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Who’s Winning the Race: Finance or Government? Betting on the Pace of Transition

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Finance and Regulation Summit Sneak Peek

The countdown is to the Power + Utilities Australia 2024 Leadership Summit. In anticipation, we’re giving you exclusive insight into what you can expect our line-up of industry professionals and experts to be discussing.

This year, the summit includes a dedicated stream to the finance and regulatory framework of Australia’s utilities sector. Both the finance and regulatory frameworks wield significant influence over the transition, consisting of a complex grid of renewable energy investments, grid modernization, and the evolving landscape of regulatory policies, all driving the sector’s professional discourse and shaping its trajectory.

We spoke to 2024 Leadership Summit speaker Laura Acklandiene of RayGen, as she gives us her thoughts before the highly anticipated session in May.

Laura Acklandiene

1. How does the finance sector influence the pace of transition compared to government policies?

Governments and the finance sector play a vital role in influencing the pace of transition, with the former sitting in the driver’s seat.

Governments stimulate (“crowd in”) private investment that would otherwise not have happened. It’s important for governments ‘to do those things which at present are not done at all’, claimed John Maynard Keynes, one of the most influential economists. Mariana Mazzucato, an economist and academic, builds further on this in her book ‘The Entrepreneurial State’. She highlights how bold governments ‘willing to invest in the most uncertain phase of the innovation cycle let business hop on for the easier ride down the way’ when massive economic spill overs can be signalled. The need for such long-term investments (“patient finance”) is massive as real innovation can take decades. Even those that tolerate higher risks, e.g. venture capital, have mandates to exit their investments within three or ten years at best.

Governments pull many levers to meet their commitments to a net zero transition. They can accelerate innovative company formation with the supply side support. This includes grants, tax breaks, subsidized loans, environmental performance standards, deployment targets, even international trade policies and market mechanisms such as carbon pricing. Governments can also signal future market potential with the demand side support. They can incentivize consumers with tax credits, feed-in tariffs and rebates and incentivize businesses with procurement contracts across the value chain.

The finance sector has a critical role to play towards sustainability, but their mandates are limited by having to deliver risk-adjusted returns consistent with existing market opportunities. Financial institutions need to see return. They provide conventional products like debt and equity finance, advisory services, institutional investment, insurance and underwriting services. As for-profit enterprises, they can only support economically viable opportunities with an acceptable risk-return profile. That’s why they cannot extend capital beyond their risk appetite thresholds to achieve climate ambitions (IIF, 2023). Risk-tolerating corporate venture capital and strategic investors are open to piloting renewable energy projects with novel technology and novel business models, while commercial banks perceive them too risky and wait until such technologies are proven at commercial scale. Hard numbers are what matters. Even high in demand instruments like green bonds reflect status quo industry expectations on risk-reward ratios, having limited potential to fund riskier projects (B. Nykvist, 2022).

It’s important for the public and private sectors to form partnerships to lower or share the risk on long-term or uncertain investments in sustainability. Governments and financial institutions need to work hand in hand. They can provide discounted loans to clean energy projects, develop new sustainability-aligned financial markets and liquid products and provide guidance to help assess emerging technologies, opportunities and climate change risks. Debt prefers contracted revenues. If novel technologies that provide an immense amount of value to the grid can articulate their proposition with additional contracts for ancillary market services like inertia or contingency, they can secure financing easier. Financial institutions can seize this opportunity and courageously create and shape markets together with the government and a wider network of willing market participants.

2. How do financial institutions shape corporate sustainability decisions more than governments?

Financial institutions have high ESG standards which raises the bar for all organisations willing to secure commercial financing. Whether raising capital to accelerate growth of a clean technology company or securing financing for a first of a kind project that provides dispatchable high-value electricity, financial institutions perform extensive due diligence around ESG and sustainability policies.

What financial institutions can do more to shape corporate sustainability decisions is to help the market assess climate change risk. There’s a lack of data, methods, tools, and scenario approaches with which to systematically assess long-term (perceived and real) risks and rewards that can be incurred from investments in novel technology that tackles climate change (B. Nykvist, 2022). Some of this data clearly does not exist yet which elevates the uncertainty and possibly the risk, but financial actors are de facto experts at judging it.

3. Given recent discussions surrounding the Capacity Investment Scheme in Australia’s utilities sector, do you feel this will impact the investment decisions of utilities in Australia, particularly concerning the development of new generation capacity and the modernization of existing infrastructure?

CIS will have an impact on the investment decisions of utilities, but it won’t be their only tool in the mix. Subject to their preferred risk-reward profiles, utilities might be concerned about reduced profits caused by “claw backs” above the revenue ceiling. Besides, the requirement for the project to be owned by a Special Purpose Vehicle (SPV) will provide limitations towards broader portfolio optimisation. I trust the government will seriously consider commercial departures and alternative options so I will be keeping an eye on any changes in the final release.

What I’m personally interested in seeing is how many CIS tenders will be awarded to projects adopting established, proven technologies (solar, wind, batteries) and new generation technologies such as long duration energy storage (LDES). The government wants to minimize the risk of projects not being delivered by 2030. Yet they are also setting criteria that projects with novel LDES technologies can competitively meet. Some LDES can provide a higher contribution to system reliability (avoid unserved energy, e.g. during high demand times), enable other renewable energy projects to dispatch (reduce their congestion/curtailment, e.g. bulk energy time-shifting), and provide other system benefit services. A project’s storage duration will be considered as part of the tender merit criteria, so I’m hopeful that the government supports projects with innovative deep storage technologies.

4. Can you cite examples of the finance sector driving sustainability changes independently of government?

You can see the finance sector and corporate investors drive sustainability when they do business across borders. Strategic investors coming from regions like Europe have high ESG standards and bring them to their investments across the globe.

What I wish to see more of is the finance sector unlocking capital for a wide range of risk profiles to drive a faster transition to sustainability. If it more readily supports new entrants, not just established actors, we will see more commercial scale deployments, faster. There’s plenty of money for the second project, but it’s limited for the first project. First-of-a-kind pilot or technology demonstration projects struggle getting commercial financing and require support from the government, strategic corporate partners and early-stage innovators. Commercial finance is the ultimate source of competitive advantage for new renewable energy technology.

5. What challenges arise when finance and government agendas diverge in setting the transition pace?

Capital is deployed with a certain view of the current and future markets, but this can very well change when governments change their agenda. Political uncertainty can stall traction and divert money from the finance sector to less risky markets.

Some elements of the transition are luckily hard to stop no matter the political landscape. For example, there’s momentum from the supply and demand point of view to improve resilience to weather events including variable renewable energy droughts. That’s why the government, grid operators, utilities, developers and, of course, the finance sector want to understand capabilities of technologies like long duration energy storage. I’m hopeful that market and institutional inertia will overcome any short-term divergence in agendas.

Don’t miss hearing from Laura and the panel live this 7 -8 May! Book your ticket here.

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