Australia’s ageing coal-fired power stations are nearing the end of their lives, the nation needs an estimated half a trillion dollars of capital to decarbonise its generation and transmission infrastructure – as well as electrify transport and other issues – yet local asset owners seem still to be reluctant to commit.

The Investment Magazine Fiduciary Investors Symposium in Healesville, Victoria, last month heard that confusion around the role of government in setting energy policy is a factor deterring greater investment.

“The role of government in Australia is actually really different compared to the role of government in the renewable energy industry in the UK, Europe and the US,” Sam Reynolds, chief executive officer of Octopus Australia, said.

“UK, Europe and the US are all subsidised markets for renewables, so the government is actually really important in regard to demand. Australia is the complete opposite. We don’t have the government with a subsidy, so we’re actually not looking at the government for demand.”

Government intervention in energy markets in Australia tends to affect supply, Reynolds said.

“When the government starts messing around in Australia, they’re actually messing around with supply: perfect indicators for investment,” he said.

“A lot of people seeing what’s happening in Queensland [are saying] actually, we should be pulling out of the Queensland energy market because the government’s not supportive. Completely the opposite approach: you should be doubling down in Queensland because the supply is going to be impacted.”

Reynolds said it looks like Australian investors are confusing what is happening in Europe or the US with what might happen here.

“If the government pulls out overseas, you should be concerned,” he said. “[It’s] different here.

“Another thing is experience. If you look at [Dutch pension fund] APG, it just made a big deployment into Australia. They’ve seen what happens to supply when it’s restricted in Europe. The fundamentals that APG or Brookfield or other big international investors are seeing in Australia are exactly the same as the supers should be seeing, but there’s a little bit of experience there.”

No embarrassment

Reynolds said that without wishing to be seen as “a complete know-it-all”,  Australian investors “need to have a little bit of a look at their execution” and that there should be no embarrassment about changing tack.

He said that the strategy Octopus arrived in Australia from the UK with in 2018-19 proved to be wholly unsuitable to the local market.

“We arrived here with a subsidised strategy, same thing we do in the UK and Europe,” he said.

“Completely bolloxed it up. I had to go back to London with my tail between my legs and say, I’ve got it wrong. [We] completely rebuilt the strategy in Australia for an unsubsidised market. That was the best thing, to pivot.”

There are other reasons Australian super funds are not investing more deeply into renewables, the symposium heard. David Allen, deputy chief investment officer of Future Group, said they include benchmark constraints and fees.

“We look at the index that we’re benchmarked against; how much renewables is in there? Not very much,” Allen said. And even when there is an opportunity to take a portfolio approach – investing in different “layers” of generation, transmission and electrification – other hurdles arise.

“Does this go in the growth, value-add high-fee bucket, or does this go in the core bucket?” Allen said. “And then you’re saying super funds like to own stuff direct, but we only like to own it direct because it’s cheap.

“I think it’s the perverse fee incentives. I can just about get over the [benchmark], I can just about get over is it value-add, or is it core; but if I’m paying value-add fees all the way through, and I can’t average down with co-invest, this is hard and expensive. I don’t mind hard, but it gets tricky.”

YFYS tweaks

Allen said tweaks to the Your Future Your Super performance test could help encourage greater investment.

“The government wants super to invest in housing and renewables and all the good things that it needs,” Allen said.

“I think the government recognises those issues, and we’re crossing our fingers and lobbying and hoping that things change. And maybe in picking your benchmark, maybe you can pick one that’s more future-tilted.”

Neil Stanford, Escala Partners’ alternatives investment specialist and a former head of private equity for Hostplus, said that while there is appetite among high-net-worth and ultra-high-net-worth clients for investment in renewables, building portfolios “really is like trying to herd cats”.

“We don’t have just one portfolio or a handful of portfolios, we’ve got hundreds of portfolios and very bespoke, customised portfolios for every client,” Stanford said.

“But it is an area where I think it is beholden on advisers to really drill down the next layer – because a lot of the investing stops at the top level of  investing for capital growth or investing for income – to actually say, well, what is the purpose of your investment?

“When we get down that next layer, I’m hoping that we can actually tap into more of the purpose about clients and aligning with clients’ longer-term purpose for their investment and tapping to sort of synergies of not only making a return but doing good with that return as well.”