Clean Energy Transformation Fund June 1 2010-1

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Clean Energy Transformation FundsCreating a dedicated pool of funds for Nation Building Clean Energy Transformation through a tax exemption onconcessional Superannuation Contributions

In order to meet therenewable energytarget, we wouldneed to increaseAustralia's CleanEnergy investmentby 350% to 0.41 % ofGOP and sustainthis level ofinvestment through2020.

The Clean Energy industry is a burgeoning industry attracting significant investment globally.Investment in the clean energy industry is critical for the long term economic growth and efficiencyof Australia. In addition, without significant investment, it is unlikely that Australia will be able toachieve its environmental objectives, specifically its renewable energy targets.This paper describes a policy designed to enable everyday Australians to allocate part of theirsuperannuation to clean energy investment. The proposed policy would enable and encourageinvestment in two key ways: firstly providing a simple and accessible means for Austral ians toinvest in clean energy and secondly by underpinning the desire to invest with a tangible financialbenefit in the form of an exemption from the 15% concessional superannuation contr ibution tax.Logistically, Clean Energy Transformation (CET)funds would be provided asan investment optionfor tax exempt concessional Superannuation contributions. This will provide a simple andpreviously unavailable way for everyday Australians to choose to invest in Clean Energy. Thesuperannuation contributions into CETfunds will form a dedicated pool of long term investmentfunds for Nation Building Clean Energy investment in Australia, by everyday Australians.In quantitative terms, concessional Superannuation guarantee contributions wil l total over $60bil lion dollars this year. Viewed conservatively, a five percent uptake by Austral ians in thisproposed policy would provide the investment required to enable Australia to invest at a ratecomparable with its G20 peers, and the funds required in order to meet our renewable energytargets by 2020.

AUSTRALIA 'S STAKE IN THE EM ERG ING $200B G LO BAL CLEAN ENERGYINDUSTRY

There is a new Global Clean Energy market emerging. Overall investment in Clean Energy grew230% in the last 5 years, culminating in USD$162 bil lion invested globally in 20091. Bloomberg NewEnergy Finance forecasts that this investment will further increase by 25% in 2010, resulting inover $200 bil lion invested globally in the clean energy sector.There are significant employment", economic and efficiency benefits being realised by many of ourtrading partners. China for example, which currently leads global investment in Clean Energy,invested over USD$34 bil lion dollars in wind power in 2009.Unfortunately, Austral ia as a nation is not investing in Clean Energy at a rate commensurate withother G20 nations. This not only means that we will find it increasingly difficult to meet ourrenewable energy targets, we will also struggle to be internationally competit ive in the growingglobal Clean Energy industry.During 2009, like most G20 nations, Australia's Clean Energy investment decreased. Unfortunately,this decrease was significantly larger than most of the G20 nations. In 2009, Austral ia's CleanEnergy investment decreased by 50%, where over the same period the G20 average decreased byonly 6.6%. Even if examined over the last five years, Australia lags behind our G20 peers with only63% growth' in Clean Energy Investment and asa percentage of GDP, Australia also lags behindalmost all G20 nations at 0.12% of GDP in 2009. As a comparison, the United Kingdom invested at0.51% of GDP, and China at 0.39% of GDP in 2009.This ranking in investment continued throughout the Global Financial Crisis, despite the fact thatAustralia fared better than most economies in the G20. Our current, and future projected levels ofinvestment in Clean Energy remained considerably lower than most of our peer nations.Australia has also committed to a 20% Renewable Energy target by 2020, which current estimatespredict will require an additional13GW of renewable energy generation and $35 billion to deliverover the next 10 years. In comparable terms, in order to meet the renewable energy target, we

1"Who's Winning the Clean Energy Race? - Growth, Competition and Opportunity in the World's Largest Economies", The Pew CharitableTrusts (2010)

2 According to "The Clean Energy Economy: Repowering Jobs, Business and Investment Across America, June 2009", employment in the CleanEnergy sector grew 2.5 times faster than jobs overall between 1998 and 2007.

