02Governance

CEFC ANNUAL REPORT / 2015–16

Enabling Legislation

CEFC Act and associated key governance events

The CEFC Act sets out the organisation’s purpose and functions, establishes arrangements for the Board, CEO and staff, and creates a system of delegations to ensure that the CEFC has sufficient resources and sufficient controls on their use. The CEFC was established by the CEFC Act on 3 August 2012.

The objective of the CEFC under the CEFC Act is “to facilitate financial flows into the clean energy sector”. The main function of the CEFC is the “investment function”: to invest, directly and indirectly, in renewables, energy efficiency and other emissions-reducing technologies. The CEFC Act also specifies a number of support functions, including:

  • Liaison with relevant individuals, businesses and agencies to facilitate the CEFC investment function
  • Performance of any other functions conferred by the CEFC Act or any other Commonwealth law
  • Anything incidental or conducive to the performance of the investment function or the other functions.

The CEFC Act contains five main positive duties (i.e. ‘you must do this’) and three main negative duties (‘i.e. you must not do this’) in relation to the investment function. See Figure 29.

Figure 29: Duties in relation to the CEFC investment function

Main positive duties

1. To perform the investment function including by investing in businesses or projects for the development of, commercialisation of, or in relation to the use of clean energy technology, or in businesses that supply goods or services needed to develop, or commercialise, or in relation to the use of the same

2. To ensure investments are solely or mainly Australian-based

3. By 1 July 2018, to ensure that at least half of the Corporation’s funds are invested in renewable energy technologies

4. To otherwise take all reasonable steps to comply with directions of the CEFC Investment Mandate

5. To establish Investment Policies that support the above.

Main negative duties

1. Not to invest in carbon capture and storage

2. Not to invest in nuclear technology

3. Not to invest in nuclear power.

Clean energy technology is broadly defined through the definitions of renewable, energy efficiency and low emissions technologies (excluding the prohibited technologies). Further restrictions on eligibility may be placed by means of the Investment Mandate. This did not occur during 2015-16.

During 2015-16 there were no amendments to the CEFC’s enabling legislation. From
18 September 2013 to 23 March 2016, Australian Government policy had been to abolish the CEFC through repeal of the CEFC Act. On 23 March 2016, the Prime Minister the Hon. Mr Malcolm Turnbull and the Minister for the Environment the Hon. Mr Greg Hunt jointly announced changes to Australian Government policy with respect to the CEFC, including retention of the CEFC.

The Australian Government had previously brought forward legislation to effect its policy of abolition on three occasions. At the change of policy on 23 March 2016, two of these Bills had failed to secure passage and the remaining Bill on foot was discharged from the House of Representatives on prorogation.

The duty of the CEFC Board, CEO and staff throughout this period remained to administer the law as it stood, to carry out the investment task assigned to the CEFC under law, and to be responsive to Government direction as it was given from time to time, issued principally through the CEFC Investment Mandate.

CEFC Investment Mandate and associated key governance events

The CEFC Investment Mandate direction is the means by which the Government of the day provides instruction as to how the CEFC can make investments, providing it:

  • Does not have a purpose of directing the Corporation to make or not make a particular investment
  • Is not inconsistent with the CEFC Act (including the object of the CEFC Act).

Under the CEFC Act, the Board must be consulted on the draft of a proposed new Investment Mandate, and any submission made by the Board must be tabled in each House of the Parliament. See Figure 30.

Figure 30: Investment Mandates in effect 2015-16

Name

Date issued

Date registered

Date of effect

Main changes from previous Investment Mandate

Clean Energy Finance Corporation (Investment Mandate) Direction 2015

17 February 2015

4 March 2015

5 March 2015 to
23 December 2015

• Increase the benchmark rate of return to the five-year Australian Government bond rate plus 4 to 5 per cent, before operating expenses, (up from the five-year Australian Government Bond rate plus nil after operating costs)

• Not increase the level of exposure to credit risk above the level of the existing portfolio as assessed on 5 March 2015

Clean Energy Finance Corporation (Investment Mandate) Direction 2015 (No. 2)

3 December 2015

23 December 2015

24 December 2015 to
9 May 2016

• Inclusion of new focus areas: supporting emerging and innovative renewable technologies and energy efficiency, such as large-scale solar, storage associated with large and small-scale solar, offshore wind technologies, and energy efficiency technologies for cities and the built environment

Clean Energy Finance Corporation (Investment Mandate) Direction 2016

5 May 2016

9 May 2016

10 May 2016

• From 1 July 2016, establish a $1 billion Clean Energy Innovation Fund for projects and businesses at the earlier stage of investment, with a benchmark rate of return of the five-year Australian Government bond rate plus one per cent, before operating expenses, with a risk profile that in aggregate is appropriate with the earlier stage technologies and businesses targeted

• Lower the overall portfolio benchmark rate of return from five-year Australian Government bond rate plus 3 to 4 per cent, before operating expenses (down from the Government bond rate plus 4 to 5 per cent before operating expenses)

• Increase the tolerance for risk to a level that in aggregate has an acceptable but not excessive level of risk, having regard to the terms of the CEFC Act and the focus on particular areas identified in the Investment Mandate

The applicable Investment Mandate at 30 June 2016 directs the CEFC to:

