This is what the big money is watching in Australian renewable energy
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Financiers are still keen on Australia’s renewable energy sector, but the return of the anti-wind-and-solar Liberal government is dampening the mood.
Investor sentiment around the renewables market is coming to an inversion point created by a hostile government and lack of policy, much as it did during the Tony Abbott government, says Michael Faulkner, an investment manager at Infratil (ASX:IFT) and Tilt Renewables (ASX:TLT) shareholder HRL Morrison.
But it’ll come back, he said at the Australian Energy Week conference.
Small cap investors fled renewable energy investments after the Liberal party was returned to government in May, dumping stocks since the election.
Large investors have their eye on a range of issues from long-term policy uncertainty and regulatory uncertainty and their impact on long term price forecasting, as well as marginal loss factors (MLFs), system stability and construction risk – as dramatically highlighted by the collapse of RCR Tomlinson.
If investors are nervous about the sector, the renewable energy industry is just as upset about the new Scott Morrison government.
Energy bosses were overwhelmingly negative during the three day conference, pooh-poohing energy minister Angus Taylor’s comments yesterday that the National Energy Guarantee (NEG) has been achieved and his promises to intervene further in the market.
But while the shock of Morrison’s “miracle” win is still reverberating through the industry, there are still bright spots for investors who know where to look, experts say.
Lenders are keen to provide debt funding to “well-structured” projects in Australia but the appetite for those which are being developed without a contracted buyer is slim, says Macquarie Capital’s Kirsten Hannan.
She says a lot of global investors had visited Australia and “turned around and gone back home”, but some have stayed and they’re keen to invest as are local institutions and super funds which have ESG commitments.
“We just need to get the fundamentals right for our projects and put bounds around the risk factors to ensure the funds continue to flow,” she said.
Tilt Renewables is tapping the equity and debt markets for finance to build their projects, a factor that Faulkner says gives them more flexibility to manage financial risks.
And there is increasing interest in power purchase agreements (PPAs), which are direct contracts between business and generators.
The risk to watch here is the credit-worthiness of the buyer, as smaller companies jump into the PPA pool.
Morgan Stanley stock market analyst Rob Koh paints a bright picture of the long term picture: globally $20tn is needed as investment by the power sector by 2025, and already half of all global finance is sunk into energy.
“Power sector investment in the past was about building stuff and co-optimising fuels,” he said.
“This time around the fuel is actually capital… It’s not a fuel optimisation exercise [because the fuel is free], it’s a capital optimisation exercise.”
Pumped hydro projects are one area where the investment return is more risky – they’re big, expensive and might have to go up against the government’s massive Snowy Hydro 2.0 development.
Faulkner says it’s easier if a hydro project can find a backer to incorporate it into their portfolio, such as a Pacific Hydro or a Hydro Tasmania, rather than going it alone.
He fingered Genex Power (ASX:GNX) as one company running into this problem, as they’re trying to get a 250 megawatt (MW) pumped hydro, with associated wind and solar, off the ground by themselves.
But the IEEFA’s Tim Buckley says they have a “bankable offtaker” in the Queensland government for the initial solar farm, and they’re likely to get a similar deal for the next stages of the project.
Genex also has equity backers in JPower, a major Japanese coal power plant builder which wants to get out of that sector, EnergyAustralia, and a Chinese pumped hydro company.