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In quantitative terms,with this policy forevery $1 billiondollars in delayedGovernment income,over $6.6 billiondollars in privatesector investmentwould be directedtowards CleanEnergyTransformation

This policy wouldencourage privateinvestment into CleanEnergyTransformation forAustralia,employment growthin rural areas,increasedcompetitiveness inthe burgeoningGlobal Clean Energyindustry

would need to increase Australia's Clean Energy investment by 350% to 0.41% of GDPand sustainthis level of investment through 2020.Even without the Renewable Energy commitment, Australia should aim to increase the level ofinvestment in this emerging global market as it will dr ive rapid employment growth, greaterenergy and economic efficiencies for industry in Australia, and enable Australia to becomeinternationally competitive in what will shortly become a large component of the world's energyindustry.

STIM ULATING DOMESTIC PR IVA TE SECTO R INVESTM ENT IN CLEA N EN ER GYIn many G20 nations, meeting clean energy targets has been a complementary approach of:

Tax incentives for investments and research into renewable energy projects, andPlacing a price on carbon pollution, thereby driving economic restructuring away from carboninefficient industry toward Clean Energy technologies.

The Australian government has a similar complementary investment incentive and restructuringpolicy agenda, however the major focus has been the Carbon Pollution Reduction Scheme (CPRS),which isAustralia's carbon pricing, capping and trading initiative.There has been significant resistance to the CPRS,mostly due to Australia's strong dependency oncarbon-related mining and industry, and the international competit iveness issues that this policymay cause for Australia. Coal for example, is Australia's major export and a main source ofdomestic energy and it may, like many industr ies, struggle under the added costs of the CPRS.Without the effective benefits of CPRSeconomic restructuring, there isa greater need to increaseAustralia's investment in Clean Energy in order to reach the Renewable Energy target, and partakein the burgeoning Clean Energy industry like most other G20 nations.Finding a source of funds for this investment is proving to be very difficult. Government spendingalone will not be able to fund the investment required in order to meet Australia's 2020 emissiontargets. Private investment has been reluctant to make substantial investments in clean energy,due to the lack of liquidity and low returns of such investment relative to other forms ofinvestment in recent years.Debt financing by Clean Energy companies has also been difficult, due to the sizeof the investmentrequired, and policy uncertainty. Australia needs to closely monitor its sources of debt. WithAustralia's gross foreign debt now over 100% of GDp3 (75% of which is the responsibility ofAustralian Financial Institutions), further borrowing from overseas to fund domestic investment,simply worsens this already formidable foreign debt burden for Australia. Australia faces a massiverefinancing risk on this debt and needs to find over $700billion in the next 12 months. We need tofind a way to fund clean energy projects from domestic sources.The proposed policy wil l encourage domestic private sector investment in Australia's Clean Energyindustry. It is the solution to meet our renewable energy targets and increase our Clean Energyinvestment levels in order to remain competit ive with our leading G20 partners.

DR IVING C LEAN ENERG Y INVESTM ENT THRO UG H TAX EXEM PTIO NS O NCONCESSIONAL SUPERANNUATION CONTRIBUT IONSAustralian Employer Superannuation Guarantee contributions currently total approximately $60bil lion per annum and represent an under-util ised source of private sector funds for clean energyinvestment in Austral ia. Currently approximately 50% of these funds are invested in domestic andforeign equities, with the remainder spread between fixed income, and other asset classes. Theseconcessional superannuation contributions are currently taxed at a rate of 15% by the ATO.

