The recent report titled “Australian Renewables Report 2021” by MinterEllison and Acuris presents an analysis of the financing opportunities and challenges in Australia’s renewable energy space. It highlights the key trends, attractive investment sectors and financing outlook to guide interested investors keen on entering this growing market. REGlobal presents an extract from this report.
Renewables infrastructure investment and M&A trends: 2020 year in review
While sentiment is strong toward future investments, trends over the past two years show a drop-off in activity. Renewable projects of all types (greenfield, brownfield and refinancings) have declined since 2018 (AU$17.1bn and 49 transactions), with 2020 posting only 20 deals valued at AU$3.8bn. Grid integration problems and transmission losses may be among the reasons for this declining investment. Pandemic restrictions also weighed on dealmaking throughout 2020. However, the trend toward progressively lower deal values is also linked to the massive improvement in the efficiency of renewable generation over the past decade.
To put this in context, the cost of utility-scale solar photovoltaic fell by 82% between 2010 and 2019, while concentrating solar power (CSP) costs dropped 47%. Meanwhile, International Renewable Energy Agency data shows offshore wind and onshore wind costs fell by 29% and 39% respectively. In short, this is a bang-for-buck story. In the case of solar photovoltaic, a dollar invested today generates five times more electricity than it did a decade ago.
Falling costs have paved the way for a new generation of increasingly ambitious projects. 2019 saw plans unveiled for the Sun Cable Tennant Creek 10GW Solar and Battery Project, an AU$25bn (US$17.4bn) renewable megaproject in Australia’s Northern Territory. Meanwhile, the proposed Asian Renewable Energy Hub in Western Australia is slated to accommodate 26GW of wind turbines and solar photovoltaic panels. Both projects have an eye to energy export markets.
COVID-19 stimulus measures are providing a further boost for investment in renewables. Western Australia’s government, for example, is backing renewable hydrogen as part of its recovery plan. The state government sees hydrogen as an increasingly important economic driver, particularly given its export potential. Initiatives include the 1520MW Oakajee green hydrogen site.
What makes projects like these so interesting is that they do not, primarily, depend on existing grids to make money out of renewable energy. New subsea cables to Asian markets, hydrogen (liquefied or converted to ammonia) and mass battery storage are key elements in the emerging megaproject story. Paradoxically, lack of conventional grid access could be seen as a spur to innovation rather than a hindrance.
M&A interest: Renewables remain compelling
While M&A deal flow was muted in 2020, value was up compared with 2019. Among active dealmakers were power producers and institutional investors, who continued to bolster their portfolios with acquisitions of pipeline projects and already-operational renewable energy assets. Among the top M&A transactions of 2020 was the takeover of Australian renewable energy developer Infigen Energy by Spain-based utility giant Iberdrola for AU$893m (US$645m). Iberdrola sees Australia as a key growth geography and the company has more than 450MW of capacity under construction and a project pipeline of over 1,000MW in development.
2020 also saw the acquisition by power producer Engie ANZ of the Hills of Gold Wind Farm development for AU$750m (US$528m). The deal involves the purchase of the project entity Wind Energy Partners Pty Ltd. Engie will be responsible for developing and operating the 420MW facility, which will be built near Hanging Rock in New South Wales.
Looking ahead renewable energy assets look to be an increasingly attractive target for infrastructure investors as they confront lacklustre returns from sub-sectors such as airports and toll roads, which have been hit hard by the pandemic.
Policy and financing: Opportunities amid challenges
Investors see federal and state government policies as being supportive toward the renewable energy sector, and they are expected to remain so. However, despite this, the proportion of respondents who think both state and federal government policies will be supportive over the next 12-14 months (83%) has fallen in recent years (92%).
While both state and federal government policies are expected to support investment in the sector over the next 12-24 months, state government support is expected to be slightly higher (86%) than federal government support (80%).
