Small ERF auction volumes to open window for high contract prices

The seventh Emissions Reduction Fund (ERF) auction will take place next week (June 6-7), with $265 million remaining in the government’s $2.55bn fund.

In line with our previous auction outlook, the average price of abatement jumped over 10 per cent at auction six, from $11.82 to $13.08, underpinned by a wider spread between lowest and highest contract prices. This again led to contracting well above the average price of abatement, with 94% of all abatement (offered under the benchmark price) purchased by the Regulator.

Modelling indicates a broad spread of contract prices is likely at auction seven, with smaller participation again opening the window for significant upside in contracting. Given the change to the variable clearing rule for this auction (lowered to 25%), lower risk contract prices will fall from the last auction. Despite this, we anticipate good upside for more sophisticated proponents, with high contracting again modelled to occur at notable premiums to our forecast average price.

Coupled with higher pricing appetite in the secondary market, albeit it small volumes, ACCU prices are expected to stay at higher levels over the short-term.

Low participation suggests that the auction will not make a significant dent in the remaining budget, with funding expected to be available for 2-3 more auctions. This may equate to a 1-2 year timeline should an annual auction cycle be implemented, which we believe is likely after next week. This reinforces our earlier notes that the ERF has run out of puff as the centerpiece to any long-term emissions reduction policy, particularly should it not be accompanied by any meaningful safeguard mechanism.

To access our full ERF outlook for auction seven, please view the Downloads box below.

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