A new mandate for the Clean Energy Finance Corporation takes effect today (Tuesday), though it has been criticised for setting “unrealistic” rates of return that would necessitate consistent outperformance of the market.
In the previous mandate, the government had expected an average return of at least the five-year Australian Government bond rate plus 4-5 per cent a year, which had been labelled as “outside market norms” by the CEFC, given the narrow investment focus it had been given.
The new return for the CEFC’s core activities is the five-year bond rate plus 3-4 per cent, which the CEFC board still thinks is too high.
“While this is a minor reduction in the Portfolio Benchmark Return from the target set out in the two most recent investment mandates issued to the CEFC (in February 2015 and December 2015), the board is of the view that this is still an unrealistically high return target for this market,” CEFC chair Jillian Broadbent said in a response to the responsible federal ministers Greg Hunt and Mathias Cormann.
Ms Broadbent said current depressed market conditions coupled with the CEFC’s “narrow investment universe of clean energy technologies in Australia” meant there was limited ability to invest in high yielding transactions.
“Consequently, as expressed in my responses to the last two investment mandates issued to the CEFC, the board’s view remains that targeting such a high rate of return will require the CEFC to seek out-of-market returns, which will be difficult to achieve.”
The last financial report saw the CEFC achieve a performance rate of 4.66 per cent, compared with an expected 7.11-8.11 per cent.
CEIF takes effect
The government mandate also gives effect to the $100 million Clean Energy Innovation Fund, which will be jointly administered with ARENA and focus on funding to support emerging technologies. The government has acknowledged the additional risk inherent in these technologies by decreasing the portfolio benchmark return to the five-year bond rate plus one per cent.
“The board views the CEIF as a natural part of the CEFC’s activities and is pleased to see the government’s recognition that the level of risk in such a fund will be significantly higher than that found in the CEFC’s core portfolio,” Ms Broadbent said.
However, she did warn the government to expect volatility.
“As the portfolio will be both concentrated within a single industry sector, and involve technologies that are not yet fully commercially established, the return outcome of the CEIF investments will range from full loss of the investment to a return of a multiple of the investment. This variability in investment returns will be more pronounced in the CEIF than in the core portfolio and while the benchmark return set for CEIF is lower than that set for the core portfolio, the government should expect high volatility on a year-to-year basis from this developing portfolio of early stage assets.”
Ms Broadbent also made a note that the CEFC would have the final say when making CEIF investments, not ARENA.
“The board considers it important to emphasise that, as the investments made in the CEIF are ultimately held by the CEFC and funded with monies allocated to the CEFC under the CEFC Act, the final decision-making authority, responsibility and management in relation to investments in the CEIF remains with the CEFC.”