If Australia wants the private sector to build new energy assets then providing an investor friendly environment is essential. Globally this is recognised and is delivering cost-effective results.
The ongoing “debate” around Australia’s electricity sector is regrettably being run along political lines. This is in stark contrast to what long-term investors want and how international experience has demonstrated energy assets can be built. By stepping back from the day-to-day political tussle it is clear that simple steps could see a bipartisan route through the quagmire.
The simple fact is that investors want as much certainty as possible – and they will look elsewhere for investment opportunities if it is not available here. Retrograde steps, like getting rid of carbon pricing, demonstrably hits investor confidence. Unlike politicians, investors in infrastructure assets take a long-term perspective. They’re investing for 10 to 20 years; they often owe fiduciary duties to their clients; and in their hands are regular citizens’ retirement hopes.
Unlike MPs, if investors get decisions and public statements wrong they lose their jobs. You haven’t heard real conservatism in action until a Scandinavian bond investor explains their concerns about stranded assets – not just concerns about getting their investment back, but worries about whether companies will survive in the medium.
These are not theoretical concerns but result from seeing their equity investing colleagues lose substantial value on European utilities and global coal miners. That’s why they back action on climate change and the developing green bonds market. That’s why more than two-thirds of institutional investors are planning to increase investments related to tackling climate change.
Across the institutional investment space climate risk is moving from a seemingly distant issue to one with greater present day tangibility, and investors are worried. Investors worry about physical risks associated with climate change, particularly the ever shortening tragedy on the horizon that Bank of England governor Mark Carney described so clearly in September 2015.
These concerns saw the Bloomberg Taskforce on Climate-Related Financial Disclosures publish clear recommendations on both public disclosure and scenario modelling the impact of a 2°C or lower world. Businesses are now actively working on developing these disclosures, including the supportive ANZ Banking Group.
At CDP Worldwide, a leading environmental data platform, we see significant growth in investors wanting environmental disclosures and with almost 6000 responding companies there is a clear recognition that meaningful environmental information matters.
Investors also worry about political risk associated with moving to a low-carbon economy either too slowly or in a rapid panic that strands assets. These worries mean they won’t invest without confidence in the regulatory and political environment.
Australia’s politicians could take notice of recent UK experience. A conservative government has shown a clear path to a cost-effective renewables-led electricity system. By supporting cross-party, long-term policy and clearly setting out their approach to driving down costs through renewables auctions the UK has resolved its investment hiatus.
Only weeks ago the UK saw a staggering reduction in the price of offshore wind generation. Costs to consumers will have reduced 50 per cent in three years to £57.50 a megawatt-hour (AU$99/MWh) placing it below nuclear and, remarkably, gas. The UK will now have clean energy that is nearly subsidy free, as well as strong local industry development and downward pressure on wholesale power prices. A real success for industry-led cost reduction, with serious and meaningful government support to get there.
Foreseeing the global green investment boom to come, the UK has also taken a leadership role in green finance. In 2012 the UK coalition government set up the UK Green Investment Bank. Reflecting the global interest in renewable assets Macquarie Group bought the bank in August this year, delivering the UK taxpayer a near $300 million profit.
At UK Green Investment Bank we set up the world’s first investment fund focused on offshore wind. This fund raised over £1 billion (AU$1.72b) in institutional funding and took offshore wind investment from a niche activity to mainstream institutional investors. As investor experience grew risk perceptions fell, ultimately driving down financing costs to projects and leading to massive reductions in prices to consumers. Everyone paddling in the same direction clearly helps.
Australia could easily emulate this success by setting out a clear path to increasing renewable power generation, planning for a reduction in reliance on ageing and polluting fossil fuel plants and letting the market drive down prices.
Despite today’s hostile climate there is, perhaps, a glimmer of hope. Our inertia on climate action means we could go straight to a renewables dominated grid, leapfrogging a gas-based transition. Perhaps as the lucky country, blessed with sun and wind, we can fumble our way to energy prosperity based solely on the now clear and compelling economics of renewable power. Just maybe our politicians could assist by listening to investors and delivering policy stability.
Jeremy Burke is a trustee at CDP Worldwide. He was finance director then director, strategy of the UK Green Investment Bank, which was established by the UK government in 2012 and sold to Macquarie Group in August this year.