIG research released in August this year showed that the cost of equity for clean-energy investments in Australia is some 100-250 basis points higher than in other OECD countries, a difference it puts down to “climate and energy risks”.
Scaysbrook adds to this analysis, saying that for the first time in decades, the future value of electricity “is a great conundrum, because we are seeing not only policy change, but technology change, technology advancement, in circumstances where our power markets are poorly designed for the world we find ourselves in.”
He says that as a result the power market designs will change “in ways that are difficult to predict”.
Structuring of investments in long-term assets — across 25- to 30-year investment horizons — therefore becomes complicated, and perhaps “matters more than what you think the headline return is going to be”.
Electable energy policy
Opinion at Quinbrook is that in the coming Federal election the most effective combination of policies will be to introduce a well-structured emissions trading scheme — “Price drives capital in just about every other industry, and I think we need to put a price on carbon,” says Scaysbrook; and to boldly incentivise new green industries.
“We have this unique opportunity where we can create vertical supply chains in Australia … whether it’s for green steel, green aluminium, green hydrogen,” he says. The country’s abundance of cheap land, solar and wind resources “is an exportable value”.
Corbell says the two market reform priorities for the coming 12 months are still, “fixing grid access rules to remove arbitrary risks for generators wanting to connect”, and streamlining the building of new transmission infrastructure to enable clean energy to replace ageing coal-fired generation.
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