IN FOCUS: What could be the impact of the variable auction rule at ERF II

The Emissions Reduction Fund (ERF) Auction Guidelines recently released by the Clean Energy Regulator contained a new rule guiding how much abatement the CER may buy at the second ERF auction, introducing a variable clearing rule enabling it to buy between 50 and 100 per cent of all abatement bid into the market below the benchmark price. This is updated from its former obligation to purchase 80 per cent of all abatement bid below the benchmark price ceiling, as specified by the government’s initial policy framework.

While the Regulator’s new clearing rule is designed to encourage bidders to bid low, analysis suggests that the rules are likely to have minimal impact. While the rules will lower market transparency, given the existing opaque nature of the market, we do not believe the rules will encourage low bids from market proponents.

Instead, we anticipate that market dynamics will continue to be the key driver of bid prices, driven by competition, supply volumes and bid-prices.

In this In Focus, we take a closer look at the operation of the Regulator’s new variable clearing threshold and step through scenarios for its implementation under high and low competition ERF auction bid-stacks.

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