3 Research Paper no. 30 2008-09, Parliamentary LibraryCLEAN ENERGY TRANSFORMATION FUNDS DOUGLAS ROSS I [email protected] I PAGE 2


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The Government could encourage investment in Clean Energy Transformation (CET)Funds througha tax-exemption on superannuation contributions. Although reducing public sector revenue, thegovernment can direct a sixtimes multiple of this in private sector investment into the domesticClean Energy sector. In quantitative terms, with this policy for every $1 bill ion dollars in delayedreceipts, over $6.6 bill ion dollars in private sector investment would be directed towards CleanEnergy Transformation.This policy would enable many large CETinitiatives to get underway without large public spendingrequirements or higher taxes on industry. This policy would encourage private investment intoClean Energy Transformation for Austral ia, employment growth in rural areas, increasedcompetit iveness in the burgeoning Global Clean Energy industry and a policy that seeksto ensurewe fund this transformation from domestic funding rather than further worsening our foreign debtsituation. Such investment funds would include large CETprojects such as:

Building more efficient long haul HVDCtransmission lines that are crit ical i f Austral ia isto unlock remote renewable resourcesLarge sustainable energy parks for Wind, Geothermal, and SolarClean energy research funding and start-up investment that will result in new exportindustries for Austral ia of both Clean Energy skil ls and patented technology rightsVery FastTrain lines to replace high use air routes along the eastern seaboard ofAustralia

All of these projects will require large volumes of money, are relatively low risk, long terminvestments that offer 'fixed income-like' returns that align well with the long term investmentstrategies of Superannuation investment.



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C LEA N EN ERGY TR ANSFO RM ATIO N FU ND SThe types of Clean Energy investment set out above can be encouraged by enabling a taxexemption in Superannuation Contributions, as long asthe contributions are into a complyingClean Energy Transformation Fund, as provided by the Superannuation fund.

PO SSIBLE DESIG N FEA TU RES O F C LEA N EN ERGY TR AN SFO RM ATIO N FUN DSFeature 1. Maximising economic utility for investors through a tax exemption onsuperannuation contributions and providing a simple way to invest in the NationBuilding Clean Energy Transformation of Australia.For APRAregulated superannuation funds (majority of superannuation funds by value), nearly halfof al l superannuation contributions are allocated to the default asset al location provided by theSuperannuation fund", The obvious conclusion isthat these investors do not have any consideredapproach to the individual superannuation investment. There is not a risk/return assessment,purely an expectation that at retirement the investments will provide an income.There is also a ground swell of the Australian population that wants to be part of infrastructurenation building especially when it is related to Clean Energy Transformation. Unfortunately, thistype of investment is generally restricted to investors with large amounts of money, in privateequity funds, and venture capital.CETfunds would enable everyday Austral ians to choose to invest in Clean Energy Infrastructure forAustralia, benefit from an income tax exemption, and a reasonable return on investment for CleanEnergy Infrastructure. The increased economic uti li ty for the investor would come from thecombination of the actual Clean Energy investment, the tax exemption and the overall return, notjust in the expectation that the money will provide an income at retirement.Every Australian understands the value of an income tax exemption over the long term, and manyAustralians would like to invest in Clean Energy infrastructure and are currently unable to do so. Itis for these reasons that concessional superannuation contributors will choose the CETfund orexpect a portion of their funds to be allocated by their Superannuation trustee to CETfunds.Logistical ly, CETfunds would be managed by fund management companies in Australia, andprovided to Superannuation trustees as an investment option for their members. Members wouldneed to change a proportion of their future superannuation contr ibutions, via the standardmechanism provided by their superannuation fund. Alternatively, Superannuation trustees maychoose to provide CETfunds aspart of their default allocation strategies.

PotentialRecommendation 1

The Government should provide a tax exemption on concessional superannuation contributionsthat are allocated to complying Clean Energy Transformation funds. The funds managers wil l havea mandate to invest in Clean Energy and thus provide a dedicated pool of capital for the AustralianClean Energy Nation Building infrastructure.

