The not-so-clean Energy Finance Corporation

The Australian Senate this week passed legislation to set up a Clean Energy Finance Corporation (CEFC). CEFC is the last (but certainly not least) of the Not-So-Clean Energy Future policies agreed by the Multi-Party Climate Change Committee a year ago. It is supposed to complement Australia’s low carbon price by funding emerging renewable energy technologies. But will it?

I have been concerned about the slow progress of CEFC, in contrast with the carbon price, which became law back in November. I am now reassured the Labor Government will not backslide on the promised funds, as the legislation guarantees $2 billion per year for CEFC from 2013 to 2017. The CEFC Board will decide when to spend the money provided by the Labor government, and is expected to leverage five times as much private investment. However, if a Liberal government is elected next year, it could still repeal the legislation before much money has been spent. For this reason, I think CEFC funding should begin immediately, and would prefer construction to begin on at least one project before the next election.

There are a number of problems with the legislation. Firstly, despite an AYCC petition signed by 16,540 people, CEFC-funded projects will not be additional to Australia’s existing Renewable Energy Target (RET) of 20 per cent by 2020. This makes no sense, and is already being exploited as an argument against CEFC. Therefore, the legislation should be amended so that CEFC projects do not count towards the RET, and/or the RET should be significantly increased. Similarly, emissions cuts achieved by CEFC should be subtracted from the annual caps of the emissions trading scheme, which will begin in 2015.

Secondly, and also despite the aforementioned petition, not all the money will go to renewable energy. CEFC will have two investment streams: it is expected to spend ≥50 per cent of its funding on “renewable energy technologies” and ≤50 per cent on energy efficiency and “low-emissions technologies”. Outrageously, the legislation’s definition of “renewable energy technologies” includes fossil-renewable hybrids. The definition of “low-emissions technology” is left to the board of CEFC, but the Expert Review recommended allowing anything that emits less than 0.417 tonnes of CO₂e per MWh of electricity (50 per cent of the current Australian average). According to the Explanatory Memorandum, “It is not expected that the Corporation will invest in conventional gas” – which leaves room for coal seam gas!

In other words, “clean energy” has been misleadingly defined to include fossil fuels, and “renewable energy” misleadingly defined to include hybrid technologies. This is particularly concerning after a leaked document in the Guardian last month revealing a European R&D program intended to fund renewable energy has been expanded to include gas. That news came as the International Energy Agency (IEA) again warned a “golden age of gas” would divert investment away from renewable energy and lock in fossil fuel infrastructure for decades, causing an unimaginably catastrophic >3.5°C of global warming. Worse still, the IEA analysis did not account for leaked emissions of methane, which could make the climate impact of gas worse than coal on human timescales. (For more on the dangers of investing in gas, see here and here.)

As burning carbon means reacting it with oxygen, all fossil fuel technologies emit carbon dioxide and are thus part of the problem, not the solution. The only realistic way to achieve the required rapid transition to a zero-carbon economy is to phase out fossil fuels as quickly as possible. CEFC should be renamed the Renewable Energy Finance Corporation and none of its funding directed to fossil fuel or hybrid technologies.

Thirdly, I am concerned CEFC could be too risk-averse, and might for that reason fail to support the most critical technologies. The test of a good project to fund should be not “how much does it cost today in dollars per tonne of CO₂e abatement?” – a narrow, short-term way of looking at the problem – but instead “how much does it contribute to the long-term transition to a zero-carbon economy?” There is a significant risk the true cost of CO₂ emissions is so high (up to US$893 per tonne) that practically any measures to move to a zero-carbon economy are worth taking. That transition urgently requires investment to bring down the costs of large-scale emerging technologies like concentrated solar power, which has the storage capacity to replace the “baseload” power provided by coal. Cheaper mature technologies like wind power are already supported by the RET, but as wind is intermittent it needs to be complemented by other sources like concentrated solar power.

It is difficult to tell whether my third concern is justified. The CEFC Board will make investment decisions on a case-by-case basis, independent of government. The government however will appoint board members. It is vital to ensure that interests in fossil fuels do not compromise the appointees. Going by the Expert Review’s recommendations, CEFC will try to finance commercially viable projects, co-financed with private investors, and will aim for a target return on investment. Wisely, however, CEFC will also value “positive externalities” (a term economists use to describe benefits they can’t account for), including reductions in cost of deployment, so their commerciality criteria will not be as strict as those of private investors. It sounds like most of CEFC’s investments will be loans, which would make it difficult for concentrated solar power to get support.

We need a Clean Energy Finance Corporation, but it must make bold investments in truly renewable energy on top of those that would have occurred otherwise.

For more information, see my submission to the CEFC Expert Review.