Changes to the Emissions Trading Scheme (ETS) could create some uncertainty around future investment decisions in big renewable energy projects, fund manager Shane Solly says.
The Ministry for the Environment this week opened public consultation on potential changes to the ETS, with a view to creating a greater incentive to reduce carbon dioxide emissions rather than just offsetting them with carbon credits.
Since the review was announced, there has been limited trading in the carbon markets, and prices have fallen from last year’s peaks, likely related to the uncertainty around potential policy changes.
Up until late last year, carbon prices had been high, meaning polluters had to pay more for their carbon emissions.
Solly, portfolio manager at Harbour Asset Management, said the review “just creates that little bit of uncertainty” for the investment climate.
“Industry in general expects some degree of carbon charging, and the businesses that are ahead of the curve are certainly thinking about this,” he said.
“Industry, on the whole, is aware that they need to be allowing for a carbon cost, and that’s influencing where they direct their investment.
“Many of the renewable energy projects that are under way stand up, even without a carbon charge, but it is fair to say that they are helpful in driving the economics for wind or other non-carbon-generating assets,” Solly said.
“As investors, we are pushing businesses to undertake investments that will improve both returns and reduce their carbon footprint,” he said.
Solly said the carbon pricing mechanism had in the past been quite effective in helping firms understand they need to act.
Billions of dollars worth of renewable energy projects are already under way and several billion dollars worth more are in the pipeline or under consideration.
Solly said potential investors will “want to see where it all lands” with the ETS review before they get on with the next tranche of investment.
“It certainly does not stop the current programmes, but there is now a grey area or a question mark over future projects.
“There are lots of different ways of influencing decarbonisation, and you can have your own view on what is sufficient, but certainly the ETS has encouraged firms to get on with projects.”
Solly said the ETS regime, in its present form, has had a significant influence on capital flows.
Milford Asset Management investment analyst Jeremy Hutton said the big four generator-retailers (gentailers) are spending over $3 billion over a five-year period to generate almost 5 terawatt-hours (TWh) of new generation, or around 12 per cent of current market supply.
“There is also a huge pipeline of other projects being explored by the gentailers and other private independent operators too, spanning the next decade or so,” he said in a report.
“Note that not all of these projects will go ahead, but it gives an indication of the new generation development activity being evaluated,” Hutton said.
The Government said its review would ensure the ETS is best equipped to reduce climate pollution at its source while also supporting greenhouse gas removals.
Wind Energy Association chief executive Kevin Hart said the outcome of the ETS review, along with proposed changes to the consenting process for new projects, would be closely watched by energy investors.
“I think projects that are already up and running – it won’t affect them.
“It’s really about how it’s going to affect the pipeline of projects,” he said.
A spokesperson for Meridian Energy said the company “generally agrees” with the advice of the Climate Change Commission - that the emissions pricing system should be designed to encourage gross emission reductions, rather than “excessive amounts” of exotic forestry planting.
Meridian expects to bring seven new large-scale renewable generation projects into operation over the next seven years.
The company did not expect the outcome of the ETS review to directly impact its investment intentions, the spokesperson said.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.