Developers to tread water at first ERF auction, expect prices near A$15

Published 06:51 on April 14, 2015  /  Last updated at 08:04 on April 14, 2015  /  Asia Pacific, Australia  /  No Comments

The market expects Australia’s Clean Energy Regulator to buy carbon emission reductions in the vicinity of A$15 ($11.40) per tonne in the first ERF auction, due this week, but bidding is expected to be cautious until developers have a clearer idea of how much the regulator is prepared to pay.

The market expects Australia’s Clean Energy Regulator to buy carbon emission reductions in the vicinity of A$15 ($11.40) per tonne in the first ERF auction, due this week, but bidding is expected to be cautious until developers have a clearer idea of how much the regulator is prepared to pay.

The regulator has set a price ceiling for how much it is willing to pay for emission cuts in the auction, and has pledged to buy 80% of the volume available at or below that ceiling.

But the ceiling has not been made public, as the regulator wants to ensure project-owners submit bids as low as possible.

After the auction, the regulator will announce the weighted average it paid per tonne of reduction, but the ceiling will remain undisclosed.

“I’d expect the weighted average to be around $15,” one developer who wished to remain anonymous told Carbon Pulse.

“It seems to be where most proponents I have spoken to would be happy to sell, and it is where many of the other domestic abatement schemes have found a sweet spot in the past,” he said.

But he admitted the regulator’s strategy going into the auction was unpredictable.

On the one hand, a high ceiling would lead to more volumes contracted, getting the controversial fund off to a successful start.

“But playing the long game, they have a limited budget to spend and need to buy a lot of abatement, so low prices are what they need,” he said.

The Department of Environment recently estimated Australia must cut emissions by 236 million tonnes of CO2e between 2013 and the end of the decade to meet its target of keeping 2020 emissions 5% below 2000 levels. Most of the abatement is expected to be made through the A$2.55 billion ERF.

NOT ENOUGH

Hugh Grossman, executive director with market analysts Reputex, told Carbon Pulse he expected the ceiling in the first auction to be set somewhere in the A$10-20 range.

But even the high end of that range would unlock sufficient market activity to supply only half the emission cuts needed, Reputex said in a study released on Monday.

A price around A$20 per tonne “may incentivise more widespread participation from industry, with potential for the ERF to purchase up to 130 million tonnes of greenhouse gas emissions abatement – comparable to around 50 per cent of Australia’s 2020 greenhouse gas abatement task,” it said.

If the regulator only offers A$5-10 per tonne, the ERF would only bring about 20% of required carbon cuts, according to Reputex.

The company has predicted that around 41 million tonnes will be bid into the first auction, but that only around 9 million will be successful.

A number of methodologies for Australia’s carbon-intensive energy and industry sectors are being developed, which in time are expected to be able to sell emission cuts relatively cheaply, but the first auction is expected to be dominated by land-based projects, such as forestry biosequestration and savanna burning.

“While the carbon farming sector is expected to be the early mover in the first ERF auction, we forecast that over the life of the scheme, carbon farmers will supply less than 20 per cent of all emissions reductions, with high emitting companies set to supply over 80 per cent of all greenhouse gas abatement,” Grossman said.

The auction will open at 9AM on Wednesday and close 5PM on Thursday. More details are available on the Clean Energy Regulator website.

By Stian Reklev – stian@carbon-pulse.com

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