Emissions Reduction Fund – Third Auction Announced

The Clean Energy Regulator held the second Emissions Reduction Fund auction at the start of November, and has just announced that the third auction…

The Clean Energy Regulator held the second Emissions Reduction Fund auction at the start of November, and has just announced that the third auction will be held in late April 2016.

The key outcomes of the second auction have been extensively documented and analysed, but in summary they were:

  • 131 projects were contracted, totalling over 45 million tonnes of abatement, roughly the same as the first auction.
  • The total amount spent by the Regulator was $557 million, leaving just over half of the allocation of $2.55 billion to be spent in future auctions.
  • The average price per tonne of abatement was $12.25, compared to a price of $13.95 in the first auction.
  • The majority of abatement came from vegetation projects.

The charts below show the change in project mix from the first auction to the second (in tonnes of Co2-e).

The charts reveals some notable differences in the final composition of the two auctions:

  • Waste projects decreased from 36% of total abatement in the first auction down to 8% in the second auction, as the backlog of transitioning CFI waste projects has now been successfully contracted.
  • Savannah burning projects increased from 1% of total abatement in the first auction to 14% in the second auction, as more of these projects have been registered in recent months.
  • Energy efficiency projects increased from 0% to 8%, as the relevant methodologies have been progressively released since the first auction.

A closer analysis of the underlying data reveals:

  • No avoided deforestation projects were successful in the second auction, whereas over 20 million tonnes were contracted under this method in the first auction.
  • At the same time, native forest regeneration projects increased from just under 2 million tonnes in the first auction to over 20 million tonnes in the second auction, which means the broader ‘vegetation’ category actually remained fairly stable across the two auctions.

There are still 269 projects on the ERF register that have not been contracted, and doubtless more projects will register before the next auction. This indicates that there is still a significant supply of abatement on offer. The government has just announced that the third ERF auction will be held on the 27th and 28th of April 2016. With that in mind, Point Advisory’s predictions for the third auction are:

  • The project mix for the next auction will continue to be dominated by vegetation projects, but the number of energy efficiency projects and the corresponding volume of abatement from these projects looks set to increase. Savannah burning projects will again feature strongly.
  • The CER will spend around $600 million on abatement, leaving budget for one final ERF auction, which may possibly take place before the next election (due at the end of next year).
  • Our preliminary analysis indicates that the weighted average auction price is likely to be broadly consistent with the first two auctions. To start the conversation, at this early stage we are anticipating an average price of between $12 and $13 per tonne based on the confluence of the following circumstances (we will expand on these in a future edition of our newsletter):

– The ‘tail’ of cheaper, pre-existing projects has been contracted, driving the future weighted average price up.

– The Regulator can now choose to contract between 50% and 100% of abatement offered below the benchmark price, giving them the ability to drive the average price down.

– Proponents of more expensive projects (>$15 per tonne) are understanding that they need to reduce future bids to have a chance of securing funding, driving prices down.

– The market price is becoming more crystallised with each passing auction, and behavioural economics tells us that where we have a strong price signal, market participants will tend to converge towards that price.

Our advice is consistent with most commentators: the ERF budget is quickly being exhausted and is unlikely to last beyond 2016. Potential project proponents should act fast to ensure they do not miss out.

To discuss any aspect of the ERF, please contact Charlie Knaggs or Neil Salisbury.