Feature 2. Making the Clean Energy Transformation funds a prudent investmentfor Superannuation TrusteesSuperannuation trustees have a fiduciary duty to make investments in members' best interests,and it is not the intention that CETfunds would be a method of attempting to override this duty orto direct trustees on how to invest private superannuation savings.Trustees would still be required to invest in a prudent manner, focussing on both the selection ofthe CETfund manager, and actively monitoring the investments. Despite the fact that the tax

4 APRA -June 2009 - Annual Superannuation Bulletin (issued Feb 2010), p6CLEAN ENERGY TRANSFORMATION FUNDS DOUGLAS ROSS I [email protected] I PAGE 4


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exemption will provide an initial unrealised ROI,the CETfund manager will need to provide anadequate return on investment and appropriate risk profile for that return.With relatively low liquidity and long term investment periods, trustees should choose fundmanagers that maintain low management fees and focus on the profit share of the investment.This wil l drive low Management Expense Ratios (MER) and furthering the overall return for theirsuperannuation contributors.Similarly, Government Superannuation policy's goal of maximising retirement savings also requiresthat CETfund managers provide appropriate return for the level of r isk of the investments. In thissmall but rapidly growing industry, the government should provide tax concessions on expensesand income derived from these investments. Recent recommendations by the Clean EnergyCouncil to the Henry review include tax concessions like accelerated depreciation for new clean-energy capital assets, tax credits for research and development, and potentially concessionaltreatment for dividends received for investment in clean energy.

PotentialRecommendation 2 The Government should still provide concessional tax treatment to Clean Energy sectorinvestments, so that the return on investment on these assets is comparable to other assets untilthe sector increases in sizesuch that more traditional equity markets become interested in thissector, or until Australia's renewable energy targets are achieved.Superannuation companies will stil l have a fiduciary duty to make prudent decisions whenchoosing CETfund managers, and Government consideration should also be made when definingeligibil ity criteria for CETfund size requirements, such that management fees (or at least MERs)are commensurate with that expected with Superannuation investment.

Feature 3. Government to maintain control/protection of investment so that itremains targeted at Clean Energy Transformation for AustraliaTo maintain the integrity of purpose of this favourable tax treatment and ensure the system is notsubject to abuse, any instrument like the CETfunds require an appropriate structure.The control structure should balance integrity of the instrument, with the duration of theinvestment horizon and the rate of return required by the fund in order to maintain investmentand success of the funds and its investors.The initial control structure should aim to manage access of organisations to be able to provideCETfunds to Superannuation organisations. The registration process should consider at aminimum the following:

Type of Assets:An investment plan with an appropriate focus on Clean Energy investmentSizeof fund: An investment plan with the size of the fund required for the plannedinvestmentsSkillsof manager: Access to the skills and resources necessary to implement its investmentplan.Superannuation fund commitment: Commitment from a superannuation fund, where the CETcomplying fund will be provided asan asset al location option.

In recent years, the registration of organisations involved in the investment in new technologyfunds and schemes provided by the government through Auslndustry has been managed byInnovation Australia. Innovation Australia was formed in 2007 in order to be an independentstatutory body empowered by the Government to oversee the administration of its industryinnovation, research and development and venture capital programs. This body currently usescommittees to decide on the eligibili ty of organisations to partake in various governmentinnovation initiatives, and could perform a similar role in providing registration of CETfunds.



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The experience of the Innovation Australia board, together with its ability to form committees ofindependent technology, finance, accounting and superannuation advisors and seek advice fromthe ATO, control by this board provides greater scope to deny applicants where there are anyconcerns about the efficacy of an application to become a CETfund.

PotentialRecommendation 3

The Government should maintain control of CETfunds through approval mechanisms that arealready in place for the registration of current government industry innovation initiatives.The policy should be administered by Auslndustry and util ise Innovation Australia's currentregistration processes to provide the eligibili ty criteria and the registration approval for CETfunds.

