As an Australian Government entity, the CEFC reports against the CEFC’s Budgeted Outcome, being the Australian Government’s objective against which appropriations are to be applied. The CEFC’s defined Budget Outcome is reported in the 2014–15 Portfolio Budget Statements (PBS) for the Treasury portfolio:
Facilitate increased flows of finance into Australia’s clean energy sector, applying commercial rigour to invest in renewable energy, low emissions and energy efficiency technologies, building industry capacity, and disseminating information to industry stakeholders.
The CEFC’s Key Performance Indicators (KPIs) are set out in the 2014–15 Treasury PBS for the purpose of measuring the Corporation’s performance against the Budgeted Outcome:
- Performance against the portfolio benchmark return set by the Government
- Placement of funds into Australia’s clean energy sector
- Investment in renewable energy, low emissions and energy efficiency technologies
- Building industry capacity
- Dissemination of information to industry stakeholders
2014-15 Performance against KPI's: Summary
A summary of the CEFC’s performance against KPIs is outlined in Figure 1. These figures should be read in the context of the following explanatory text on each KPI, particularly with respect to the Portfolio Benchmark Return (PBR), where the target changed during the reporting period.
Figure 1: Summary of the CEFC’s 2014–15 performance against KPIs
|Measure||2014–15 Target||Result to 30 June
|Result to 30 June
against the Portfolio
(PBR) set by the
To 4 March 2015:
From 5 March 2015:
To 4 March 2015,
From 5 March 2015:
|The PBR was 3.14%
Placement of funds
into Australia’s clean
|$ invested||Funds committed
into the sector
taking into account
|$1,205.9 million||$931 million|
low emissions and
Section 74 (1) (a)
|$ invested||Renewable Energy
(RNET): equal to or
greater than 50% of
$673.4 million (56%)
$75 million (6%)
$577 million (62%)
$279 million (30%)
$75 million (8%)
in the finance
sector, the energy
sector and the
2014–15 Performance against KPIs: Analysis
KPI 1 – Portfolio Benchmark Target
The performance against the Portfolio Benchmark Return set by the Government is calculated with reference to the method set out under the Investment Mandate. A new Investment Mandate was issued during the reporting period, and the benchmark return for the portfolio was one of the key changes. Performance is set out against both Mandates that were in effect for the year (the 2013 Investment Mandate and the 2015 Investment Mandate). See CEFC Investment Mandate and Associated Key Governance Events for further information.
2013 Investment Mandate - Applicable to 4 March 2015
In simple terms, the PBR under the 2013 Investment Mandate involves three steps:
1. Calculation of the Portfolio Benchmark Return (PBR): This is based on a weighted average of the five-year Australian Government bond rate. This is a composite measure: for every investment, the CEFC calculates an individual reference rate based on the average five-year Government bond rate over the preceding 15 days prior to the investment. The weighted average of these individual reference rates then becomes the PBR.
2. Calculation of the CEFC’s performance rate: This rate is not the actual interest rate that the CEFC lends at, and reflects cash holdings as well as loan and equity investments. Information relating to the performance of the different types of investments is set out under Key Portfolio Metrics.
– It is also important to note that this is a ‘net rate’, i.e. after operating expenses, including a provision for statistically-estimated investment impairment. This does not include the impact of any concession (a non-cash accounting charge based on the difference between the rate of CEFC lending and the prevailing or estimated market rate, which unwinds over the life and performance of the investment to net out to a zero impact).
3. Comparison of the CEFC’s performance rate with the PBR: This involves subtracting the PBR from the CEFC’s performance rate to deliver a ‘profitability’ measure, after operating costs and Government funding costs. It is important to remember that:
– The comparison is a ‘snapshot’ at a point-in-time on 4 March 2015, the date the 2013 Investment Mandate was superseded
– The CEFC was in a start-up phase over 2013–2014. As loans were written, cash was often held in a construction or secured funding account against these commitments until the borrower drew down the funds
– The PBR is a cumulative measure over time, expressed as an annualised average return rate
– In the words of the Explanatory Statement to the 2013 Investment Mandate: ‘The [PBR] is a long-term target and expected to be earned across the portfolio and over a period of time’.
Under the 2013 Investment Mandate, the Corporation’s aim was to achieve a PBR in excess of the five-year Government bond rate, while also covering the operating costs of the Corporation.
The CEFC’s PBR to 4 March 2015 of 3.88 per cent exceeds the 2013 Investment Mandate PBR of 3.16 per cent. The operating costs are net of the start‑up operational funding received from the Commonwealth.
