Direct Action fund likely to be rorted by big business, analyst says

A new analysis of the federal governments Emissions Reduction Fund – the centrepiece of Direct Action – says the scheme is likely to be rorted by big business, who will be able to inflate the price of emissions reductions through techniques known as “bid shading.”

The analysis, from RepuTex, says that while the government is promising lowest-cost abatement, industry is set to profit from the scheme, with some companies potentially winning abatement contracts despite bidding more than 15 times the cost of reducing their emissions.

It says the government may have to pay three times what it expected for the emissions abatement – around $800 million for the credits to be sold, rather than the $250 million it hopes.

The analysis comes as a separate report notes that the removal of the carbon price is causing emissions to rise, and suggests that the renewable energy target – if left unchanged and given policy certainty – could deliver a large part of Australia’s 5 per cent carbon abatement target by 2020, without the need for government payments to polluters.

In the first report, Hugh Grossman, the executive director of RepuTex, said there would be a large discrepancy between the intended design of the ERF, and the way it will operate in practice.

“The Clean Energy Regulator has advised companies that the best strategy for success at an Emissions Reduction Fund auction is to bid ‘the lowest price’ at which it is worth your while to undertake a project”

“However, analysis indicates that companies are actively seeking to bid the highest clearing price so that they can generate greater returns. Business typically sells at the highest price, not at the lowest.”

In some cases, bids may be more than 15 times higher than the cost of actually creating the emissions reductions, leading to a significant windfall.  He pointed to the waste sector, which has negative marginal abatement costs. But rather than sell that abatement cheaply, companies will look to exploit their cost advantage to maximise their returns.

“In some cases, companies may inflate their bid-price by 15 times the cost of creating the emissions reductions, and potentially much higher” he said.

The first ERF auction – with up to 45 million Australian carbon credit units (ACCUs) is due to be held in just six weeks, on April 15-16, and RepuTex says the government may be shooting itself in the foot by keeping the market guessing about ceiling prices, and the lack of market transparency.

“The underlying cost of a project is now irrelevant for companies. Regardless of the cost of a project, all companies will seek to bid the highest clearing price, which will float in line with supply volumes” said Mr Grossman

“This will create a false abatement cost curve, where low cost projects that would have been expected to be contracted first, will actually be bid far higher, making it impossible for the Regulator to purchase the lowest cost abatement first”.

Meanwhile, a new report from leading energy analysts Pitt & Sherry says that the current renewable energy target, if left unchanged and given policy certainty, could deliver almost all the abatement needed to meet the federal government’s 5 per cent emissions reduction target by 2020.

This would mean that the current target could be met by introducing more large-scale wind and solar farms, which would force out inefficient black coal generators. Just this process alone would deliver a 4.5 per cent reduction in emissions

Of course, this would mean that the $3.5 billion to be given to companies via Direct Action would not be needed.

Pitt & Sherry’s Hugh Saddler said it was clear that the major driver of longer-run changes in the mix of electricity generation is the large-scale renewable energy target.

This currently has a target of 41,000GWh by 2020 and, if retained and  given certainty by the government, this would displace mainly coal-fired generation. (The caveat on this is that Australia’s electricity demand grows slowly, as forecast by the market operator).

“Assuming, for the sake of illustration, that indeed only black coal generation is displaced, and that demand is as forecast by AEMO, then the reduction in emissions between 2014 and 2020 will be roughly 25 Mt CO₂-e,” Saddler said. “Any reduction in the LRET will obviously dilute the effect.”\

But a dilution is exactly what is likely. Industry minister Ian Macfarlane is refusing to budge on his plan to gut the RET, repeating his performance of nearly a decade ago when he brought the then mandatory renewable energy target to a halt, because it was “too successful.”

Labor rejected the Coalition’s latest overture on Monday, saying that the offer – believed to be 31,000GWh – would decimate the industry. Macfarlane said last week that if the clean energy industry did not accept a big cut, then he would leave the current target as it is, but would refuse to change the 2-year review cycle, meaning that uncertainty would remain.

Sources say that Macfarlane used a similar threat when in Opposition in 2013. Tragically, the clean energy industry and Labor balked at his threats, and the change in the review cycle to four years, as recommended by the Climate Change Authority at the end of 2012, was not put through parliament, leaving the industry at the standstill they now find themselves.

The Warburton review found that the main beneficiaries of dumping the RET would be coal generators. They are already benefiting from the removal of the carbon price.

All generators expect a significant uplift in value in their coal assets from the removal of the carbon price.  Meanwhile, Pitt & Sherry note that over the six months from June to December 2014, total emissions increased by 4.6 Mt CO₂-e, equivalent to 1.6%.

Of this total, 3.9 Mt CO₂-e occurred through electricity generation changes – amounting to an increase of 2.6% in electricity emissions.