The fifth Emissions Reduction Fund (ERF) auction will take place on April 5–6, with $440 million in remaining in the government’s initial funding tranche. Just 17 new projects have been registered since the last auction, down from 28 ahead of ERF IV, and well below the average project registration rate (90) ahead of auctions 1-3.
While the Clean Energy Regulator (Regulator) notes that the fifth ERF auction is expected to be “smaller and more representative of business as usual”, we believe that low levels of participation are reflective of negative market sentiment, with the low average price of ACCUs, and the commercial and administrative complexity of the scheme, creating a significant barrier to participation for many firms, particularly high emitting companies.
In this context, even if funding for the ERF is topped up at the forthcoming policy review, we believe that we are unlikely to see the ERF abatement profile – concentrated in the land sector – align with Australia’s emissions growth profile, which is driven by the industrial sectors. While additional funding may enable ACCU prices to rise, the bigger issue for policymakers therefore remains the failure of the ERF to achieve Australia’s absolute 2020 emissions reduction target, with emissions projected to grow 3 per cent from 2016 – driven by the safeguard sectors – to be 559 Mt in 2020, short of an absolute minus 5 per cent target (522 Mt).
In the short term, fortune appears likely to favour the brave at the fifth ERF auction, with modelling indicating that ACCU contract prices are likely to push higher at the fifth ERF auction, driven by lower participation and reduced competition. This is likely to see the spread between the lowest and highest contract prices again grow, with good upside for informed bidders operating at the top end of an auction bid-stack.
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