MARKET UPDATE: Goodbye ERF price cap, hello “floating” price?

The Clean Energy Regulator has noted a preference for the next ERF auction to take place when a minimum number of bidders are registered to supply enough abatement to ensure effective competition. This is consistent with the Regulator’s objective to purchase ‘as much abatement as possible for the budget available’.

In line with such an approach, the Regulator is unlikely to lower the benchmark price for the second ERF auction, with the preservation of a high benchmark price – and therefore high priced contracts – likely to reduce industry pessimism and ensure enough competition to lower the average price of abatement.

Analysis indicates that a high benchmark price is likely to lead to a ‘competition driven’ abatement price forming at auction two, whereby the benchmark price will be largely irrelevant to the formation of an ACCU price due to the impact of competition. Instead, we forecast that the average price of abatement – and the highest clearing price – will “float” in line with supply volumes and bid prices, up to the 80 per cent clearing threshold.

In our Market Update for June, we analyse the impact of this “floating” dynamic on the price of Australian Carbon Credit Units (ACCUs) for remaining ERF auctions, and the opportunities for market participants.

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