New Zealand needs a lot more renewable energy to power our future, and we're already seeing a wave of new projects that include significant innovation and diversification of our energy sector.
However, getting projects off the ground can be a complex exercise that requires collaboration across science, engineering, construction and finance — and banks have a critical role to play in helping this happen.
Before we jump into that, it's worth reflecting on the fact that in a world where many countries remain tethered to legacy electricity grids reliant on fossil fuels, New Zealand is lucky to have a range of renewable energy options.
Our big hydro dams are the backbone of our renewable network and are supported by geothermal and wind generation.
And now, solar is set to have its day in the sun.
Already proven on rooftops across the country, solar technology will be ramped up under plans by Lodestone Energy to build New Zealand's largest commercial solar farms.
Our team at Westpac NZ has agreed conditional terms to provide the company with the $150 million debt facility that will allow Lodestone to build five solar installations across the Far North, Coromandel and Bay of Plenty.
Solar diversifies the range of ways electricity is generated, helping to reduce the nation's reliance on snow melt filling dams, and improve resilience. Lodestone Energy's solar farms are also earmarked for regions that have a shortage of generation and have the added bonus of being able to support continued agricultural operation.
When it comes to increasing renewable energy generation and diversifying our energy sources, the case for change has never been stronger. Climate change is a major threat to our wellbeing, and we believe that business and the financial sector have a major role to play to reduce emissions and prepare communities for future impacts. We also need to play our part in shaping our future energy system to one that is affordable for everyone, resilient and sustainable.
That's one of the reasons we support the development of renewable energy, and we are acutely aware that our role as a bank is critical to getting these environmentally and economically important projects off the ground.
A diversified national grid with significant generation from renewables will provide better capacity for expected increases in power usage, as the population grows, consumers switch to EVs, industry decommissions its coal boilers and space heating goes electric.
In short, we support the benefits of renewables and are confident market demand will increase in years to come.
However, there is also complexity and uncertainty within the sector, especially in the short and medium term, which can make it hard for these projects to get the go ahead.
For example, the notoriously volatile wholesale electricity market makes it difficult to forecast energy generation revenue from year to year, or even month to month. One way to mitigate this risk can be through power purchase agreements (an agreement to buy a set amount of power for an agreed price over a certain time period) which provide predictable and stable cash flow and as a result are easier to finance. However, Westpac is also open to exploring other ways of mitigating "market" risk.
There are also question marks over the supply and demand balance within the market. To give one example, if the Tiwai Point aluminium smelter closes down in 2024 as expected, that could significantly increase the amount of surplus power within the network because the smelter is the largest single user in New Zealand. So what happens to that energy?
If another large-scale industrial use does not eventuate — for example the production of hydrogen in Southland — it's not as simple as feeding excess power into the national grid for use in the North Island where most of the demand is, due to transmission constraints across the Cook Strait.
There are other potential disruptors in the electricity market, including the way electricity is distributed. You only have to look overseas to see how 'big battery' installations such as in South Australia are enabling suppliers to store electricity when it is cheap and easily available, for use during peak demand when prices are higher. Consumers are also starting to do this by pairing rooftop solar with batteries. Lastly, the possibility of regulatory change can never be discounted, meaning the electricity market could evolve in yet other unforeseen ways.
These uncertainties and natural market evolutions make the energy industry a dynamic and fascinating place to work. We're lucky the Westpac NZ project finance team includes experts who have worked in the sector and understand the opportunities, risks and potential curve balls very well.
We're also able to call on the experience of Westpac Group, which has expertise in supporting large scale solar and wind projects in Australia.
This institutional knowledge is invaluable when deciphering the complexity of renewables projects, with specialist expertise required across the design, construction and operation of facilities.
It's not just solar where we're working with pioneering companies; we are also working with Hiringa Energy to finance a project which is using wind power to create green hydrogen. That hydrogen is earmarked for the production of fertiliser, which will displace high emission imported product, and also be made available to trucking companies through a high-capacity nationwide distribution and refuelling network being established by Hiringa.
While providing support for capital expenditure and watching shovels go into the ground to build New Zealand's energy future is exciting, the Westpac NZ team is also using sustainable finance to support the energy sector in many ways.
As well as structuring green loans and green bonds, where energy companies can borrow money from banks and investors to support their renewable energy assets, we are also offering sustainability-linked loans to help our customers achieve their climate change and renewable energy goals.
Sustainability-linked loans incentivise companies to make positive environmental and social changes within their business by offering discounted interest rates on loans when they hit their rigorous targets.
Or, to flip that idea on its head, these loans penalise companies financially when targets are missed.
Westpac NZ structured New Zealand's first sustainability-linked loan in the energy sector with Contact Energy and we recently signed another sustainability-linked loan with Genesis Energy.
The loan supports Genesis to reduce over 1.2 million tonnes of greenhouse gas emissions and also sets out annual milestones to ensure it delivers on its medium-term commitment of 2,650 GWh of new renewable electricity generation to be built by December 2030.
We've been recognised as the leading bank in sustainable finance in New Zealand and this quarter alone we've structured over $460m worth of sustainability-linked loans.
It's great to see such interest in sustainable development and financing from the energy sector.
The leaders we speak to are as conscious as us of the need to lower emissions and build a sustainable and resilient energy system for New Zealand.
We look forward to speaking with more like-minded companies to understand their ambitions, and how we might be able to help them get their project off the ground and build a better New Zealand.
• Andrew Bashford is Head of Institutional Relationships at Westpac NZ. Westpac is a sponsor of the Herald's Infrastructure report.