Bigger volumes, lower prices expected as Australia launches second ERF auction

Published 03:30 on November 4, 2015  /  Last updated at 03:30 on November 4, 2015  /  Asia Pacific, Australia  /  No Comments

Australia on Wednesday opened the two-day bidding window for the Emissions Reduction Fund’s second auction, with observers expecting prices around A$11-13 per tonne and the contracted volume to be bigger than the 47 million bought in the first auction.

Australia on Wednesday opened the two-day bidding window for the Emissions Reduction Fund’s second auction, with observers expecting prices around A$11-13 per tonne and the contracted volume to be bigger than the 47 million bought in the first auction.

Nearly four hundred projects are eligible to bid for contracts in the auction, almost three times the number of successful bidders in the April auction, when the government paid A$13.95 per tonne on average.

With increased competition, observers expect the price to drop slightly compared to the first auction.

“We may see more volume bid into this auction – this is because there were a number of projects that were unsuccessful in the first auction, plus a large number of projects have been registered since,” Elisa de Wit, a climate expert with lawfirm Norton Rose Fulbright, told Carbon Pulse.

“There will still be a strong emphasis on projects from the land sector, with projects from new methodologies, such as energy efficiency and transport, only making up a small component of total volume,” she said.

Observers and market participants speaking to Carbon Pulse said they expected 50-80 million tonnes of CO2e cuts to be contracted in the auction.

Analysts Reputex said 93% of all registered projects are in the land use and waste sectors, and tipped forest regeneration and savannah burning activities to be the biggest winners.

“While industry accounts for only a small number projects registered, the size of those projects means that we anticipate they will supply a relatively large volume of ACCUs, particularly from coal mine waste gas and industrial energy efficiency projects,” Reputex said.

“We estimate that total supply from industry will be just under 20 per cent of the ERF II supply curve.”

CHEAP

Environment Minister Greg Hunt said in a speech Tuesday that the ERF is modeled on the CDM. But while the UN mechanism had strict additionality rules in place, the ERF’s only consideration is price, which meant 75% of the successful bidders in the first auction were projects that already existed.

“Our focus for each auction is to purchase the lowest cost abatement. There is no drive for us to purchase large amounts of abatement at the expense of price. There is plenty of competition in the market,” Chloe Munro, the Clean Energy Regulator chair said Wednesday.

In August the Regulator changed the auction rules in what observers saw as a move to push prices down.

In the first auction, the government was obligated to buy 80% of the volume bid under a pre-defined (but unannounced) price threshold.

For the second auction, this level has been changed to 50-100%, leaving the Regulator free to buy fewer tonnes of carbon cuts if bids are higher than it prefers.

“I have been saying since the beginning that the best strategy to be successful at auction is to bid the lowest price at which it is worth your while to run your project,” Munro said.

But Reputex said that while the average price was likely to be in the A$11-13 range, some project types might be able to bid successfully at around A$15.

“Results will be influenced by the behaviour of aggregators, who have the ability to use their larger portfolios to spread their bids in search of the Regulator’s highest contract price,” it said.

The auction results will be announced on Thursday Nov. 12.

By Stian Reklev – stian@carbon-pulse.com

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