Nathan Lim

9 April 2014 — Investment manager and super fund Australian Ethical has downgraded Australian renewables due to government policy uncertainty that has forced some companies in the sector to turn to fossil fuels. However, Asia is now looking like a hot destination instead.

According to Australian Ethical international equities portfolio manager Nathan Lim, with the Coalition Government attempting to repeal climate legislation and a Renewable Energy Target review with an outcome that already seems decided, the investment environment in Australia has become “very poor”. This has led the company to downgrade the country’s renewables sector to a “negative” category – a reflection of the limit of potential financial return on investment.

The poor environment has driven some renewables companies to diversify into conventional energy, with AE this week announcing it had been forced to divest from geothermal energy company Petratherm after it sought a licence for oil and gas exploration in Tasmania.

Mr Lim told The Fifth Estate AE had held shares in the Petratherm for more than five years and was committed to helping the company prove its technology, however AE’s charter meant it could no longer lend support.

Mr Lim said Australia now didn’t have much of a renewables sector to speak of. There was wind company Infigen, which he said was stuck in a position where it couldn’t support any more Australian projects, and Carnegie Wave Energy, which was still in the R&D phase.

“We just don’t see any good opportunities [in Australia],” he said.

International companies steering clear

Even large international companies like First Solar and wind developer Acciona are reviewing their investment in the Australian market.

The government was “absolutely” purposefully creating a poor climate for renewable investment, Mr Lim said, particularly with the RET review.

“You can’t blame someone for looking at Australia and saying, ‘This is too hard.’

“By introducing reviews, you’ve already put fear into developers. No one in their right mind would invest in a wind project when they don’t know what the policy will be next year.”

The fears seem warranted. According to energy market analyst RepuTex, in research released today [Wednesday], wind energy generation could be 40 per cent lower in 2020 if the carbon price is repealed and the RET revised downwards.

The government’s proposed replacement to the current carbon price, the Emissions Reduction Fund, offered no investment certainty either, Mr Lim said, describing it as “a stimulus package masquerading as energy policy”.

Asia’s where the money is

The Climate Institute today put out a fact sheet on the climate policies of Asian countries, including China, Japan and South Korea.

Mr Lim said Asian countries were leading on renewables, and AE’s renewable investment focus was in this region.

“We know that in terms of renewable energy, China and Japan are just bumping everybody,” he said.

China last year installed 16 gigawatts of wind and 11.3GW of solar. To put that in context, worldwide only 35GW of wind and 37GW of solar was installed, meaning China had the lion’s share.

For the next year, China looked set to install 18GW of wind and 14GW of solar, Mr Lim said.

Japan was another success, with 6.9GW of solar installed last year and 20GW approved.

“These are huge numbers,” Mr Lim said. “That’s the good news. The bad news is that for renewable energy, China is pretty much a closed market.”

Even though China looked like an attractive renewable energy investment destination, exposure could only really be gained by buying local Chinese firms, he said.

A problem overseas investors faced was that transparency is not great in China, and there have been a number of high-profile bankruptcies.

AE was not invested in Chinese companies, but with companies that had exposure to the Chinese market.

Some exciting investments AE had made with exposure to the Chinese market were around pollution and energy efficiency.

One company, the Japanese NGK Insulators, had created particulate matter filters for trucks to improve emissions profile. With China’s well-documented pollution problems, and a rise in enforcement of pollution standards, there now is a burgeoning market to exploit.

Another energy efficiency investment was Danish firm Rockwool, which melts down rocks and turns them into a stone wool fibre for insulation. The product, which is fire resistant, is increasingly being specified in Chinese high rises, making buildings safer and more energy efficient.