Climate Equipment Finance: Lessons from Australia

Climate equipment finance presents a significant market-entry opportunity for the equipment finance industry. Climate and emissions targets on the books worldwide dictate that the global market opportunity around climate finance is expected to expand significantly through 2050. In the U.S., it is estimated that $27 trillion in capital expenditures across industries is required to hit climate targets by 2050. Globally, investment in climate finance is currently at $1.2 trillion annually and is expected to grow to $9 trillion by the year 2030.

While the November 2024 U.S. elections will undoubtedly impact the government incentives and regulatory posture that have been propping up American climate equipment investments since the 2022 passage of the Inflation Reduction Act, the fact remains that global sustainability goals remain in place, and the world continues to experience the impacts of a changing climate.

Keith Rodwell, CEO of The Alta Group’s Asia-Pacific Region, digs into climate equipment finance in an article in the September/October 2024 edition of the Monitor. As Rodwell points out in his introduction, “Uncertainty is a consistent theme running through the commentary on energy transition and climate finance.” That makes it imperative that equipment finance leaders seek out opportunities to learn from areas of the world where green assets are being deployed at a rapid rate. Based in Sydney, Rodwell finds one such example in the adoption rate of residential rooftop solar panels in the U.S. versus Australia.

Rodwell points out that Australia leads the world in rooftop solar penetration, at nearly 30% of houses versus 3% in the U.S. “What can be learned from this Australian experience and applied to other climate-related finance segments in the commercial finance world?” he asks.

While government incentives have assisted this high adoption rate, Rodwell says that the availability of private financing for residential rooftop solar has been a major driver of its success. While the up-front investment is large, the ultimate economic benefit is such that it makes sense for both the lender and the end user.

Ongoing technological innovations are also increasing the incentives for homeowners to adopt rooftop solar. These include the reduction in cost of battery storage that allows solar owners to draw from their supply at night, the ability to sell power back to the grid through two-way transmission, and real-time pricing of power made possible through data connectivity.

“A lesson here for commercial financers is to look at the value proposition that has led to such high penetration in the Australian residential market,” Rodwell writes. “It’s nothing to do with rooftop solar per se; rather, it’s the fact that the investment in this technology replaces the cost of power in the household budget. In addition, under Australian mortgage lending laws, homeowners remain obligated for any shortfall in a mortgage default. The combination of the self-servicing nature and the equity in the house, creates a sound risk framework for providers of rooftop solar loans. This is despite the limited security value of rooftop solar equipment in default,. Could owner-operators benefit from a similar investment in rooftop solar, charging infrastructure or batteries? Could landlords garner higher rents by offering their tenants premises with this infrastructure? While the sustainability benefit is often the headline, the decision to invest is ultimately made based on impact to the bottom line.”

When we compare this to the world of commercial finance, many factors are currently limiting the speed of green asset adoption. Few businesses are property owners, so equipment security value is more critical. Risk mitigation is challenging at this point, when secondary-market values for some climate equipment, such as electric vehicles, are uncertain. But this is a temporary condition, Rodwell notes:

“At a point in the future, market values will be more predictable and private lending decisions will be based on better data. We may also see internal combustion engine vehicle values suffer greater LGD, as demand shifts to clean-energy assets, thereby negating the relevance for lenders of historical market resale values.”

While it may be moving slowly at the moment, a surge of investment into climate-focused equipment is coming, Rodwell writes.

“Equipment financers who wish to enter this market can start by looking for the potential cashflow and other benefits customers could gain by installing sustainable energy equipment or battery storage, especially as the capabilities of this technology improve,” he writes. “The clear risk to the speed of transition is need for secondary-market sales data for clean-energy equipment to allow private financers to assess security value. Without some form of mitigation of these risks, the transition will take longer. If the benefits of clean energy accrue to everyone, it is logical and prudent that the public sector play a role by assuming or mitigating some of these risks to accelerate the transition.”

The Alta Group brings a global perspective to climate finance considerations. With advisors in the Asia-Pacific, Europe, the Middle East and Africa and Latin America, we bring a wealth of knowledge of how policies and regulations in various parts of the world are driving this market. In the U.S., The Alta Group has played a leadership role in helping the equipment finance industry understand the imminent opportunity that climate finance presents. Alta Director Patricia Voorhees chairs the Equipment Leasing & Finance Association’s Climate Finance Working Group. She was the lead author on the spring 2024 Equipment Leasing & Finance Foundation research report, “Climate Finance: A Massive Commercial Opportunity for Equipment Finance.”

Read Keith Rodwell’s full Monitor article here.