The Clean Energy Regulator has flagged its intention to offer “options” contracts under the Emissions Reduction Fund as part of a plan to provide greater flexibility to emissions reduction projects.
The regulator has proposed in a consultation paper a “new approach” to contracting under the emissions fund, that will allow projects to secure a guaranteed price for emissions reductions, while providing projects discretion over whether that abatement is ultimately sold to the government, without the risk of contract default.
It’s an approach that some long-time carbon market participants hope will be a positive step in maturing Australia’s carbon markets.
The Emissions Reduction Fund represents the bulk of the federal government’s efforts to reduce Australia’s greenhouse gas emissions, with the Morrison government allocating an additional $2 billion to purchase around 100 million tonnes of abatement between 2021 and 2030.
Currently, the CER only offers contacts for the “firm” delivery of emissions abatement. When projects contract with the Regulator for emissions reductions, they are then contractually obligated to deliver on those reductions, even if something were to interfere with the contact.
By offering a “put options contract” to projects, the Regulator would provide the right, but not a legal obligation, to a project to sell emissions reductions to the government at a contract price.
“An option to deliver could provide sellers with the opportunity to better manage price and supply risks and play a key role in underpinning investment in carbon projects in Australia,” the Regulator says in its consultation paper.
The option contract would then effectively provide a floor price to projects, with the guaranteed price available from the Clean Energy Regulator, while also providing projects to sell abatement to other customers, such in the voluntary carbon offset market, if it can achieve a better price.
The new approach of offering options contracts would offer greater flexibility for project proponents, and would remove the risk of a contract default of a project found itself in the position where it becomes unable to deliver on a firm contract with the Clean Energy Regulator.
The proposal is almost certainly a response to reports of failed contracts under the Emissions Reduction Fund, which saw contracts for millions of tonnes of abatement terminated by the Regulator.
It will likely create two separate markets for emissions reductions, with the ‘flexible’ options contracts likely to trade at a discount to ‘firm’ contracts, reflecting the value the ability to be flexible in terms of delivery.
However, this is a trade-off against the Regulator’s ability to guarantee that it will successfully source sufficient emissions reductions.
“Our new approach would also allow more people to reap the rewards of participating in the Emissions Reduction Fund by helping people better manage their supply and price risks,” Chair of the Clean Energy Regulator David Parker said.
“We are always on the look-out for new and innovative ways to encourage participation in the Emissions Reduction Fund and the new $2 billion Climate Solutions Fund (CSF). Our new approach underpins investment in new carbon projects by providing more opportunities for people to secure long-term, but flexible contracts with the Commonwealth.”
Managing director of carbon market consultancy Market Advisory Group, Raphael Wood, told RenewEconomy that the Regulator’s proposal could be a positive step forward for the maturity of the market, if implemented correctly.
“More detail is needed, but if the options contracts are implemented correctly, and well, this a step towards greater maturity of the market. It should be positive for the carbon industry as a whole, and contribute to maturing the secondary market,” Wood told RenewEconomy.
“It could assist, and move, the carbon industry towards greater bankability, by providing the surety of a buyer without limiting exposure on the upside.”
“As a project developer, again assuming it is implemented well, the availability of options contracts with the Regulator should drive new project development. It would give projects a mix of income certainty, while keeping exposure to an upside in the market.”
The Regulator will continue to apply the same assessment process as applies to current proposals for emissions reductions, and bids will be selected on a competitive basis, but the Regulator will seek to develop the options contracts proposal in consultation with industry and market participants.
The Regulator has faced growing calls to change its approach to purchasing emissions reductions, after the last Emissions Reduction Fund auction secured contracts for just 59,000 tonnes of abatement, bringing into questions its ability to secure the 100 million tonnes the government hopes to purchase under the fund.
The Clean Energy Regulator will undertake consultation with stakeholders and industry participants on the options contracts, and pending support will seek to offer such flexible contracts at the next Emissions Reduction Fund auction scheduled for March 2020.
The Regulator has released a consultation paper on the proposal and is accepting submissions until 31 January.