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#estimates - the Clean Energy Finance Corporation

Estimates & Committees
Scott Ludlam 1 Feb 2016

Senator LUDLAM: I have some questions in a similar vein. I might throw the first one to you, Senator Ruston, here in your representative capacity. Is it still government policy to abolish the Clean Energy Finance Corporation? 

Senator Ruston: Yes. 


Senator LUDLAM: Can you provide a brief run-down for us as to why? 

Senator Ruston: The government's policy in relation to the Clean Energy Finance Corporation is obviously well known to you. The fact is that the Senate has chosen not to agree with the government's policy position in that regard. Obviously, we will continue to work with Mr Yates and the organisation to maximise the benefit that is able to be delivered by this particular institution, but I think the government made it pretty clear when we were elected that we did not believe that we should be in the job of being a bank. However, as you well know, the decision of the Senate is such that we will have it and, while we have still got it, we will maximise the opportunity it provides for this particular area. 

Senator LUDLAM: Thank goodness for the Senate. I can kind of understand why Prime Minister would have come to the election with that view, but would you not view the CEFC as complementary to the Prime Minister's stated vision of being diverse, agile and innovative? 

Senator Ruston: The decisions that cabinet make in relation to policy changes are obviously the remit of cabinet. As you know, I am an assistant minister and not privy to those conversations. To the best of my knowledge, there has been no decision to change the policy position in this particular area, but obviously things change over time. I am not in a position to pass judgement one way or the other. At the moment, the policy of the government has not changed. 

Senator LUDLAM: You are here defending the policy, presumably. 

Senator Ruston: Absolutely. 

Senator LUDLAM: Okay. Mr Yates, what proportion of CEFC's projects are in regional or rural areas? Is there a handy break-up without going into too much detail? 

Mr Yates: I do not have a handy break-up, but I could provide that on notice for you—if we can; normally we do it on a state basis. I can provide you with a state breakdown if you would like. 

Senator LUDLAM: It was more the breakdown between metro and rural and regional that I am interested in. I presume the vast majority are rural and regional. 

Mr Yates: The vast majority of renewable energy projects are obviously in regional and rural areas; however, there is an enormous amount to be done in cities from an energy-efficiency perspective. 

Senator LUDLAM: I will come to some specifics on that in a sec. I do not want to have it become a real headache for somebody to work it out to tender some more places, but just rough numbers for what is going on and what sort of work you are financing and supporting in metro as opposed to outside it. 

Mr Yates: We will take that on notice and provide it to you. 

Senator LUDLAM: Do you have a rough estimate of how much private sector investment you have generated to date? 

Mr Yates: Currently our leverage multiple is about 1.9. In other words, for every dollar the CEFC puts in, we are seeing about $1.9 worth of private investment coming into the transactions. 

CHAIR: Sorry; Mr Yates offered to put something on notice, but was that the question you just answered? 

Mr Yates: No, that was a different one. 

CHAIR: You did not say whether or not you wanted it on notice. 

Senator LUDLAM: Yes, I would appreciate rough numbers. 

CHAIR: Thank you. That was just to clarify. 

Senator LUDLAM: Thanks. In terms of private sector investment, your multiple is 1.9. In rough numbers, how much money is that overall since you started up shop? 

Mr Yates: If it is 1.9 and we have portfolio commitments of $1.5 billion, logic would apply to it, but I could ask Mr Powell, my CFO. 

Mr Powell: It would be approximately $3.5 billion. 

Senator LUDLAM: Of private sector capital? 

Mr Powell: In total, including ours. 

Senator LUDLAM: And that would not have been mobilised if you guys had not been in business. 

Mr Yates: That relates to the projects that are within our contract. It is always difficult to say they would not happen, but clearly some transactions, particularly the most innovative ones, would not have happened. But we are also trying to change the way people do things. There are some really good examples I can give you another time, time permitting, where in the first transaction we have done we may not get a large leverage multiple, but then the private sector may copy that transaction, and we do not even count that in our numbers. 

Senator LUDLAM: So you have made it safe. I am presuming your investment guidelines are around trying to support projects that need your help and would not have got up without your intervention. 

Mr Yates: That is correct. We do not have an additionality test, for want of a better term, but if a transaction can get done without our involvement then we would encourage the transaction to get done. 

Senator WHISH-WILSON: A point of clarification on that: would you say that is because there is some kind of market failure in relation to financing these kinds of projects? 

Mr Yates: Market failure is, I think, an overutilised term. It could be a market failure, but a market failure could also represent the fact that there are not a lot of investors in certain asset classes. You could call that a market failure, lack of market experience or lack of market volume. If you call that market failure then, yes, it is a market failure, but the markets cannot provide answers to everything. 

Senator LUDLAM: In terms of benefits to the taxpayer, there are the obvious benefits of more economic activity in a sector that we desperately need to grow, but your latest annual report identifies on page 134 that the CEFC has a retained surplus of $62.6 million. That number is a little bit old now. Have you got a rough or more precise idea of what that is sitting at around now? 