“Federal policies are unsupportive right now, but there may be changes soon,” says the Head of Corporate Development at a Canada-based energy company. “More financial support will also be required from the federal government. There could be more finances allotted to renewables projects.”
Both domestic and foreign investors point to a slightly more favourable outlook for state versus federal policy, APAC-based investors in particular (96%). European investors are the notable exception with 66% expecting state policies to be supportive versus 81% for federal policies. Australia-based investors are marginally less positive about government support than they were in the previous survey with 91% anticipating supportive policies from state government and 85% from federal government, versus 90% overall (federal and state) in the 2019 study.
Top challenges: Policy uncertainty and regulatory complexity
Respondents point to instability around incentives for renewables, cited by 63% of investors, rather than 2019’s high valuations, as their main hurdle going forward. “This uncertainty does not facilitate smooth planning and diversification for investors,” says the Director of Corporate Development and Investments at an Australia-based energy company.
As well as instability, several overseas investors point to ambiguity and a lack of clarity surrounding incentives. “We do not know how much to expect from incentives,” says the Managing Director of a Switzerland-based financial sponsor. Meanwhile, the Head of M&A at a Netherlands-based energy company says: “The instability surrounding incentives and the take in different states is not inviting for foreign investors.”
While investors are attracted to Australia’s stable regulatory systems, regulatory complexity is concerning to 59% of investors, a slight increase on our 2019 study. Reforms to Australia’s foreign investment rules are a key area of concern, cited by a number of respondents. These changes have implications for foreign investors acquiring an interest in, or starting, a “national security business”. This includes energy businesses.
“For foreign investment groups, the stricter approval process could be a major barrier,” says the Managing Director of a China-based financial sponsor. “The instability surrounding investment does not allow companies to plan their investments or diversification strategies.”
Accessing the grid: Shifting perceptions
Grid access is a challenge and respondents say that it is getting more difficult. This problem is not unique to Australia. Grids seldom get the investment they deserve. In many developed economies, grids evolved to connect coal-fired power generation (often sited near coalfields) with cities. But in most cases, the best sites for modern renewable generation are far from the traditional transmission network.
More than half (53%) of respondents say accessing the grid is getting more difficult compared to a year ago. “Unless effective measures are taken to solve the issue, connectivity problems will persist,” says the CFO of an Australia-based energy company. Despite this, 63% expect there will be improvements within the next 12 months. Development of Renewable Energy Zones (REZs) by state governments will help. “Grid connection issues will become easier to manage as government is taking steps to manage the inconsistencies,” says the Managing Director of an Australia-based energy firm.
Renewable energy targets are a feature of both federal and state energy policy and investors see these as key in the development of clean energy projects in Australia. However, there are big differences between federal and state governments in their approach to targets. At the federal level, the national Large- Scale Renewable Energy Target (RET) for utility-scale generation has been a cornerstone of Australian energy policy for 20 years. Australia was one of the first countries to introduce such a scheme, which requires liable entities (including electricity retailers) to buy large-scale generation certificates (LGCs) from renewable energy generators.
The target for the RET – 23.5% of total electricity sourced from renewables by 2020 – was reached in 2019. The RET scheme will continue until 2030. However, the downside for renewable energy generators is that the income stream from LGCs will dwindle as the amount of renewable energy in the grid – and therefore the number of certificates issued by generators – rises over the coming decade.
As there is no longer a federal target, goals set by state and territory governments are assuming greater significance. Some of these targets have already been achieved. The island state of Tasmania, for example, recently reached its goal of 100% renewable generation – something it achieved two years early. Tasmania is now legislating for a 200% target by 2040. The Australian Capital Territory also has 100% renewable electricity, although using renewable power largely generated outside the territory.
Interestingly, respondents are lukewarm about the importance of investment in transmission network development (ranked fifth). Given the problem of grid constraints, these rankings are lower than might be expected.
Renewable Energy Zones: The way forward?
