A cloud of uncertainty
Ask any moneyed investor where start-up capital is set to flow in the coming years and there’s an excellent chance that the clean energy sector will be high up on the list.
Some of the sums bandied about are astronomical. According to a report released this week by Bloomberg New Energy Finance, there will be $36 billion in renewable energy investment between now and 2020. This is more than the entire amount spent on the National Broadband Network.
“In 2010 alone, over $4 billion was invested in renewable energy in Australia. That’s nearly half of the amount the mining industry invested in equipment, plant and machinery over the same period,” enthuses Seb Henbest, who heads Bloomberg New Energy Finance's Sydney-based research team.
“We forecast that strong levels of investment will continue thanks to the national targets and the rapidly falling costs of clean energy. This means that by 2020, renewable energy in this country will be as big as the NBN.”
On the face of it, green start-ups are due a huge windfall, aided by a compliant government. The reality on the ground, however, is a little different.
Despite a surge in the number of solar panel and, briefly, home insulation installation businesses, investors are still doing more talking, rather than actual investing, in renewable start-ups. And the situation, in the short-term at least, could be set to get worse.
“There’s been a lot of expectation, a lot of hope and a lot of hype over renewables, but the fulfilment just isn’t there,” says Tim Buckley, managing director of green investment firm Arkx.
Despite the notable lack of big business investment in green start-ups – Australia has no domestic version of Google, for instance, which recently invested more than $100 million in a new wind farm project – Buckley lays the blame squarely at the feet of government.
“There is no transparency, longevity or certainty coming from the Government,” he says. “In the last six months, there have been more than 22 regulatory changes that affect the industry. How can you invest when you’ve got the Government making those kind of backflips?”
There is little question that the renewable market is in full bloom overseas.
Germany, for example, despite being located in often-gloomy northern Europe, has a solar production capacity 200 times that of Australia. Despite its abundance of natural resources, Australia is struggling to act as a friendly host to innovative green start-ups.
Buckley blames the recent cutting back of Federal Government grants and household incentives for renewable energy, such as the Green Loans program. This has led to what the Clean Energy Council calls the “stop start” growth of the renewables market in Australia.
The situation is set to become tougher in July when the Government scales back its solar credit multiplier a year ahead of schedule. The scheme offsets the cost of solar power by issuing additional certificates under the Renewable Energy Target. This week, the government said that the multiplier would be reduced to a multiple of three, down from four, from 1 July. Climate Change minister Greg Combet says that "strong demand" for solar panels prompted the move.
Meanwhile, the NSW State Government has already put its support for a similar state-based scheme on ice. Nationally, the solar industry is expected to fend entirely for itself by 2014.
Where's the boom?
“In theory, this should be a boom time for renewable opportunities,” says Russell Marsh, policy director of the Clean Energy Council. “The Government has a 20% renewable energy target by 2020 and it’s around the single digit level now, so that should prove a great opportunities for new companies to come in.”
“But at the moment the policy framework is uncertain, as is the carbon price. The renewable market is soft and there isn’t much incentive to get into it.”
“The Government is moving from a grant-based system, where they will pay out money to new renewable businesses, to relying on the market to drive the industry. There are companies that have started up based on a policy that is changed overnight. They are left stranded with stock and staff they can’t use.”
Buckley’s Arkx, which is 30% owned by Westpac, may be located in Sydney, but it invests in no Australian start-ups at all. Buckley says that that isn’t through a lack of effort.
“We keep an eye on Australian companies but there isn’t a return for shareholders in them at the moment,” he says. “Investors are working out how to adjust their portfolios but they are confused by the misinformation put out there by the fossil fuel lobby.”
“In China, there are 100,000 people employed in solar and they already have 50% of the market.”
“Ironically, we have world-leading universities when it comes to renewable research, but all the equipment and technology ends up coming from China. Sun Tech Power is the leading solar company in Australia and it’s owned by a Chinese guy trained by Sydney University.”
