Australia's Energy Financing Challenge was developed in collaboration with a working group of over 20 senior executives from across the energy and finance sectors. It outlines nine recommendations that the Australian energy sector needs to implement to create an attractive, stable market environment to facilitate investment.
The Australian government has indicated that private capital will be essential to fund the investment outlined in the Energy White Paper and predicted that “a significant proportion of the required capital – debt and equity – will need to be sourced from overseas." Despite pressures on global capital markets, pools of funds are accumulating worldwide.
Until now, no one has looked at the ability of the energy sector to finance all the projects required in the context of the current market and policy environment.
"Australia has natural advantages in energy and the good fortune of being located on the rim of the world’s fastest-growing region. But global competition for capital is intense, and there are blockages to unlock," said Anthony Jones, Head of Power & Utilities at KPMG.
"Unless Australia makes changes in a range of intersecting policy, market and financial areas, it will be left behind in the global competition for capital. Reducing market and sector risk and making Australia an easier place in which to invest in the energy sector can quickly make a difference."
"Potential investors rarely say why they fail to invest," added Energy Policy Institute Executive Director, Robert Pritchard. "They walk away quietly, without any bother."
"Given the opportunities Australia has, we need as many sources of capital available to our energy sector as possible and the recommendations made in this report are a call to action for both industry and government," said Mr Jones.
The key recommendations include specific tax reforms to level the playing field for global investors, the continued development of a more deep and liquid corporate bond market in Australia and the need to examine why the Australian superannuation sector invests such a small allocation of their funds in the Australian energy sector.
"The Australian superannuation sector invests only about 5 percent on average in infrastructure and clear thought needs to be given as to balancing current short term liquidity requirements against investing in long term assets and providing mechanisms to allow further consolidation in a very fragmented superannuation sector. Size and scale matter when it comes to investment in the energy infrastructure sector," said Mr Jones.
"Both investors and consumers need a system of energy industry governance that they can trust and work with over the short, medium and long-term. Right now the system has too many contradictions and can be tied up by so much red tape that it cannot function predictably," said Mr Pritchard, who has also recommended the formation of a National Energy Commission to develop unified energy policy amongst stakeholders, and across federal and state jurisdictions.
"Australia’s energy sector is at a crossroads. If we don’t work now to enhance the investment environment and attract the financing we need, we will miss the opportunity to set Australia up for the next 50 years of generational change in energy and energy infrastructure and the cost of energy will continue to rise through inactivity and a lack of core investment," said Mr Jones.
However, the report outlines that responsibility for energy reform and action lies with both the private and public sectors. Investors also need to take an innovative and integrated approach to accessing both traditional and non-traditional forms of capital. With these elements in place, financial markets have a proven track record of innovation.
The nine recommendations are:
Drive finance innovation by removing market impediments
- Consider various tax changes to level the global playing field. Remove the recent withholding tax increase on managed investment trusts and remove the inequality of tax treatment for global debt investors receiving interest from bonds.
- Address the reasons for superannuation trustees’ reluctance to invest in long-term energy projects. Regulatory disincentives to domestic superannuation fund investment in energy should be removed or eased.
- Develop Australian debt markets, including the bond market to increase liquidity and depth, and make a workable source of finance for energy projects.
Develop a better energy market framework to improve the energy investment environment and attract finance
- Privatise all generation energy assets held in New South Wales, Queensland and Western Australia and deregulate the retail price tariffs.
- Facilitate demand side participation over the next 2-5 years with the use of technology (smart meters and smart grids), price signalling and consumer education to help reduce peak demand, increase efficiency and give customers greater control over electricity usage and expenditure.
Create an investment grade energy policy
- Reform current regulation at federal and state levels, including the COAG and SCER processes – to enable a balanced, robust and stable energy policy which is assured of implementation. To facilitate this, an independent ‘National Energy Commission’ should be established to develop a unified energy policy amongst stakeholders and across federal and state jurisdiction.
- Regularly assess and provide a consolidated view of the energy investment pipeline to allow greater transparency for investors, on opportunities and competing projects/investments.
- Develop an integrated report across the Australian energy sector to build a sustainable, cross-electoral cycle ‘energy business model’. KPIs should be used to track progress of energy policy, and allow identification of key drivers, risks and mitigants. The business model and performance in implementing it could be captured in a periodic integrated report authored at the federal government level.
Move to a more integrated reporting model to support investment decisions
- Adopt integrated reporting to help investors gain a more meaningful understanding of the business model supporting an energy investment proposition, and provide more insight into the performance and prospects of companies by taking the analysis beyond the traditional narrow emphasis on the financials.