Despite its lower ranking, respondents see Renewable Energy Zones (REZ) as critical to facilitating further investment in renewables projects. Indeed, 86% agree with this idea, noting that REZ development holds out hope for the future because they offer greater coordination between renewable generation and transmission capacity than has been the case historically.
Three state governments – New South Wales, Victoria, and Queensland – have so far committed to developing REZs. These are intended to provide large-scale renewable energy generation and storage to replace coal-fired power stations as they reach the end of their lives. By taking into account the need for shared transmission infrastructure, REZs promise to alleviate the grid access problems that have held back some projects.
Our survey shows that investors are nonetheless cautious about REZs with particular reference to grid access and bankability. “To ensure a renewable energy zone is sustainable, it needs to have easier connection to the grid, certain marginal loss factors and bankability,” says the Managing Director of an Australia-based fund. “If any of these are not taken care of, the entire development can become ineffective.”
Sectors in the spotlight
Confidence in photovoltaic (PV) solar and offshore wind continues to grow, with 94% and 83% of investors respectively saying these sub-sectors are the most attractive. This is a significant change since our 2019 study.
Aside from providing the greatest opportunities, PV solar and offshore wind are also seen as lowest risk among sub-sectors. Indeed, only 1% of investors say offshore wind has the greatest risk (compared with 30% in the 2019 study) while none say PV solar has the greatest risk. According to the partner of a UK-based fund, “PV solar has good opportunities. With the expansive region and availability of greenfield opportunities, there can be faster developments.”
Batteries are also highly rated by investors. This is not surprising: Australia is home to one of the world’s biggest grid batteries – the Tesla battery at Hornsdale in South Australia – and more big batteries are in the pipeline. Three- quarters of investors point to batteries as offering the most opportunities, although this is down slightly from sentiment in 2019. Geothermal and hydro are seen as much riskier compared with our previous survey. Investors point to factors such as environmental concerns and construction risk. “I think the most risk is geothermal energy, because of the environmental effects,” says the Managing Director of a UK-based fund. “There are more chances that environmentalists will protest and cause a hindrance to projects.”
Firming up the future
Combinations of solar, wind and batteries could hold the key to providing reliable and consistent generation as existing thermal generation reaches the end of its life. Indeed, 81% of respondents think that hybrid solutions combining wind, solar and storage hold huge potential for Australia.
Delving into the detail, investors see solar (with or without firming) as the most likely candidate to meet system stability requirements within the next decade as existing thermal power plants are phased out. According to the Director of M&A at an Australian energy company, “Australia will be using solar, paired with firming technology as the main preference. When it comes to the reliability, solar energy is a stable form, and the energy consumption can be met on a regular basis.”
Wind with firming technology also scores highly among investors, as does the provision of grid-scale batteries. The least-likely options highlighted by respondents are life-extension of existing thermal plants and the construction of new coal-fired generation. Interestingly, respondent sentiment reveals a significantly greater awareness of the need for firming when compared with our 2019 survey. This finding underlines the growing maturity of the renewables sector and its willingness to shoulder more responsibility for providing reliable, consistent and resilient power supplies.
The rise and rise of hydrogen
Hydrogen has exciting potential as a future fuel for industrial, transport and household use. It also has potential as an export earner. Hydrogen has a number of characteristics making it attractive. First, it can be produced using renewable electricity using only water as a feedstock. Second, liquefied hydrogen has an extremely high energy density – three times greater than petrol and more than 100 times higher than a fully-charged battery per unit of weight. This makes it useful in transport applications. Third, it produces zero emissions when used as a fuel – the only exhaust is water vapour. Finally, it can be stored indefinitely.
Hydrogen is also especially interesting for its potentially symbiotic relationship with renewable generation. For instance, electricity can be used to produce hydrogen; equally, hydrogen can be used to produce electricity. Deploying renewable generation, electrolysers and fuel cells on the same site therefore has the potential both to minimise curtailment risks and to provide flexible load and frequency services to the grid. This is possible because electrolysers (which consume electricity) and fuel cells (which produce electricity) can be ramped up and down rapidly. In short, hydrogen could provide a way of getting around grid access issues.