Mr Yates: In December it was about $73 million. We are expecting that to continue to grow as we go through the year. That $73 million is our total retained surplus since we started operation. 

Senator LUDLAM: So you are $73 million in the black. That is money, which you hold on behalf of taxpayers, that would not be available to the CEFC if you were not making good investments. You are making a profit, not a loss. 

Mr Yates: It actually could be a lot worse than that. The investments could be bad and we could lose money, so the objective is to try to encourage activity without losing money. 

Senator LUDLAM: Yes. The point I am drawing out is that you are not losing money; you have made $73 million. 

Mr Yates: That is correct. Our retained profits are $73 million. 

Senator LUDLAM: I am keen to know what happens to that retained surplus. It seems to me that you can sit on it, throw it back into consolidated revenue or give it to ARENA. Let's tease out each of these options. Firstly, why are you holding a retained surplus rather than one of those other two options? 

Mr Yates: If we retain the surplus, it means we have to draw down less from Treasury when we make our future investments. We do not retain it; we just redeploy it in another investment. It is all money going around. 

Senator LUDLAM: Okay. Senator Ruston, feel free to jump in if you want. Was there a direction from the government one way or another about whether the CEFC should reinvest its profits—its retained surpluses—in its own operations, spool it out to ARENA, which is pretty short of cash, or bring it back into consolidated revenue? Is there a direction from the government on which of those three options to pursue, or have you left it to the CEFC to make that call? 

Senator Ruston: I would have to take that on notice. I am not aware. Dr Dickson: There has not been any direction. 

Mr Yates: There are actually only two options. The two options are that the minister can, when asked by the CEFC board, agree for a dividend to be paid to ARENA—I think that is the way it works—or it otherwise goes back into our account, from which we can draw down in the future. 

Senator LUDLAM: But the government cannot pull it back into consolidated revenue. Is that in your act? 

Mr Powell: That is in the act. 

Senator LUDLAM: Okay, there are two choices. That is helpful to clarify. Minister, you have just taken a question on notice as to whether there was a direction, although Ms Dickson has just identified that no direction was given as far as CEFC was concerned. So I might just put a second one on notice to you, if I could, around whether it is a conscious decision to let the CEFC retain that money and reinvest it in its own work or whether you have a view as to whether it should go to ARENA—more at the start-up R&D innovation? 

Senator Ruston: I will take that on notice and get the minister to respond. 

Senator LUDLAM: Thank you. I am not quite sure about scheduling. Are ARENA still scheduled to appear straight after or have they been pushed back? 

CHAIR: No, the Climate Change Authority is next. I cannot say exactly when ARENA will come on, but it probably will not be for a couple of hours. It is likely to be after the dinner break. 

Senator LUDLAM: That is fine. I will come at them a little bit later. Mr Yates, you identified earlier that you had started to do some work in the energy efficiency space in cities. You have made your first foray into residential energy efficiency, which was pretty welcome, with St George Community Housing. You are obviously familiar with that project? 

Mr Yates: Yes. 

Senator LUDLAM: It looked pretty good to me. Can you describe very briefly for the record the nature of that program and how it came about? 

Mr Yates: What we have been noticing is that many houses—certainly in the community housing sector, many new houses—being built for low-income residents are being built to standards which are actually relatively low. The concern for that is not only environmental concern; obviously low-income residents have the least disposable incomes. So we were putting our low-income residents in some very high operating cost houses. So we looked, together with our first transaction with St George housing cooperative, to work out how we could encourage them to build new homes and new apartments which were much more highly rated than the current ones that they were building. The first building which is going up now will be eight-star NatHERS, which is a great result. In addition, we said to them, 'Well, whilst we will set up this program with you which is $60 million to build 200 new houses, we also want to divert a small amount of the interest revenue that you are paying to us into a community reserve which will be used to upgrade existing houses'. They have 4,300 existing houses, and many of them need significant upgrades if they are going to become efficient. So it is a program to set better building standards, to demonstrate that better building standards are better for residents and cheaper for cooperatives to operate. It also provides a means by which the cooperative can then undertake programs for their residents to improve the efficiencies in their homes. 

Senator LUDLAM: That sounds brilliant. I know your remit is principally around getting investment done, leveraging investment around reducing greenhouse gas emissions, but this happens to have the additional benefit of making energy bills for people in inefficient housing a lot cheaper. Are there any ways of estimating how much cheaper you have made people's bills in that housing? 

Mr Yates: Actually, I think we looked at it—and don't quote me on this—and I think the difference between six star and seven star is like a 25 per cent reduction in the energy cost. As you go through the stars, there is actually a set multiple. If you like, I will come back and let you know what the difference is on average between a NatHERS six star and a NatHERS eight star. I will take that on notice and come back to you. We hope to make this—buildings around this country all need to be built to the highest star rating that is economically viable; and to the extent we can encourage that, it is critical. We just did a search in the property market at the moment, and there are only, I think, 16 or 18 commercial real estate buildings in Australia that are built to six star. That is all. We are miles behind the rest of the world. We need to encourage people to build better. These buildings are going to be around for 20 or 30 years and, we need to get them right now. It is the same with infrastructure. We are going to be spending $200 billion on infrastructure over the next four years, and the rating requirements there do not exist. So there is a lot of work to be done.  