Feature 4. Type of qualifying assetsThe growth of Clean Energy investment globally has been extensive in recent years with a globalgrowth of 230 percent since 20055. With this explosive growth many new technologies areemerging and re-categorisations of technologies are occurring and the definit ion of a quali fyingasset needs to be made asflexible as possible, whilst sti ll retaining integrity to the eligibility criteriaof the asset for this type of investment.Given the flexibi li ty the Government can retain in determining successful applicants, it is our viewthat the list of el igible projects should be asbroad aspossible. This minimises the risk that projectswhich would otherwise be deserving candidates for the scheme are denied access on the basis ofnarrowly drafted eligibility criteria.At the time of writing the global Clean Energy sector seems to be defined under the following:

Energy generation, transmission or distribution facilities, including all Clean EnergytechnologiesCarbon Capture and Sequestration and similar technology upgrades to current energyinfrastructure.Transport conversion and efficiency: Land transport, Air and Seaport facilities and transporttechnology to improve Clean Energy utilisationClean Energy storage, technology and research.

Potential Eligible assets for a new scheme could include sustainable energy generation assets, CCS,energyRecommendation 4 transmission infrastructure, and other designated Clean Energy assets or technology research.

Furthermore, there should be flexibil ity for the Minister (or regulatory body like InnovationAustralia) to expand the list of eligible Clean Energy assets by way of regulation.Consideration could be given to allowing incentives to be targeted toward particular industries orprojects.Feature S. Preference for Investment in Australian Owned AssetsA fundamental premise of this proposal isto increase private investment in Australian majorityowned Clean Energy industry and technology. This is to both increase Australia Clean EnergyInvestment and similarly improve and restructure ski lls, employment and infrastructure inAustralia.This preference would not preclude foreign investment in the assets invested into by the CETfundmanagers. This would also not preclude investment by CETfunds in foreign owned investments,however there would be a requirement for the majority of the investment capital (greater than

5 "Who's Winning the Clean Energy Race? Growth, Competition and Opportunity in the World 's Largest Economies", The Pew Charitable Trusts(2010)



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50% of funds under management) to be invested in majority Australian owned assets (greater than50% owned).

Potential Given that the purpose of the tax incentive is to encourage the flow of private funds intoRecommendation 5 Australia's Clean Energy industry and technology, policy should include a need for the majority of

the funds to be invested in majority owned Australian assets.

Feature 6. Government maintaining control of loss of tax revenue under thispolicyAt the extreme end of the scale, there is a possibility that there is a large uptake of this policy byindividuals creating a substantial movement of funds into Clean Energy and away from otherindustries funded by the loss in revenue by the government. This could potentially occur to a levellarger than the Government would prefer to flow into one sector of the economy. There istherefore a requirement for a method of restricting the flow of funds into CETfrom time to time.A potential solution would be to restrict the size of an approved CETfund with a cap, and set theminimum offering period for commitments to the fund. This would enable the government torestrict the creation of new eligible funds, and thus also restrict the inflow of new funds into theClean Energy sector.There would also be a need to have a provision in the policy for the Superannuation Funds to beable to change the member's al location preference back to a previously agreed asset allocation,once the CETfund had reached the cap and/or the offering period had lapsed.

Potential The Government would be able to maintain control of the tax revenue losses and the amount ofRecommendation 6 funds flowing into the Clean Energy sector from concessional Superannuation contributions byputting a cap on the CETfunds and a minimum offering period.

Feature 7. Making Australia a global hub of Clean Energy Investment fundsIn the past, technologies and patents by Australian companies go overseas in order to find theinvestment funds to commercia lise and manufacture the products. CETfunds would slow thistrend, and asAustralia becomes a hub of Clean Energy investment funds, overseas technologieswould come to Australia in order to find the funds and commercia lise products. Australia wouldstart to import technologies, ski lls and patents that would further improve our internationalcompetitiveness in Clean Energy,Similarly, in the extreme case whereby there is an excess of committed capital in the CETfund, andnot enough projects or assets in which to invest in Australia, the CETfunds should have theflexibil ity to invest in overseas assets and projects, in order to take a majority Australian ownershipstake. This would further Austral ia's abil ity to export Clean Energy technology, and also enableAustralia Clean Energy companies to expand overseas.

