Wind Power Investors: Get Out While You Can

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For anyone still foolish enough to have their hard earned cash invested in wind power companies the warnings to grab your money and run couldn’t be louder or clearer.

The members of the RET review panel have signalled their intention to take an axe to the RET: spelling out the fact that the review has absolutely nothing to do with “climate change” or CO2 emissions – their task is simply to analyse, model and forecast “the cost impacts of renewable energy in the electricity sector” (see our post here).

The Treasurer, Joe Hockey entered the fray last week – during an interview with Alan Jones – when he branded wind turbines “a blight on the landscape” and “utterly offensive”. However, it’s what he went on to say about the “age of entitlement” that should have wind power investors quaking in their boots (see our posts here and here).

Joe outlined the Coalition’s plans to scrap a raft of public sector departments and agencies ostensibly charged with controlling the climate (there are currently 7 climate change agencies, 33 climate schemes and 7 departments).

Joe went on to say that the Coalition’s attack on the “age of entitlement” will be directed at “business as much as it applies to each of us.” If ever there was a beneficiary of the “age of entitlement” it was the wind industry and the rort created in its favour by the mandatory RET/REC scheme – quite rightly described by Liberal MP, Angus “the Enforcer” Taylor as: “corporate welfare on steroids” (see our post here).

The chances of the mandatory RET surviving the RET Review panel – and a Coalition itching to scrap it – are slimmer than a German supermodel.

With the wind industry on the brink of collapse there are three main groups facing colossal financial losses: retailers, financiers and shareholders.

Wind power companies – like any company – raise capital by borrowing (debt) or issuing shares (equity). Bankers price the risk of lending according to the likelihood that the borrower will default and, if so, the ability to recover its loan by recovering secured assets. Share prices reflect the underlying value of the assets held by the company and projected returns on those assets (future dividends). Share prices fall if the value of the assets and/or the projected returns on those assets falls.

Retail power companies saw the writing on the wall as the Green-Labor Alliance disintegrated at the end of 2012, presaging the Coalition’s election victory in September 2013. The risk point for retailers sits in their Power Purchase Agreements with wind power generators – the value of which depends on the amount of “renewable” energy fixed by the mandatory Renewable Energy Target and the value of Renewable Energy Certificates. Scale back the mandatory RET and the price of RECs will plummet; scrap it and RECs won’t be worth the paper they’re written on. Faced with that increasingly likely scenario, (sensible) retailers stopped entering PPAs around December 2012.

RECs are transferred from wind power generators to retailers under their PPAs, and the retailer gets to cash them in at market value. Retailers that haven’t signed PPAs can thank their lucky stars – chances are they will have avoided the very real prospect of being left with millions of worthless RECs.

Bankers have also baulked at lending to new wind power projects, keeping their cheque books firmly in the top drawer over the last 18 months or so. However, having lent $billions to wind power developers over the last 13 years, Australian banks have more than their fair share of exposure – exposure, that is, to the insolvency of the wind power company borrowing from it.

Ordinarily, bankers protect themselves by holding valuable security over the assets held by the borrower (eg the mortgage you granted over your patch of paradise when you borrowed to buy it). However, the value of the security granted by a wind power company is principally tied up in the future stream of income guaranteed under its PPA with its retail customer (the true value of which is tied to the value of RECs).

In the event that the RET were scaled back or scrapped it is highly likely that retailers (left with a bunch of worthless RECs) will seek to get out of their PPAs, making the bank’s security largely worthless. A wind farm with a fleet of worn-out Suzlon s88 turbines – on land owned by someone else – is unlikely to yield all that much for a receiver or liquidator charged with recovering the assets of an insolvent wind power company for its creditors.

Were banks forced to write off $billions in loans to wind power companies as bad and doubtful debts, then shareholders in that bank can expect to see the value of their shareholdings fall. Now would be a prudent time for those with shareholdings in banks to find out just how much that the bank has lent to wind power companies and, therefore, the bank’s exposure and risk they face as shareholders of that bank.

Shareholders in wind power companies, of course, have direct exposure to the declining fortunes of the wind industry. A decline in the share price obviously reduces the value of the shareholder’s investment. However, in the event of insolvency shareholders rank last behind all creditors, which means their shares are, ordinarily, worthless. In the case of wind power companies this will be invariably the case, as the companies in question are merely $2 companies with no real assets to speak of.

