Cefc and the Future Essay

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[. . .] You also utilize soft loans and growth capital as financing for these types of projects (Clean Energy Council 2012).

The CEFC will also fund commercial scale demonstration of technologies such as ocean wave in tribal Power Systems, as well a second generation biofuels and bioenergy. For many of these projects it will help to provide the large upfront capital needed, risk inherent in this type of technology, and the additional equity required to scale the project properly (Clean Energy Council, 2012).

The CEFC will finance a number of different projects in various asset classes. Various asset classes require different sets of benchmarks to measure the success of the investment strategy. However, the CEFC has published the following guidelines for its investments and projects:

The CEFC should generate a long-term return sufficient to enable it to be self-sustaining

A long-term investment perspective should be adopted

Investments and financing should provide funding where private capital was currently not available and avoid competing with private sector investors

The CEFC should act in partnership and co-investment with national and international capital providers

Investment risk across the portfolio should be managed by having investment limits over individual companies, technologies and asset classes

Investment should be managed against recognised benchmarks for asset classes and overall investment returns managed across the portfolio

Investments should not distort other complementary policies

Investments must achieve positive environmental or social impact through, for example, emissions reduction or new renewable energy capacity " (Clean Energy Council, 2012, p. iv).

These guidelines are general and encourage the development of specific benchmarks for various projects.. It is difficult to devise specific benchmarks for the CEFC because every project is different. These general guidelines allow the benchmarls to be established according to the project parameters. They serve as guidance, rather than specific benchmarks for the CEFC to follow.

Certain benchmarks have been defined by the government. They will serve as a filter for the projects that are selected. These benchmarks will not be as strict as they are in the private sector. Each type of asset class will be expected to provide a defined rate of return (Commonwealth of Australia, 2011). Some projects will be allowed to carry a higher risk than others. In some cases a lower rate of return will be accepted if the project is deemed to have sufficient social value (Commonwealth of Australia, 2011). A panel will decide the appropriate rate of return for specific projects and financing instruments. However, individual stakeholders will be allowed to apply their own rate of return and assessment instruments to the project as well (Commonwealth of Australia, 2011). The purpose of the CEFC is to serve as a filter to eliminate projects that will at least meet minimum requirements. However, the project may have to meet more stringent guidelines set by the stakeholder or individual lender.

Comparison to Similar Initiatives

The CEFC is not the first of this type of financing initiative. The UK Green Investment Bank launched a similar program and was the first of its kind. At present, a large scale international programs have not been developed, but several countries have recently instituted or began to develop programs such as the Green Investment Bank and the CEFC. As these programs develop, and become more numerous it is expected that international initiatives will follow.

The purpose of the Green Investment Bank is similar to that of the CEFC. They are committed to set the UK on a firm course to a growing and more environmentally friendly economy that promises long-term sustainable growth (Department for Business Innovation & Skills, 2012). One of the key similarities between the UK Green Investment Bank and the CEFC is the use of the commercial approach. Both of these programs intend to move clean energy beyond research and development to become capital enterprises. There are many similarities between the UK Green Vestment Bank and the CEFC, even though these programs have different benchmarks according to their needs and environment.

The financing of projects is the focus of the UK Green Vestment Bank and the CEFC. However, the broader focus is on impacts to the environment and investment in the future. The UK Green Investment Bank has broken the expected effects of various projects into several different categories according to their expected environmental impact. They consider the case for photovoltaics, solar energy, wind, offshore wind, and other potential categories of funding projects. The UK Green Investment Bank has determined that switching to renewable energy sources will result in long-term energy savings for many of the businesses that utilize green energy in the future. The purpose of the green investment bank is to help these businesses obtain the initial capital that they will need to realize long-term gains (BIS, 2011).

Both the CEFC and UK Green Investment Bank were designed for similar purposes and have similar mechanisms for achieving their goals. They expect similar outcomes in terms of long-term energy savings for the companies and organizations that utilize their programs. Both of them intend to serve as a catalyst for green energy investment. However, in terms of whether they are a success or failure, this is yet to be determined. The idea of green investment is relatively new and these programs have barely begun to function. It will be several years before it can be determined whether the CEFC or other similar programs can be deemed a success or failure.

The Effect of Externalities

Many stakeholders will experience externalities as a result of funding by the CEFC and private institutions. One of the positive externalities has been previously discussed in the long-term benefits of energy savings for companies that utilize green energy projects funded by the CEFC. A negative externality may be the effects of initial funding on the finances of the company. It is difficult to pinpoint specific externalities to the parties involved, as the situation, company, and financing mechanism chosen will have an affect on the externalities.

Externalities are often intangible and difficult to measure in specific financial terms. For instance, the external cost in manufacturing is pollution and greenhouse gases. A positive externality of projects funded by the CEFC may be reduction of pollution in greenhouse gases in the future. The projects such as solar and wind energy production will have externalities that can be expressed in financial terms such as lower energy costs in the long-term future.

Several externalities will have a direct effect on the CEFC and its financial gains or losses. These can represent barriers or advantages depending on the location and type of fuel source used. One of the key externalities that will affect energy production is variation in the energy supply. This is particularly true for wind turbine systems and solar systems that depend on availability of the natural resource. This natural resource can change unpredictably, requiring the need for backup power when the natural fuel source is not available (Commonwealth of Australia, 2011). Externality such as these will vary by location and one of airing effects on projects.

It is difficult to give specific examples in financial terms such as how they will affect the net present value or discounted cash flow, but they will have a direct impact on project funding. The impact of externalities on funding would be the same for any financial instrument utilized by the private sector banking industry. The effects of externalities would have to be considered on a case by case basis. Funding by the CEFC will be subject to the same barriers and affects of externalities as private sector financing instruments. Appendix I provides the various financing mechanisms inttended to be utilized by the CEFC, as well as the definition and roll of the CEFC in the financing instrument.

Loans as opposed to equity financing is expected to dominate the CEFC financing initiatives. It is expected that in the early-stage the CEFC, investments will be loans, as opposed to equity. This is largely because the companies chosen for investment will be in the final stage of research and development (Wagg 2012). The CEFC is investing in companies that do not yet have a commercial product to sell and therefore do not have equity available for financing. In the later stages of the program, companies that have viable products on the market may have equity built and will be able to financing expansion products with existing equity, but in the early stages of the program, loans will dominate CEFC financing due to a lack of existing equity from the companies that are being financed. Wherther debt or equity financing is more suitable for A specific project will depend more on the company asking for the financing than on the type of project or finance category.

There is been considerable concern over whether the CEFC initiative can work effectively with the existing Carbon Pollution Reduction Scheme (CPRS). The CPRS treats carbon emissions as quantifiable, The biggest polluters will have to pay for each ton… [END OF PREVIEW]

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