Recent developments in the renewable energy industry mean that the appetite for the construction, development, and operation of renewable energy projects is stronger than ever and super funds are emerging as key participants.
Developments include the recent establishment of a regulatory framework for offshore renewable energy projects which has led to many opportunities for potential developments, and continued commitments to expanding the hydrogen and energy storage markets in Australia.
In this article, our Tax team and Funds and Financial Services team discuss the importance of fund structuring and methods to make a potential renewable energy project more attractive for super fund investors.
Importance of Structure
Careful consideration should be taken when designing the structure of a new fund. Particularly for renewable energy projects (REP(s)), each asset is generally held separately via a special purpose vehicle established for the sole purpose of acquiring and completing a specific REP.
These divided structures are often preferred over structures where various assets are subject to, and controlled by, a single agreement. This is firstly because REPs tend to carry an asset from the development process (including planning and construction), through to the operational phases. Each phase can carry a different return profile, project specific risk, and differential tax treatment, and so it makes practical sense to divide and manage each asset separately (to the extent possible).
Secondly, holding several risky assets within a single structure can pose risks with limitation of liability clauses and limited recourse finance facilities, where a single failed REP could carry the risk of cross default that prevents the completion of the remainder of projects in the portfolio. In these circumstances, a receiver may be entitled to liquidate all the assets held within the structure.
Attracting superannuation fund investment
Recently, superannuation funds have shown a growing appetite to invest in long-term REPs considered to generate long term returns and provides green investment. This aligns well with a superannuation fund’s main purpose to provide retirement benefits to members.
Hamilton Locke recently advised Birdwood Energy on the formation of the ‘Birdwood Distributed Energy Platform’ in which Aware Super made an initial investment commitment of $300 million. The investment by Aware Super is understood to be the first significant investment by an Australian superannuation fund into the distributed energy sector.
REST Super, whose renewable energy investments include ownership of Collgar Renewables, Western Australia’s largest wind farm, also plans to expand into the solar energy market.1
Key tips to attract a superannuation fund
Tax structuring
As outlined above, one of the main considerations when investing in a REP is the suitability of the REP ownership structure. Each ownership structure will have its advantages and disadvantages, but superannuation funds are likely to be attracted to tax transparent structures.
These structures can include unincorporated joint ventures, partnerships, trusts or corporate collective investment vehicles. Investments into these types of entities can provide superannuation funds with a tax efficient structure, as the funds can flow from the project without the imposition of tax at the project level, which provides investors with an opportunity to structure their own tax affairs.
These structures can also facilitate distributions of cash from a REP in advance of recognising accounting or tax profit which is beneficial where the project has significant non-cash expenses (such as depreciation).
Utilise C-Notes
Convertible notes, or ‘C-Notes’, are short-term hybrid debt and equity instruments that allow investors to front up capital in the form of interest-accruing loans that will eventually convert into company shares following a trigger event. They allow for ‘bridging’ capital with lower risk until completion of the relevant development project and also enable superannuation funds to meet the detailed requirements to disclose fees and costs in a consistent and transparent way, all of which can be highly attractive to potential superannuation fund investors.
Distribute risk
As discussed above, the design of the fund structure used to hold assets can mitigate cross default risk for a leveraged portfolio of assets. Superannuation funds may be unlikely to invest where the structure used doesn’t meet required parameters established by their investment or governance committee. Risk should be distributed appropriately across the portfolio of assets and minimised through preventative measures where possible to provide investors with comfort in the project and management of the project.
Be licensed
Most institutional investors, including super funds, will expect the sponsors of new energy investment funds to be appropriately regulated under financial services laws. Our team can assist you to develop fund structures in accordance with these requirements, including the requirement to hold an Australian financial services licence (AFSL).
Other considerations
Developers should keep in mind the specific fees, costs and disclosure requirements of their institutional and superannuation fund investors under ASIC’s Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97), and expect to provide the information that they need to include in the relevant product disclosure statements and periodic statements.
Future Market Development
In the future, the market may see superannuation funds develop further in-house capabilities for large deployments of capital in REPs. Combined with the predominant view within the superannuation fund industry that environmental factors are important to the investment thesis, this is likely to mean that superannuation funds will have a stronghold in the sector as they consider mitigating risks to their members’ retirement outcomes.
1Glenda Korporaal, ‘Energy transition offers huge opportunity for investors: REST CIO’ (30 January 2023): https://www.investmentmagazine.com.au/2023/01/energy-transition-offers-huge-opportunity-for-investors-rest-cio/
