Bloomberg New Energy Finance - Week In Review

This Week In Review was sent on Tuesday 2 September.

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The long-awaited review of Australia’s Renewable Energy Target, or RET, dealt a blow to its renewables industry, when the government-appointed panel gave Prime Minister Tony Abbott two options to cut emissions more cheaply: either scrap or weaken its main clean energy programme.

However, such a drastic change ie, scrapping the RET is unlikely to be legislated due to the Palmer United Party’s promise to block changes to the proposal in the Senate.

The Abbott government was required to assess the programme this year as part of a bi-annual process. The study was led by Dick Warburton, a former Reserve Bank of Australia board member much known for his sceptical views on climate change. Implementing either of the two options would only serve to imperil AUD 20bn ($19bn) of existing projects and close the door to new investment.

“Essentially, this says Australia is closed for business for renewable energy,” Kobad Bhavnagri, an analyst for Bloomberg New Energy Finance in Sydney, said after the government released the panel’s recommendations at the end of August.

Closing the Large-scale Renewable Energy Target (LRET) to new investment is likely to cause certificate prices to collapse and the value of the Large-scale Generation Certificate (LGC) to be destroyed. LGCs are likely to have a fundamental value of zero because the units will cease to be a scarce commodity.

Renewable energy projects exposed to market prices will only receive revenue from the wholesale electricity market, with prices at between AUD 30 and AUD 44/MWh. But for projects that have been built under the RET, they require revenue of around AUD 100-120/MWh in order to be able to meet costs, pay debtors and deliver some kind of return to equity holders. The massive gap between expected and required revenue means that equity investors will be quickly wiped out and projects could default on debt payments. Not unexpectedly, bankruptcies of renewable developers may then be imminent, and exposed energy assets will probably be stranded.

All this and more on the impact of this policy change can be found in a Bloomberg New Energy Finance Analyst Reaction published prior to the outcome of the study, and titled: Stranded assets: the consequence of cutting Australia’s RET.

So while the renewable industry is battling to stay alive in the world’s smallest continent, the biggest country in the world – Russia – is doing much to spur development in solar and wind.

Six solar power generators are slated to be built in southern Russia by 2016, with Moscow-based VC/PE investor Bright Capital and Solar Management having agreed to invest RUB 10bn ($277m). The plants are to have a total capacity of at least 90MW, according to a statement from a signing ceremony with Bright Capital managing partner Mikhail Chuchkevich, Solar Management’s Pavel Shevchenko and Astrakhan governor Alexander Zhilkin on the regional government’s website. At capex over $3/W, the project should be able to meet the Russian local content requirement.

Wind power, which is not, so far, much of an energy source in the country, is getting a boost with Chinese Xi’an Electric and Hong Kong’s Goldwind International Holdings mulling building a factory in partnership. The plant will manufacture wind power equipment, according to engineering firm E4 Group. Electronic equipment for the plant would be supplied by Xi’an Electric Engineering, which is part of the China XD Group, according to the statement.

Goldwind is not the only Chinese manufacturer to express an interest in Russia. Similar plans have been announced by other Chinese companies such as Dongfang Electric. Several European manufacturers including Siemens and Vestas are also believed to be looking at Russia. However, the country's stringent local sourcing rules and disappointing interest in past tender rounds for wind have had a negative effect on investors. Still, for Goldwind, a final decision may be close: on 26 August, it suspended trading of its shares on the Hong Kong Stock Exchange and the Shenzhen Stock Exchange, pending the announcement of a “major event”.

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Global new build asset finance for geothermal is already up 260% this year, due to deal for world's biggest project

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Q&A of the week

Green bonds need "pricing advantage"

There must be a “firm standard” for what a green bond is if a market for the product is to be sustainable, according to Geoff Sinclair, head of carbon trading at Standard  Bank Plc. “At the moment, a green bond has no pricing advantage” compared with any other bond, he said. “If the market is going to  work, there has to be something to drive the  pricing differential.”

Sinclair said green bonds must attract more than institutional investors who are looking to “do good” by making environmentally responsible investments.  Green bond issuances have already reached a record this year, according to Bloomberg New Energy Finance. Total volume this year could surpass $40 billion  at the current pace. This would triple the $14 billion issued in 2013. 

Standard Bank is playing its own role in the market. In June, the bank announced it acted as co-arranger on the city of Johannesburg’s green bond. This was the first listed green bond in the South African Debt Capital Markets. The bond will be used for environmental and social sustainability projects. Sinclair spoke with Clean Energy & Carbon Brief about the future of green bonds and whether ex-carbon traders might find new job opportunities in the market. 

Q: If someone wanted to get into carbon markets now, what would be your career advice?
A: Specifically carbon markets – I say don’t. I think if they’re motivated by climate change, clean energy and energy efficiency, I’d say they would be better to get into the underlying activity: whether it’s renewable energy development or energy efficiency work. I think it’s going to be much more promising than going into carbon markets. Unless they just want to trade EUAs [European Union Allowances], in which case they need to trade other energy products as well.

Q: Negotiators from countries around the world are aiming to finalize and sign a global climate change agreement in Paris at the end of 2015. The deal would not take effect until 2020. What do you expect will happen in Paris?
A: The main outcome of Paris is going to be a…

This is an excerpt from the Clean Energy & Carbon Brief published weekly. To subscribe to the Clean Energy & Carbon Brief, click here.

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