2015 Investment Mandate – Applicable from 5 March 2015
Under this new 2015 Investment Mandate, calculation of the PBR is a cumulative calculation from inception of the CEFC (albeit expressed as an annualised average). This is similar to that of the 2013 Investment Mandate, with two important differences:
1. Without lifting its level of portfolio risk above the level observed on 5 March 2015, the Corporation is expected to target a Future Fund-style premium above the Australian Government bond rate of 4-5 per cent. This compares against a previous Mandate with no explicit cap on the level of risk in the portfolio, and a requirement to target a return in excess of the bond rate.
2. The measure is now to be calculated at a revenue level – that is, pre-expenses. Previously, the PBR was calculated net of operating expense.
For this measure the CEFC’s PBR to 30 June 2015 of 4.66 per cent falls short of the 2015 Investment Mandate PBR of 7.11 to 8.11 per cent.
This is to be expected given:
- The new measure was brought in late into the year, and applies to the portfolio as a whole, including all previously-completed transactions
- Achievement of the levels of return stipulated in the new Mandate will require the identification of out-of-market returns, as the requirement to increase investment returns while curtailing risk is contrary to observed market behaviour.
During the year, the CEFC commissioned two acknowledged experts in the field – Professor Bob Officer and Dr Steve Bishop – to examine the effect of the PBR changes contained in the 2015 Investment Mandate. Their analysis affirmed that actually meeting the PBR would be ‘highly unlikely’ given the other limits on how the CEFC can invest and what it can invest in, stating:
We have examined the historical spread of listed Australian and Corporate Bond yields over government debt securities and, if history is a guide to the future, then CEFC would need to move to a portfolio dominated by sub-investment grade debt (e.g. a B rating or below) if its portfolio was restricted to debt securities. Alternatively it would need to lever up a portfolio to earn the required yield to meet the benchmark or include equities in the portfolio. Both of these strategies increase risk. We note the new benchmark is above the current risk premium of BB rated debt of circa 3 per cent which is the current rating of the current CEFC portfolio.
The CEFC agrees with this analysis and maintains that out of market returns are unlikely to be achievable in the near term.
More information about the Investment Mandate changes, the CEFC’s response and the Officer-Bishop paper can be found on the CEFC’s website.
It should be noted also that in comparing performance in 2013–14 and 2014–15, yields on the Australian Government bond rate deteriorated by about 0.5 per cent during the period.
KPI 2 – Placement of funds
To 30 June 2015, the CEFC had committed $1,206 million of funding to projects. This represented $484 million in new finance committed, partially offset by $211 million in portfolio ‘roll off’ (loans being repaid, reductions in loan amounts borrowed because the borrower did not use the full facility, expired availability periods etc), leaving a net increase of $274 million.
The $484 million was supplemented by a $15 million placement shortly after balance date and a further $24 million in portfolio roll off. Given the substantial lack of activity in the market as covered elsewhere in this report (Australian Government energy and environmental policies, page 114) the CEFC views this as a reasonable level of growth in the portfolio.
KPI 3 – Investment in renewable energy, low emissions and energy efficiency technologies
Recognising that an effective emissions reduction program must target energy generation and the energy mix, the CEFC Act limits the Corporation to investing in three types of clean energy technology: renewable energy, low emissions and energy efficiency technologies.
The Act also specifies that in performing its investment function, at least 50 per cent of the CEFC funds invested by 1 July 2018 must be deployed into renewable energy technologies.
The CEFC Act does not set similar targets for energy efficiency or low emissions technologies, but by logical extension, these must collectively total less than 50 per cent of the investment portfolio by value by 1 July 2018.
With investments in renewables of $673 million, energy efficiency of $458 million and low emissions of $75 million, the CEFC is on track to meet this requirement, with renewables currently making up almost 60 per cent of the investment portfolio by value.
The report against this KPI is the report required by the CEFC Act at section 74(1)(a).
KPI 4 – Building industry capacity
Organisational capacity building and skills development involves a process of enhancing an organisation’s abilities to perform specific activities, through knowledge sharing, training, transferring IP and providing experiential opportunities. The CEFC has adopted a qualitative approach to assessing its performance in building industry capacity in the following ways:
- The CEFC is financing equipment upgrades which improve energy productivity, raising the profitability per unit of manufacture in terms of energy costs. New upgraded equipment also invariably delivers other productivity gains or new capabilities, providing the basis for growth and greater sustainability of the business.
- Cost reductions and productivity gains resulting from CEFC-financed projects see funds deployed to more productive alternative purposes.
By increasing the critical mass of the clean technology industry through greater investment and an increased number of projects, the CEFC assists the renewables and energy efficiency sectors to achieve economies of scale and drive down deployment costs and risk.
CEFC activities assist project proponents by helping to develop the business case, and introduce the proponents to other financiers, who may subsequently, or concurrently, provide finance.