  • Mobilise investment in renewable energy, low emissions and energy efficiency projects and technologies in Australia, as well as manufacturing businesses and services that produce required inputs
  • Apply commercial rigour and make its investment decisions independently of Government
  • Establish a $1 billion Clean Energy Innovation Fund for projects and businesses at the earlier stage of investment, with a target portfolio benchmark rate of return (PBR) of the five-year Australian Government bond rate plus one per cent, before operating expenses and a portfolio that in aggregate has an acceptable but not excessive level of risk, having regard to the terms of the CEFC Act and the particular areas of focus for the Clean Energy Innovation Fund. The Innovation Fund became operational on 1 July 2016
  • For the balance of the CEFC portfolio (excluding the Innovation Fund), target a benchmark rate of return based on a weighted average of the five-year Australian Government bond rate plus 3 to 4 per cent, before operating expenses and measured across the portfolio of investments over time
  • Seek to develop a CEFC portfolio that in aggregate has an acceptable but not excessive level of risk, having regard to the terms of the CEFC Act and the focus on particular areas described here:
    • Include a focus on supporting emerging and innovative renewable technologies and energy efficiency, such as large-scale solar, storage associated with large- and small-scale solar, offshore wind technologies, and energy efficiency technologies for cities and the built environment (while noting the Corporation may invest at the demonstration, commercialisation and deployment stages of innovation).
  • Invest responsibly and manage risk to achieve financial self-sufficiency
  • Use financial products and structures to address impediments inhibiting investments in the sector
  • Limit the provision of concessionality to $300 million in any one financial year
  • Take a medium to long term outlook when setting its investment strategy
  • Ensure that projects seeking CEFC funding of greater than $20 million comply with the Australian Industry Participation Plans (AIPP) policy
  • Consider the potential effect of the CEFC on other market participants and the operation of the Australian financial and energy markets when making investment decisions
  • Have regard to positive externalities and public policy outcomes when making investment decisions and when determining the extent of any concessionality for an investment
  • Adopt best practice corporate governance, adopt policies on environmental, social and governance issues, and not act in a way that is likely to cause damage to the Australian Government’s reputation.

Copies of the Investment Mandates, and accompanying Explanatory Statements, the consultation drafts and CEFC submissions on them are available at comlaw.gov.au.

CEFC Investment Policies and associated key governance events

The Board’s role to ensure that the CEFC takes all reasonable steps to meet the requirements of the Investment Mandate, including through appropriate Investment Policies. The CEFC Investment Policies set out:

  • A governance framework for the CEFC, which clarifies the roles of the Board, the Executive, the committees and the CEFC’s external advisors in investment making
  • The investment strategy of the CEFC, including the 2018 Portfolio Vision, investment approach and guidelines
  • Board-approved definitions of key terms it is empowered to define under the CEFC Act (“solely or mainly Australian-based” and “low emissions technology”) and guidelines as to what it will assess as “renewable energy technology” and “energy efficiency technology”
  • Benchmarks and standards for assessing the performance of the CEFC’s investments and of the CEFC itself
  • Risk management for the CEFC’s investments and for the CEFC itself.

These policies are reviewed at least once annually, and automatically upon issue of a new Investment Mandate. The Investment Policies have been under continuous review from 5 March 2015 and throughout the 2015-16 year due to the iterative development of the Investment Mandate over that period. In 2016-17, we expect further amendments to the Investment Mandate to reflect Australian Government policy as announced during the 2016 election campaign.

Figure 31: Special Account credits and debits under CEFC Act 2015-16

Transaction

Credits ($m)

Debits ($m)

Balance ($m)

Opening balance of the Special Account –
1 July 2015

 

 

2,919.0

Section 46 Credit – 1 July 2015

2,000.0

 

4,919.0

Section 54 Return of Funds – 10 June 2016

391.2

 

5,310.2

 

 

 

 

Section 48  Drawdown of Funds* – 10 June 2016

-

331.2

4,979.0

Total

2,391.2

331.2

4,979.0

* On 10 June 2016, a net drawdown of $60 million was made, comprising both a return of funds under section 54 and a draw of funds under section 48.

CEFC funding and associated key governance events

The CEFC is self-funding through its investment returns on money appropriated to it under the CEFC Act. Under the CEFC Act, $2 billion is credited to the CEFC Special Account maintained by the Department of the Environment and Energy each 1 July, for five years from 1 July 2013.

The CEFC was not created to exercise a major cash management function. Accordingly, funds credited to the Special Account do not actually leave the Consolidated Revenue Fund created by The Constitution until they are released for investment when authorised by the nominated Minister in accordance with the procedure outlined in the CEFC Act.

In other words, the funds credited to the CEFC Special Account give rise to a drawing right of the CEFC against the CEFC Special Account, rather than an actual transfer to the CEFC. The funds are only actually drawn down when the CEFC has a use for them.

Investments are made (both directly by the CEFC and indirectly through intermediaries) into eligible clean energy technologies. Repayments and returns from these investments are paid directly to the CEFC’s operational account. Where the Board has identified funds that it considers surplus, these funds can be returned to the Special Account via the Department of the Environment and Energy.

During the 2015-16 year, the CEFC and the responsible Ministers agreed a mechanism for the return of surplus cash amounts and the CEFC returned funds to the Commonwealth (see Note 4.1 to the Financial Statements). A summary of movements in and out of the Special Account is set out in Figure 31.

Under the CEFC Act, and subject to ministerial authorisation by the Minister for the Environment, the CEFC may also make payments to ARENA. There were no payments made to ARENA during the 2015-16 reporting period.