By Hugh Grossman, Managing Director, RepuTex
Over the past three weeks 73 projects have been registered under the Emissions Reduction Fund (ERF), a new record for project registrations under both the ERF and the former Carbon Farming Initiative (CFI) schemes – at more than 2.5x the previous monthly registration high of 28 – set in March 2015, just prior to the first ERF auction. A sign of things to come?
The July spike in project registrations – exactly three months after auction one – comes as proponents ready themselves for a possible “early” auction in line with the government’s ERF White Paper, which proposed that four auctions be held in the first 12 months of the new scheme in order to provide “regular opportunities for participation”. Such a timeline would have seen auction two take place in mid-July, followed by a third auction prior to the end of the year in mid-October.
Despite this guidance, the Clean Energy Regulator is exercising its discretionary power to set its own auction timeline (subject to a 6 week notice period), and publish an indicative forward schedule of auctions on its website (which it is yet to do).
As we noted in our earlier update, rather than a quarterly schedule, we continue to anticipate a semi-annual timeline as the most likely to be eventually adopted by the CER. This means at least one more auction is likely to be held prior to the end of 2015, followed by auctions roughly every 6 months, provided new projects are registered to ensure adequate competition within the scheme.
Of the 73 projects registered in July, only 1 (belonging to EDL) stems from a ‘non-CFI’ methodology (Coal Mine Waste Gas), while out of all 351 projects, only 5 are registered under industrial methods (to firms including EDL, Visy and Goldfields), equivalent to just 1.5 per cent of all projects.
Subsequently, while the jump in July project registrations indicates that existing proponents are readying themselves for the possibility of an early auction, in reality the spike is more akin to a nervous twitch, and does not yet reflect any significant pre-auction momentum from the broader industrial sector.
AUCTION TIMELINE IS CRITICAL FOR CFI PROJECTS
As we outlined in our latest Market Outlook, the timing of the second auction, and the schedule for subsequent auctions, will play a key role in determining which projects will participate in the ERF, with implications for both the price and quantity of abatement purchased by the CER, plus the contracting potential of industry and carbon farming methods.
Should an “early” auction be set, this would restrict industry participation in the ERF, with many industrial methods unlikely to be active until the second quarter of FY 15-16.
Such an outcome would be beneficial to CFI based projects, specifically those that were unsuccessful in the first round of the ERF (notably higher cost savanna burning and environmental planting projects), with these activities having their best opportunity to secure long-term contracts in the second auction without excessive competition from industry.
Inversely, the participation of industry will have a negative impact on the more expensive CFI projects, which will begin to be displaced from winning contracts in line with the competitive pressure of industry.
A “late” auction timeline would provide time for more low cost industry projects to participate at the next auction, with this participation to place downward pressure on prices, and therefore squeeze out a number of higher cost land sector projects.
Subsequently, should industry enter the market soon, this would have a detrimental impact on higher cost CFI methods, with higher cost environmental planting, savannah burning and reforestation & afforestation methods, likely to be the first to come under pressure from industry participation in the scheme.
This would result in considerable gains for high emitting sectors, with $1.4 billion of the remaining $1.89bn in ERF funding (75 per cent) forecast to be contracted to industry. Four sectors alone – the Metals & Mining, Property, Power and Energy sectors – are forecast to receive 85 per cent of the $1.4 billion won by industry. In comparison, the carbon farming sector would win only $450m in funding over the next 12-18 months, or just 25 per cent of the remaining ERF budget. To view our full outlook for the ERF, please click here.
Auction timing will therefore have a considerable impact on the quantity of abatement purchased by the Regulator, and the price of abatement.
While additional competition may place downward pressure on the average price of abatement, we again forecast considerable pricing upside, with industry proponents expected to take a more sophisticated approach to the market (than initial carbon farming participants) as they seek to maximise the value of their abatement, particularly with high prices forecast to be available.
CLEAN ENERGY REGULATOR BETTER SERVED BY TRANSPARENCY
By waiting to hold a second auction until later in the year, the CER would likely see more abatement purchased at lower prices due to the increased supply of lower cost abatement. This is unlikely to occur should an “early” auction be immediately scheduled. Resultantly, we believe a semi-annual auction timeline is the most likely to be adopted.
While project registrations may continue at high rates as businesses – notably from CFI proponents – seek to rush projects to market, it is now up to the Clean Energy Regulator to take a proactive stance in setting a transparent auction schedule in order to re-establish short-term ACCU demand.
Maintaining silence over the forward schedule – whereby an auction is “sprung” on proponents six weeks prior to the next auction – risks the market losing momentum at a point where industry registrations would be encouraged by the certainty of formal auction schedule being announced.
Therefore, the CER has the ability to enhance abatement project development from high emitting sectors by setting an auction schedule, which is likely to stimulate more participation in the ERF by clearly communicating timelines with industry market participants.
To its surprise, the Regulator is likely to find that the market responds to transparency.