The fifth Emissions Reduction Fund (ERF) auction was held on April 5–6, with 31 contracts entered into by the Clean Energy Regulator (Regulator) for the delivery of just 11 million Australian Carbon Credit Units (ACCUs) at an average price of $11.82. $133 million in funding was committed, with more than $300 million remaining in the government’s initial $2.55 billion funding tranche.
In line with expectations, results are a considerable step down from earlier auction events. At auction four (November 2016), over $360 million in funding was committed to purchase 34 million ACCUs (47 contracts), while $516 million was committed at auction three (April 2016), purchasing over 50 million ACCUs over 73 contracts.
As noted in our earlier outlook, the poor auction result reflects negative market sentiment in the ERF, with the low average price of ACCUs and the administrative complexity of the scheme creating a significant barrier to participation for many firms, particularly high emitting companies.
This low level of participation is expected to continue for the foreseeable future, with the low average price of abatement resulting in many projects being economically stranded under the ERF with little incentive for further bidding given the current low price environment.
Low participation leading to higher contract prices
While the low price environment is impacting broader participation, low registration rates have led to higher contract prices as a result of reduced competition.
In line with our auction outlook, the average price of abatement jumped over 10 per cent from $10.69 to $11.82 at auction five, underpinned by a wider spread between lowest and highest contract prices.
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. Nor does the average contract price reflect the current value of ACCUs – and in this way, should not be mistaken for a market-derived “carbon price”.
To this end, modelling again indicates a broad spread of contract prices at auction five, with many proponents contracting at a premium above the weighted average price. Proponents seeking to capitalise on lower participation, by bidding above the average price, were therefore rewarded by favourable contract prices.
We continue to see good upside for bidders operating at the top end of the auction bid-stack, with the high variable clearing threshold (84.1 per cent of abatement purchased below the benchmark price) creating upside opportunities for informed bidders
Our auction review for ERF five
Our ERF Auction review backcasts the outcomes of the fifth ERF auction in line with our ERF Auction Simulation Tool. Analysis provides greater detail on auction outcomes, including contract price estimates, auction bid stack (supply versus bid prices), the variable clearing rule and the ‘highest clearing price’.
The RepuTex Team
Australian Emissions Markets