Slashing the Renewable Energy Target (RET) as proposed by the Federal Government would smash the value of projects that are already operating, and potentially expose the government to massive compensation claims by those affected, new analysis by law firm Baker & McKenzie reveals.
The report Financing impacts of amendments to the Renewable Energy Target examines the risks that are likely to arise should the government’s proposal to cut the target be implemented, and how this would impact financial and contractual arrangements for existing and future large-scale renewable energy projects.
The report also examines the issues and complexity associated with designing and implementing any compensation regime to compensate existing renewable energy projects.
While the Federal Government has repeatedly assured the industry that changes to the RET would not affect existing investments, its position announced last Wednesday made no reference to compensation to off-set the retrospective hit on existing investments that would result from its proposed 64 per cent slashing of the current scheme.
Clean Energy Council Acting Chief Executive Kane Thornton said it was not only future projects and jobs that were on the line if the RET was slashed.
“A retrospective change to the policy would result in financial impairment and a substantial risk that existing projects and businesses would collapse, as well as inflicting damage on Australia’s reputation as a safe place to invest,” Mr Thornton said.
“This report shows that a cut in the target of the scale proposed by the government would have far reaching and damaging consequences, and also that ensuring adequate compensation would be an extraordinarily complex and expensive task.
“The finance for every renewable energy project is significantly different, and compensation or transitional assistance would need to be different for each and every project.”
Mr Thornton said over $10 billion worth of investment had been made in large scale renewable energy projects, and those investments were made based on the legislated 41,000 GWh target.
“The legislated policy provides the revenue to underpin the investments in renewable energy projects out to 2030, but this revenue would collapse if the RET is cut, smashing the companies which invested behind the policy based on its long-standing bipartisan support,” he said.
“The Renewable Energy Target legislation that has been supported by all political parties for over a decade is explicit about the 41,000 GWh target, and the Coalition re-stated its commitment to the fixed 41,000 GWh target in the lead up to the recent election.
“Moving the goal posts so significantly on investors would result in massive asset devaluation, job losses and business closures, and send a signal to international investors that Australia is closed for business. The future viability of existing renewable energy projects is highly dependent on a strong, bipartisan policy.”
The main findings of the report are as follows:
- Any substantial reduction of the RET will lead to renewable energy certificate prices being substantially lower than prices modelled for operating and future projects for the purposes of equity and debt financing.
- Any substantial reduction to the RET will trigger a review of existing funding arrangements by lenders. The cost of capital for equity is likely to be higher, reflecting the higher cost.
- There are likely to be legal challenges to any legislative change made to the RET which results in adverse financial impacts on renewable energy operators and developers.
- Any compensation and transitional assistance regime will need to be designed for the specific financial arrangements of each and every renewable energy project.
- Designing and implementing compensation or transitional assistance will involve significant inherent complexities and policy issues that could potentially undermine the overall effectiveness and efficiency of a reduced RET.
- There is a risk for the Australian Government that the policy objective of achieving even reduced targets might not be met because of the impacts resulting from sovereign risk associated with a reduction to the RET.
- The vast majority of existing projects will be up for refinancing over the period 2016-2018. Existing projects might not be able to meet the minimum financing requirements based on the revised set of risk assumptions and parameters.
Financing impacts of amendments to the Renewable Energy Target is available from the Clean Energy Council website.
Please contact Clean Energy Council Media Manager Mark Bretherton on 0413 556 981 for more information or to organise an interview.