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.
This analysis by law firm Baker & McKenzie examines the risks that are likely to arise should the government’s proposal to cut the RET 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.
The main findings of the report are:
- 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.