Potential CETfunds wil l help Austral ian owned companies commercia l ise and manufacture Clean EnergyRecommendation 7 technologies, rather than migrate overseas to find the investment capital.

Also, in the extreme case where the flow of funds is significantly larger than the Clean EnergyAssets and projects available in Australia, the CETfunds should be able to invest in overseascompanies and technologies in order to gain a majority stake in the ownership of the asset.



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IMPORTANT NOTICEThis paper has been prepared by OnDemand Consulting Pty Ltd ABN 26 116 261164 ("On Demand Consulting") for the sole purpose ofproviding an overview of Clean Energy Transformation Funds ("Purpose"). This paper may be reproduced for the sole purpose ofdiscussing clean energy transformation funds.This paper is provided by OnDemand Consulting for general information purposes only, without taking into account any potentialinvestors' personal objectives, financial situation or needs. It should not be relied upon by the recipient in considering the merits of anyparticular transaction. It is not an offer to buy or sell, or a solicitation to invest in or refrain from investing in, any securities or otherinvestment product. Nothing in this paper const itutes investment, legal, tax, account ing or other advice. The recipient should consideri ts own financial si tuat ion, objectives and needs, and conduct i ts own independent invest igation and assessment of the contents of th ispaper, including obtaining investment, legal, tax, accounting and such other advice as it considers necessary or appropriate.This paper hasbeen prepared on the basis of publ icly available information. OnDemand Consult ing has relied upon and assumed,without independent verif ication, the accuracy and completeness of all such information. I t contains selected information and does notpurport to be all-inclusive or to contain all of the information that may be relevant to the Purpose. The recipient acknowledges thatcircumstances may change and that this paper may become outdated as a result. OnDemand Consulting is under no obligation toupdate or correct th is paper.OnDemand Consult ing, i ts related bodies corporate and other aff il iates, and their respective directors, employees, consultants andagents make no representat ion or warranty asto the accuracy, completeness, t imeliness or rel iabili ty of the contents of this paper. Tothe maximum extent permitted by law, no member of OnDemand Consulting accepts any liability (including, without limitation, anyliability arising from fault or negligence on the part of any of them) for any loss whatsoever arising from the use of this paper or itscontents or otherwise ar ising in connection with i t. This paper may contain forward-looking statements, forecasts, estimates andprojections ("Forward Statements"). No independent third party has reviewed the reasonableness of any such statements orassumptions. No member of OnDemand Consulting represents or warrants that such Forward Statements wil l be achieved or wi ll proveto be correct. Actual future results and operations could vary mater ial ly from the Forward Statements. Similarly, no representat ion orwarranty is made that the assumptions on which the Forward Statements are based may be reasonable. No audit, review orveri fication has been undertaken by OnDemand Consulting or an independent third party of the assumptions, data, results,calculat ions and forecasts presented or referred to in this paper.The recipient acknowledges that neither i t nor OnDemand Consult ing intends that OnDemand Consult ing act or be responsible asafiduciary to the recipient, i ts management, stockholders, creditors or any other person. Each of the recipient and OnDemandConsulting, by accepting and providing this paper respectively, expressly disclaims any fiduciary relationship and agrees that therecipient is responsible for making its own independent judgments with respect to any transaction and any other matters regardingthis paper.OnDemand Consult ing may have interests in the securit ies and other investment products referred to in the paper, including beingdirectors of, or may have or may in the future act in various roles including as underwriter, dealer, broker, lender or financial advisor totheir issuers and may receive fees, brokerage or commission for acting in those capacities.None of the entities noted in this paper are an authorised deposit-taking institutions for the purposes of the Banking Act 1959(Commonwealth of Australia). OnDemand Consulting 2010

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