Risk-reward sentiment is shifting in favour of hydrogen. In 2019, 47% of investors said it was an opportunity sector, although 53% said it was too risky. This study shows that 49% see it is an opportunity sector. Notably, only 31% now say it is too risky. In short, positive momentum is building. Echoing the sentiments of many respondents, the Director of Corporate Development at an Australian energy company says “Hydrogen has more opportunities. Investors can invest in the earlier stages of a project for valuable returns.”
Additionally, more than two-thirds (69%) of respondents agree that developments in Australia’s hydrogen economy will cross an inflection point in the year ahead and allow the country to become a primary supplier for energy markets within the next 12-24 months. Respondents envisage multiple uses of hydrogen in the not too distant future. Transport (39%) and industrial applications (26%) are seen as the top hydrogen opportunities. According to the Managing Director of an Australian bank, “Hydrogen can be used for creating a sustainable transport ecosystem. The current burning of conventional fuel is expensive and replacements would really transform the transport sector performance.” Integrating hydrogen into gas networks (i.e. blending hydrogen with the existing natural gas supply to reduce its carbon content) is highlighted by 18% of respondents.
Renewables developers are expected to be the most active investor group in the coming year, according to 99% of respondents. Meanwhile, 89% believe power producers will play a greater role in the market, up from 82% in the last study. “Power producers will be active because Australia has plans to substitute current conventional energy usage completely within the next few years,” says the Managing Director of a Singapore-based financial sponsor.
Funds – which include infrastructure, private equity and pension/ superannuation funds – also ranked highly, with 80% of respondents expecting these to be among the most active. Inbound infrastructure developers and investors could be an important factor here: 71% of respondents think that regional renewables funds, similar to Singapore-based Equis, will be increasingly active and competitive in the Australian market in the year ahead.
Domestic pension/superannuation funds – as well as those based in Europe and North America – have also been showing a keen interest in Australian renewables, observes the Strategy and Business Development Director of a France-based energy company: “The long-term yield and alternative investment model is ideal for their returns anticipations.”
Financial institutions, including banks, are also expected to be active in the renewables market in the year ahead (cited by 63%). This is higher than in our previous survey and it is likely to reflect the fact that banks are decarbonising their portfolios and switching lending to renewables instead – a trend that gained momentum throughout 2020. All of Australia’s big four banks have now said they will restrict financing to thermal coal projects.
“Banks are offering tailored solutions for the renewables market,” says the Managing Director of an Australia-based bank who does not want to miss out on any investment opportunities that open up in the next two years.
Positive financing outlook
Australia ranks high among the countries offering the most supportive financing environment for renewables, with 87% of respondents predicting that it will have the most supportive environment in 12 months’ time versus 68% today. This performance is comparable with the likes of major renewables markets in Europe (Germany) and North America (Canada).
The retreat from fossil fuels and the decisive shift toward socially-responsible investing continue to provide firm underpinnings for Australia’s renewables sector. Only 46% of respondents see financing as a challenge, on par with 2019 (44%).
“Australia will become a more supportive environment because most of the active projects have been planned well,” says the Investment Director of an Australia- based fund. “Financers and investors have confidence that returns can be maximised over time.”
One of the positive factors shaping the renewables financing environment is the growth of ESG lending and investing. 2020 was a year in which both domestic and overseas banks and financial institutions reappraised lending on fossil fuel projects. Most are actively decarbonising their portfolios – in some cases, writing off coal-fired investments altogether – while looking to back renewable energy projects.
Renewables developers also continue to benefit from federal support. This is provided by the Clean Energy Finance Corporation (CEFC), a government- owned green bank (acting as a lender or investor) and by ARENA, the Australian Renewable Energy Agency (which primarily provides grant funding). Between them, these agencies have invested approximately AU$8.5bn in clean energy projects over the past eight years.
The original report can be accessed here