AEMO’s Electricity Statement of Opportunities: private credit funds could enter market

AEMO’s report (122 pages / 7.69MB PDF), published on 31 August, identifies periods when projected electricity supply will fail to meet anticipated demand in the coming decade. AEMO said the planned retirement of five coal-generation plants over the course of the next seven years would reduce Australia’s domestic energy supply by around 8.3 gigawatts (GW). The report also outlines the significant expected investments required in the National Electricity Market (NEM), in addition to the committed projects included in the reliability assessment as well as those under construction and anticipated to commence operation after 1 July 2024.

The existing generation of the NEM is 59.6GW. Beyond those projects which have been committed or which are under construction totalling 8.6GW, there is a pipeline of 165GW proposed, publicly announced projects, along with an anticipated 3.4GW of projects which meet some, but not all, of the criteria to be classed as ‘committed’. The projects will be spread across regions, with the largest pipeline of capacity being lined up in New South Wales (NSW).

AEMO CEO Daniel Westerman said: “The report reiterates the urgent need to progress generation, storage and transmission developments to maintain a secure, reliable and affordable supply of electricity to homes and businesses”.

The AEMO has the goal to be able to operate the power system at 100% instantaneous renewable generation by 2025. AEMO will continue to work with governments, market bodies, industry and the community to manage risks and potential solutions as the power system transitions from coal to firmed renewables, supported by the efficient investment in the transmission system.

The financing of proposed renewable energy projects will play a key part in Australia reaching net zero emissions by 2050, and private credit funds could play a vital role in funding new clean energy generation, storage and transmission projects, according to Jeremy King of Pinsent Masons.

 “There is a clear and present opportunity for private credit funds to augment rapidly their debt offerings in Australia,” he said. “Private debt funders are well-placed to provide long tenor debt for long-life assets in a way that existing bank debt providers may not be able to.”

AEMO has received A$20 billion in extra funds from the federal government to rebuild and modernise Australia’s grid. At the state level, governments in NSW and Victoria have specific funds set aside for clean energy transition, including an A$1.2 billion Transmission Acceleration Facility in NSW, which will speed up the development of Renewable Energy Zones (REZs).

REZs are areas identified with high potential for renewable energy, such as wind, solar, rain, tidal, wave and geothermal heat. The Victorian government has also set aside A$540 million for the development REZ network infrastructure – part of the A$1.6bn clean energy package it announced November 2020. It is estimated that the government contributions will unlock at least A$14bn in additional private infrastructure investment.

King said: “There isn’t a shortage of liquidity in the Australian market for large transmission projects. Domestic Australian banks are, however, often limited in the tenor they can offer to project sponsors and borrowers – at least on reasonably economic terms – to about five years. But the asset life of a large transmission project is measured in decades. That creates refinancing risk at multiple points in the asset’s life.  With the Reserve Bank of Australia now regularly raising the cash rate to try and contain inflation, short tenor debt creates unnecessary risk for the development of such essential assets.”

He added: “There is no impediment to private credit funds entering the market to complement bank debt offerings in Australia, rather than compete with domestic Australian banks. In the US, private credit funds, such as direct debt funds, infrastructure debt funds, and pension funds, now make up 70% of syndicates in certain sectors. In the EU, that drops to 40-50%, while it is only 10% in the Asian market. Private debt funders, meanwhile, have ‘dry powder’ and could be the answer to funding Australia’s clean energy challenges.”