The government recently accepted the recommendations made by an independent review team on the implementation, governance, and operating mandate for the Clean Energy Finance Corporation (CEFC).
The CEFC is a $10 billion, five-year program linked to the Clean Energy Future Policy which will provide a new source of financing for the types of renewable energy and clean technologies unable to attract private funds.
The recommendations include a 50/50 split of the funds between renewable energy – which includes hybrid technologies but excludes carbon capture and storage – and energy efficient and low emissions technology – defined as technology “at, or below, 50 per cent of the emissions intensity of the grid”. It also grants loans to manufacturers who enable low-emission, energy efficient and renewable technologies.
The CEFC will apply a “commercial filter” with the aim of achieving a target rate of return equivalent to the government’s cost of funds – the long-term bond rate. Thus, the CEFC will apply a less stringent filter than the private sector but will aim for self-sufficiency and will provide financing on the least generous conditions possible for the investment to proceed – that is, as close to the market rate as possible.
The Coalition has been vocal in its opposition to the fund and industry has argued that it will distort markets. This claim was made by the Australian Industry Greenhouse Network, whose membership includes major producers of greenhouse gas emissions in Australia including BlueScope steel, RioTinto, Alcoa of Australia, BHP Billiton, as well as BP Australia and ExxonMobil amongst others.
The fund corrects a distortion
Rather than distort markets, the fund corrects a distortion. There are positive externalities or spill-over benefits associated with investment in renewable and low-emissions technologies and these cannot be captured commercially and do not figure into the calculations made by private sector financing sources.
The externalities include the knowledge externalities that result from research and development. Development of renewable technologies by one firm can stimulate technological improvements by other firms because the knowledge created is available for all to use.
Funding clean technologies also reduces the negative externalities of fossil-fuel based energy production – emissions of carbon and other pollutants – and leads to public health benefits while meeting our obligations to the global community.
If these externalities are considered, the social benefit of many clean technologies would outweigh the cost and financing would be forthcoming. However, the finance sector considers only the private returns and it is this distinction between social and private benefits which results in a market failure. From a social perspective, funds should be forthcoming but they aren’t.
In such circumstances it is right for the government to step in. Thus, due to the public policy purpose and positive externalities, the CEFC will correct a distortion by taking on higher risk or accepting lower private returns while still ensuring self-sufficiency.
Industry claims are hypocritical
In arguing that the CEFC will distort markets, the industry group is not only incorrect but hypocritical. The industries represented by the Greenhouse Network have received and continue to receive large subsidies. For example, the Institute for Sustainable Futures found that in 2005/6 subsidies for fossil-fuel based electricity production amounted to $1.2-2 billion while support for renewable energy and energy efficiency was $0.1-0.2 billion.
The actual distortion then is a distortion of reality. The claim by the Network is disinformation aimed at gathering community support for maintaining the fossil-fuel industry’s monopoly over electricity production.