Perhaps most importantly, the CEFC contributes to increasing capacity within the private finance sector, familiarising co-financing institutions with the attributes and benefits of investments in new asset types, financial structures or products.
By creating ‘sell through’ arrangements (i.e. CEFC-financed off-the-shelf financial products) with co-finance partners, the CEFC can reach small and mid-sized businesses and extend the availability of capacity-building finance to the ‘engine room’ of the economy.
The CEFC attracts new finance to the Australian clean energy sector, with CEFC participation helping to improve the flow and diversification of funds into the sector, in particular from new sources and European and Asian institutions. CEFC engagement in the project development market has also assisted in:
Bringing new commercial banks and international sponsors to Australia
Developing new transactions which more closely match the term of the financing to the life of the assets
Establishing new investment vehicles to draw finance providers, institutional investors and superannuation and other funds into investment in clean energy.
The CEFC works with industry bodies to build knowledge and promote opportunities in reducing energy costs.
Large-scale projects are required to develop Australian Industry Participation Plans (AIPPs), which help to open up proponent purchasing programs to Australian suppliers of goods and services.
The CEFC’s investments are distributed broadly across Australia, including rural, regional and remote areas, as this is where most of the best renewables resources are located
KPI 5 – Dissemination of information to industry stakeholders
The continued expansion of the CEFC’s portfolio in 2014–15 was accompanied by increased external engagement, with the objective of sharing information about CEFC investments, as well as building awareness of the CEFC and its Mission, functions and available financing. This activity is an important way in which the Corporation engages with the market, identifies new investment opportunities, and helps accelerate and increase the take up of co-financed products.
While the CEFC does not conduct wide-reaching advertising or mass-marketing campaigns, the year saw a 50 per cent increase in the level of CEFC participation in, and presentations to, industry conferences and forums. In addition, CEFC Board members, executives and staff regularly attended meetings and contributed presentations about clean technology and its financing.
The CEFC Chair and executives participated in and delivered expert presentations across a broad range of topics relating to financing for clean energy, including various forums, such as: Green Cities 2015; Clean Energy Week 2014; Solar 2015; the Council of Small Business of Australia (COSBOA) Summit; Responsible Investment Association Australasia conference; Bioenergy Australia 2014; Energy Efficiency Council Conference 2014 and the National General Assembly of Local Government.
The CEFC continued its substantial engagement program around energy efficiency, conducting eight market education seminars in regional and metropolitan Australia in partnership with Commonwealth Bank. The seminars provide a forum for those involved in manufacturing, agribusiness, property and State and Local Government to hear from industry experts about the effective application of energy efficient technologies, and how to access CEFC and Commonwealth Bank finance to deliver these. Seminars were held in Melbourne, Shepparton, Adelaide, Port Hedland, Darwin, Hobart, Launceston, Toowoomba, attracting some 335 attendees.
The CEFC also increased its engagement with relevant industry associations, including the Energy Users Association of Australia; the Property Council of Australia; the Climate Bonds Initiative; the Responsible Investment Association Australasia; The Investor Group on Climate Change; Bioenergy Australia; Irrigation Australia; The Green Building Council of Australia and the Australian Securitisation Forum.
Supporting these market outreach efforts, the CEFC continued to use its website, cleanenergyfinancecorp.com.au, and CEFC social media platforms on Twitter and LinkedIn, to provide resources and ready access to information about our activities. The CEFC has also produced nine video-based case studies highlighting results of projects undertaken by recipients of CEFC finance to help better explain how CEFC funds are being used in practice. These are all available from the CEFC website.
The CEFC responded to invitations to make submissions to a number of parliamentary enquiries and Australian Government policy reviews, reflecting our commitment to engage constructively on a factual basis with these processes.
The year saw a 43 per cent increase in direct communication with external stakeholders, and a 62 per cent increase in the distribution of CEFC media statements. Specific activities included:
- Presentations at 54 conferences, events, symposiums and industry events, including peak industry forums
- The CEFC received recognition from the Institute of Public Administration Australia for its 2013–14 Annual Report
More than 20,000 direct communications with stakeholders
More than 98,000 visits to our website, with in excess of 285,000 page views
Development of 13 fact sheets describing the economic and business impact of CEFC activities
Publication of seven case studies describing specific CEFC investments
Production of nine video case studies
Distribution of 39 media releases, engaging with media and external stakeholders about CEFC investments and external engagement
Publication of four Quarterly Investment Reports on the CEFC website
Publication of two statements providing information relating to the CEFC Investment Mandate.
The CEFC received a Gold Award from the Institute of Public Administration Australia for the online edition of the 2013-14 Annual Report, the CEFC's second award for excellence in online reporting. The 2013-14 Annual Report was also recognised in three categories of the Australasian Reporting Awards.