However, it is superannuation funds that have, by far, the greatest total exposure to the imminent collapse of Australian wind power companies. Australian superannuation funds (particularly industry and union super funds) have invested very heavily in wind power. These investments are either directly through shareholdings (equity) or through investment banks lending to wind power companies (debt). Examples include Members Equity Bank and IFM Investors (outfits run by former union heavy weight, Gary Weaven and Greg Combet) which have channelled $100s of millions into wind power operator, Pacific Hydro. It’s little wonder then that Labor apparatchiks and Union bosses come out swinging whenever the RET faces attack.

If you think that superannuation funds are somehow magically immune from the risk of the financial collapse of the companies they invest in, then cast your mind back to the wholesale corporate collapse of companies involved in Managed Investment Schemes that saw banks and super funds lose $100s of millions (see this story).

Anyone with their money in superannuation should be asking their fund just how much exposure their fund has to wind power companies?

Since the RET review panel outlined their mission a couple of weeks ago it seems that the word “RISK” – associated with investing in, or lending to, wind power companies – is the word that’s on everyone’s lips. Here’s the Australian Financial Review.

Green energy on tenterhooks
Australian Financial Review
Tony Boyd
30 April 2014

Contrary to popular opinion, leading businessman Dick Warburton does not have any pre-determined views about the future of Australia’s $20 billion Renewable Energy Target scheme.

While it is reassuring he is determined to be completely impartial in his rapid fire review of the RET scheme, Warburton makes it clear in an interview with Chanticleer that there will not necessarily be a grandfathering of existing arrangements.

“We have not made a decision on that – how could we when we have just started consulting with the industry,” he says.

In other words, it is possible that Warburton’s committee will abandon the RET targets and the accompanying certificates that are used by renewable energy developers to subsidise operations.

That helps explain why the renewables industry is starting to be priced for a disastrous outcome that could wipe out billions of dollars in existing investments and see a wave of bankruptcies and restructuring.

Shares in wind farm operator Infigen Energy have fallen 25 per cent since the RET scheme review was announced. Its shares are being priced for a negative outcome from Warburton’s review.

Chief executive Miles George says Infigen’s Australian business would lose roughly 40 per cent of its revenue in the event of existing targets and certificate arrangements not being honoured.

“Our business would fail, along with most other wind farms in Australia,” he says. Infigen has 20,000 shareholders split about one third between mums and dads and two thirds institutions. They could lose their entire investments.”

Infigen is not the only company worried about the potential damage to its business from changing the RET target, which is 41,000 GWh. One of Australia’s largest infrastructure investors, IFM Investors, is concerned its renewable energy business, Pacific Hydro, will have to shut down and move its investment offshore. Garry Weaven, chairman of IFM Investors and Pacific Hydro, tells Chanticleer that while he respects Warburton’s independence and ability as a businessman, he is particularly worried by the “climate change vibes” emanating from the Abbott government.

Weaven told CEDA in a speech last month that renewable energy development in Australia has been severely handicapped by inconsistent and untimely interventions by successive governments.

He makes the perfectly valid point that investors in renewables have to measure their investments over at least 25 to 30 years.

“It is simply not possible to generate an acceptable project IRR for a wind farm without that assumption, and other forms of renewable energy generation are still less economic and also require a very long investment life-cycle,” he told CEDA.

Weaven’s broader point is that with the plan to scrap the carbon tax and the uncertainty surrounding the government’s Direct Action policy, there is no new investment in any form of energy generation in Australia at the moment. Banks are unwilling to go anywhere near power generation investment unless it is the purchase of existing assets, such as Macquarie Generation, which is being sold by the NSW Government. Warburton says George and Weaven should not be barking at shadows, especially since the expert panel has only just begun speaking to industry participants.

But he is also crystal clear that every aspect of the RET scheme is up for grabs.

As Warburton says, there is good reason why sovereign risk is one of the five key areas being examined by an expert panel which also includes Brian Fisher, Shirley In’t Veld and Matt Zema. The key words used in the terms of reference in relation to sovereign risk are as follows: “The review should provide advice on the extent of the RET’s impact on electricity prices, and the range of options available to reduce any impact while managing sovereign risk.”

Sovereign risk is not something normally associated with investment in Australia. It last raised its ugly head when the former Labor government introduced the Mineral Resources Rent Tax. But investors around the world are getting used to escalating sovereign risk in democratic countries with normally predictable long term policies.

Recently in Norway, the Canadian Pension Plan Investment Board (CPPIB) was severely burned when the government changed the tariff that can be charged by a private company that bought the rights to manage a gas pipeline.

CPPIB’s return from its company, Solveig, was slashed from 7 per cent to 4 per cent.