“Just look at the track record of entrepreneurs who have invested money in renewables in Australia only to be decimated by government regulatory changes. There are good companies like Carnegie Wave, but they have gone offshore to France and Scotland because they can’t build the business here.”
“The fossil fuel lobby is exceptionally strong here and they have huge funds to prevent change. A day’s further delay is a day’s further profit for them."
"The other problem is that Australia doesn’t have an energy security problem. China has a massive energy security issue and so do Germany and Italy. They all have plans. What is Australia’s five-year plan?”
Where growth exists in the renewable market, it’s patchy. While a plethora of solar PV installers have cropped up, buoyed by feed-in tariffs offered to consumers, the geothermal and wave technology industries are still in their infancy.
“The market is still looking for a winner at the moment. Once they do that then the game changes, but at the moment, we are like the Wright brothers,” says Nick Boyd, founder of Aquagen, a start-up company that generates power through the movement of waves.
Boyd says that Aquagen’s patented technology is a world first – it transfers the wave force from buoyancy units via a cable and pulley system, rather than a more inefficient and costly underwater cable system – but getting government funding support for the idea was a struggle.
“One problem was matching the funding dollar for dollar,” he says. “I understand that they want to reduce risk, but if you assess a project properly, you can reduce that risk.”
“I needed to get a family loan to get the $186,000 for a proof of concept loan from Commercialisation Australia. But now I need to commercialise it and getting the $2 million to match that loan is a little bit more difficult.”
Boyd, like many other Australian entrepreneurs in the renewables market, has had to rely on overseas investment to grow.
He says that Aquagen has signed an agreement to supply power a new $40 million Asian desalination project, a move that has provoked greater reassurance among Australia’s more conservative investors.
The next move is to commercialise a business that currently only has a small R&D buoyancy unit located off the pier in Lorne, a small coastal town in Victoria.
“Australia probably has the best wave resource in the world,” Boyd says wistfully. “The CSIRO says that Australia’s entire electricity needs could be covered three times over, just by the south coast alone.”
“It’s a bit like the gold rush. There is a huge opportunity that we can take advantage of. It just takes someone to make a leap of faith.”
So what does the future really hold for renewable start-ups in Australia? If the carbon price is introduced next year, funds raised will probably be made available for new green tech businesses but the detail, like much of the scheme, is still unclear.
Arkx’s Buckley says that there are pockets of opportunity, such as the fitting out of energy efficient buildings. Australia is already making strides in the area, as witnessed by a new ‘six star’ energy efficiency building in Sydney’s Darling Harbour.
“The question is, though, how quickly can we build that sector before China copies it?” he says. “Eventually, we will realise that this is the industry of the future, rather than hanging on to the industry of the past. There are plenty of individuals doing good work, the government just has to realise the opportunities.”
Marsh says he sees opportunities in several areas, including the building of ‘smart grids’ that handle the increased amount of renewable energy generated. But, in the short-term, challenges remain.
“At the moment, the market is flat,” he says. “I think we’ll see some consolidation over the next few years. There will be fewer companies around and the larger ones will be able to survive better than the smaller ones.”
“I think in 12 months, there will be less uncertainty in the market. There will be a carbon price and we will see more deployment of green technology. I think the market will pick up. But it will take time.”
In a statement, Department of Climate Change and Energy Efficiency says: "The (solar credits) changes, commencing from 1 July 2011, are intended to ensure that households continue to contribute to the cost of installing their solar panel system and to ease pressure on electricity prices."
"The Renewable Energy Target has been enhanced to provide greater certainty for households, suppliers of renewable energy systems and large renewable energy projects."
"The enhanced RET scheme legislation came into force on 1 January 2011 and will help ensure the growth of both the small-scale and large-scale renewable energy sectors. Economic modelling suggests that with a carbon price the RET will deliver at least a 20 per cent share of renewable energy by 2020, and will drive around $16 billion of investment, in real terms, in the same period."