The fourth Emissions Reduction Fund (ERF) auction was held on the 16 and 17 November 2016, with 47 contracts entered into by the Clean Energy Regulator (Regulator) for the delivery of 34 million (M) Australian Carbon Credit Units (ACCUs). The final ERF auction is expected to be held in April 2017, with 17 per cent, or $440M remaining in the initial tranche of funding.
In line with our pre-auction expectations, the fourth ERF auction was a step down in size from previous events, with low participation and the absence of ‘mega projects’ leading to a nominal increase in the average price of abatement. While the average price of abatement disclosed by the Regulator ($10.69) is a market reference point, in practice, it is of little help as a robust price signal given it does not reflect the wider value of contracted emissions reductions. To this end, modelling again indicates a broad spread of contract prices, with many proponents contracting at a large premium above the weighted average price.
Analysis indicates that previous ACCU overhangs from spikes in project registrations have become disinterested and/or economically stranded under the ERF, to the point where they are no longer bidding under the current low price environment. This is likely to slow ACCU crediting and issuance, potentially dampening supply of domestic ACCU offsets, while discouraging non-additonal or ‘zombie’ projects.
As noted in earlier updates, low market interest in the ERF is likely to continue until Australian policy is defined at the government’s impending policy review, specifically future ERF funding and the interaction with the safeguard compliance market. While additional funding will restore market confidence, action will be required to address the administrative complexity and low price environment of the scheme should the government wish to maintain the ERF as the centrepiece of its climate policy framework to 2030.
In this update, we estimate the underlying outcomes of the fourth ERF auction in line with our ERF Auction Simulation Tool, including the operation of the variable auction clearing rule (auction cut-off), the ‘highest clearing price’ (the high point of ACCUs contracted) and our ERF auction bid-stack.