Warbuton says potential management of sovereign risk would not have been a part of the terms of reference for the RET scheme review if all options were not on the table. Warburton, chairman of Westfield Retail Trust and Magellan Flagship Fund, will use a cost-benefit analysis from ACIL Allen as the foundation of the RET review. ACIL Allen has been accused of being in the pocket of the fossil fuel lobby but its data was used on Tuesday by the Clean Energy Council in a document in support of keeping the RET scheme in its current form.

The Clean Energy Council report, which was prepared by ROAM Consulting, modelled three scenarios: a business as usual case, a no RET scenario, where the RET is repealed, with only existing and financially committed projects being covered by the scheme and an increased and extended RET scenario where the RET is increased by 30 per cent by 2030 target and extended to 2040. The report concluded that the legislated large scale RET can be met under the business as usual scenario.

It also says that both RET scenarios result in lower net electricity costs to consumers in the medium to long term.
…
Australian Financial Review

When AFR refers to “the $20 billion Renewable Energy Target scheme” – it underplays the cost of the RET by at least $30 billion (probably just small change to the AFR?).

The energy market consultants engaged by the RET review panel, ACIL Allen produced a report in 2012, that showed that the mandatory RET – with its current fixed target of 41,000 GW/h – would involve a subsidy of $53 billion, transferred from power consumers to wind power generators via Renewable Energy Certificates and added to all Australian power bills. From modelling done by Liberal MP, Angus “the Enforcer” Taylor – and privately confirmed by Origin Energy – ACIL Allen’s figure for the REC Tax/Subsidy is pretty close to the mark.

Adding $53 billion to power consumers’ bills can only increase retail power costs, making the Clean Energy Council’s claims about wind power lowering power prices complete bunkum (see our post here). And that figure is a fraction of the $100 billion or so needed to roll out the further 26,000 MW in wind power capacity needed to meet the current RET – and the duplicated transmission network needed to support it (see our post here).

Yet again, the wind industry and its parasites seek to hide behind the furphy of “sovereign risk”. “Sovereign risk” and “regulatory risk” are two entirely different animals: the wind industry is the product of Federal Government regulation which, of course, is prone to amendment or abolition at any time.

“Sovereign risk” is the risk that the country in question will default on its debt obligations with foreign nationals or other countries; and, by some definitions, includes the risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts.

It has nothing at all to do with changes in legislation that impact on industry subsidy schemes – which is precisely what the mandatory RET/REC scheme is: the prospect that a subsidy might be reduced or scrapped is simply “regulatory risk”.

To claim that the alteration of a government subsidy scheme is “sovereign risk” is complete nonsense.

At one point during the RET review panel’s meeting in Sydney, as Dick Warburton spelt out the panel’s mission, the boys from Infigen howled from the back of the room: “but, what about sovereign risk?!?” To which a nonplussed Warburton retorted: “what about it? Sovereign risk is your problem, it’s not our problem.”

And, indeed, it appears that Infigen has serious problems (whether or not “sovereign risk” is one of them).

Infigen is bleeding cash (it backed up a $55 million loss in 2011/12 with an $80 million loss, last financial year). It’s been scrambling to get development approvals for all of its projects so they can be flogged off ASAP. If it finds buyers it can use the cash to retire debt and fend off the receiver – who must be circling like a vulture all set to swoop.

Reflecting its fading fortunes, Infigen’s share price has taken a pounding in the last 8 months (if the graphs below look fuzzy, click on them, they’ll open in a new window and look crystal clear):

Note the drop after the Coalition took office in September; the dive after the RET Review was announced in January; and the plummet in April, when the Panel defined what its mission was about, as it called for submissions (see our post here).

The drop seen above – from the year high of $0.32 (in August 2013) to $0.20 (now) – represents a 36% loss for investors who bought in at the top of the market this financial year. But spare a thought for those that bought in back in 2009 – when Infigen emerged from the ashes of Babcock and Brown:

The early movers have seen their shares freefall from over $1.40 to $0.20 – representing an 80% loss. Ouch!

The collapse in Infigen’s share price simply highlights our warning to bankers and investors. Remember this is an outfit that used to be called Babcock and Brown – which collapsed spectacularly in 2009 – taking $10 billion of investors’ and creditors’ money with it on the way out (see this story). Get set for a replay.

Consider this STT’s fair warning to anyone with exposure to wind power companies – be it shareholders, bankers or those who face exposure through their super fund’s investments – grab your money and get out while you can.