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YFYS, policy still holding transition finance back: ASFA

Super funds want to put their $300 billion of annual inflows to work in new renewable energy infrastructure. But policy settings, Your Future Your Super and intensifying competition for local assets could all have unforeseen consequences.

New additions to large-scale renewable energy infrastructure currently lag institutional investor demand, according to research from the Association of Super Funds of Australia (ASFA). But while targeted government initiatives will increase the opportunities across generation and storage (and potentially transmission) there are other obstacles to investment.

“To date, there have been significant, well-documented constraints on the roll-out (and, by extension, the funding of) of new renewable energy projects by the private sector that need to be addressed in the context of a credible and effective transition plan,” the ASFA report says.

“For investment in new generation capacity in particular, constraints have included a lack of certainty around long-term commitments to purchase power from generators; lack of certainty of access to distribution networks; and uncertain closure dates of coal power plants.”

  • In 2022, 20 large scale projects were completed, adding around 2.3 gigawatts of new capacity at a cost of roughly $4 billion, while 27 projects were completed in 2021, adding three gigawatts at a cost of $5 billion. Of that new capacity around 20 per cent is owned – directly and indirectly – by a super fund. But at the same time, the entire industry has an annual quantum of new capital for deployment of around $300 billion thanks to the Superannuation Guarantee.

    There are arguments for and against investing that money overseas, but some super funds would rather plough it into competitive local projects that are cheaper and easier to oversee than new developments in far flung locales. But Australia is rapidly becoming a hot destination for international capital too.

    “Competition for renewable energy assets extends to the broader universe of institutional investors, including foreign pension and sovereign wealth funds – which is intensified by growing reputational and stakeholder pressure on the global funds management industry to deploy capital in support of net zero transition. From a system perspective, the risk of asset price inflation will remain a perennial issue,” the ASFA report says.

    But the constraints of Your Future Your Super (YFYS) could be leading to underinvestment from super funds. ASFA has previously put forward alternative policy options, including a right-of-review process for products that fail the performance test, but “disincentives to investment” remain.

    “In terms of industry composition, the YFYS benchmarks necessarily comprise current assets and thus are heavily weighted to conventional energy generation rather than alternatives (and so are ‘backward-looking’),” the report says. “Renewable energy assets comprise a very small component of the current benchmark allocation. Thus, being over-weight in renewables is a potential source of tracking-error risk vis-à-vis the benchmarks.

    “More broadly, however, is the risk that for some funds, increased sensitivity to benchmarks (as it relates to investment decisions) is driving overall strategic asset allocation towards asset classes that are readily benchmarked – listed equities for example. This relates to infrastructure, but also private equity investments.”

    Lachlan Maddock

    Lachlan is editor of Investor Strategy News and has extensive experience covering institutional investment.

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