Senator LUDLAM: I am interested in the idea that you might throw back some of the profits and benefits into retrofitting older housing—particularly older social housing; if anything, that is the hardest cohort to get to. 

Mr Yates: That is exactly what we decided to do. 

Senator LUDLAM: You will come back at us with some rough numbers on how much money is saved for the individuals in the dwellings. My rough read is that most rental housing would be in NatHERS equivalent of about two star. A lot of it is crap. 

Mr Yates: That is true, because the landlord does not have an incentive to care about the insulation because he does not have to pay the bill. 

Senator LUDLAM: And the tenant does not have the ability to do anything. 

Mr Yates: Correct. So there is a real dichotomy there, which we decided to step in to and try and fix. 

Senator LUDLAM: This is my favourite moment of estimates so far today. Tell us how you get from what you describe on your website as a 'demo project' to scale? How does this become much, much bigger? 

Mr Yates: We like to do one demo project and then, with that success, we launch a program. We have a $250 million program for large-scale solar, having done a number of solar transactions. We will probably be likely to launch a project which is more available to housing cooperatives right around the country who also want to build better and upgrade their houses so that they too can get the benefit of government funding at a rate above the government's cost of funds and improve the livelihood of their own members, reduce their own energy costs and decrease our carbon emissions in one hit. 

Senator LUDLAM: This all sounds good. You made it sound as though you have something in the works. 

Senator SINGH: It takes me back to the previous Labor government's policy. 

Senator LUDLAM: Indeed. Some of it still survives. 

Senator SINGH: Just. 

CHAIR: Senators, I think it might be helpful if you direct questions and commentary to Mr Yates, not to each other. It might be a good time to interrupt you, Senator Ludlam. It was a bit remiss of me, but I want to acknowledge Mr Tony Windsor, who has joined us in the room. He is a former member for New England for 12 years, if I am not mistaken. Welcome to this hearing, Mr Windsor. 

Senator LUDLAM: You made it sound like that is in your forward program. Without wanting to pin you down to specifics—though I am happy to hear them if you are happy to give them—at what point can we look for an announcement about taking that to the next scale? 

Mr Yates: Given the good relationship or the managed relationship we have with our minister in this coordinated portfolio, we work very closely with our minister to time appropriate announcements together and make things productive. We think that it is an important step forward and that this would hopefully be the first area. It should apply to old age homes, it should apply to improving our hospitals. We need to improve all of our buildings, and if we can do it with government finance in a way which generates a positive return to the taxpayer, we have to get on with it. 

Senator LUDLAM: I am not sure I could have put that any better. The CEFC has also partnered with a couple of different companies to offer no-up-front-cost solar panels. What is the model and how is that working in the Australian context? 

Mr Yates: It is interesting. It has not worked as well in the Australian context as it has worked overseas. We have found that Australian homeowners have tended to opt to buy systems on their roof, rather than lease them like in the US. The concept was to follow the US system, where people who did not have money to fund the solar system on their home or put a battery system would be able would be able to obtain finance, either through on-bill financing or with a direct contract with an energy supplier. We have been trying this with a number of parties, but the penetration has been low. Individuals tend to opt to sign up and pay for the facility rather than enter into a long contract. I do not think Australia is the same credit nation as potentially other nations around the world where this business model has been more effective. 

Senator LUDLAM: Do you still want to play in that space? 

Mr Yates: We definitely want to make sure that the private sector can have a go at playing in that space, so we are facilitating programs, but it is actually up to the private sector to make sure that they can make those business models work. 

Senator LUDLAM: Were you pitching more at residential or commercial? There is a lot of rooftop space in commercial districts around the country. 

Mr Yates: It is residential and commercial. The commercial story always runs into the scenario that often the tenant in the building is not the landlord, so there is that split incentive as well, which causes a problem. 

Senator LUDLAM: Thanks, Mr Yates. On the basis of what you have told us this morning, that you have made $73 million for taxpayers, you have leveraged nearly $2 billion worth of private capital and you are making the energy bills of people living in rental houses cheaper, Senator Ruston, could I ask you to take on notice whether you might invite your cabinet colleagues to reconsider abolishing this agency? 

Senator WHISH-WILSON: Or perhaps merge it with the CSIRO in its new form. 

Senator Ruston: I am sure Minister Hunt's officers are listening to your commentary, and I would suggest that they will be looking at all policy areas to maximise the benefit and the outcome for the Australian people in the decisions they make and in whole-of-government decisions. 

Senator LUDLAM: Let us see what comes of that. 

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