During Q1, there was significant public commentary on announced exit arrangements from Commonwealth fixed delivery contract milestones. Analysis by some suggested that the market will be flooded with ACCUs and the spot price could fall to around $24, inhibiting investment in new ERF projects. This chapter presents analysis on the milestone exit arrangements and data on how the market responded in Q1 2022 and more recently.
Firstly, it is important to distinguish between spot ACCU transactions, including price and volume, reported by a small number of intermediaries, and other over the counter (OTC) transactions where there is no such reporting. Typically, price/volume reported spot trades are between 5 - 10% of all transactions that occur in the ANREU Registry (see Figure 1.1). The increase in reported spot trade volumes in February and March was marked by a small number of relatively large transactions.
Intermediaries reporting such trades are providing important information to the market. The reported ACCU spot price has moved across a very large range over the past year. Consequently, reported spot prices may not be representative of all prices paid in the broader ACCU market.4 Preliminary analysis by the Clean Energy Regulator from the ANREU Registry for transactions between July 2021 and March 2022 shows total secondary market volume is, on average, 7 times larger than reported spot ACCU volumes.5
Figure 1.2 shows the reported spot ACCU price ran up very quickly over the second half of 2021 from $19.75, reaching a peak of $57 on 24 January 2022. Several market analysts commented this was a result of a lack of available supply in that part of the market. Following the announcement in relation to exit arrangements for Commonwealth fixed delivery contract milestones, the reported spot price fell from $47 to a weighted average price of $32.10. This was on the back of 18 reported transactions for a total of 345,000 ACCUs between 4 March and 27 April. From 12 March, reported spot trading in ACCUs slowed with only 8 reported trades (accounting for 95,000 ACCUs) taking place between 12 March 2022 and 27 April 2022. However, on 5 May, 2 call options for 100,000 ACCUs each were reported at a strike price of $35 with an upfront fee/premium (non-refundable) of $1.15 per ACCU for one transaction and $1.30 for the other. Prices and volumes in the reported ACCU spot market increased in late May with generic ACCUs trading at about $36 on 24 May and HIR ACCUs attracting a premium of up to $2 per unit.
The above analysis and figure 1.2 shows the reported ACCU spot price is still at a material premium to prices prior to the start of the very steep price increase in the second half of 2021.
While the monthly transaction profile in Q1 2022 is consistent with that of previous years, with a peak in February and a drop off in March (see Figure 1.3), the marked reduction in reported spot transactions in the month from 12 March suggests the market may have been considering a range of factors impacting supply, demand and price. These may have included matters such as likely take up of exit arrangements for Commonwealth contract delivery milestones, reporting on claims made about some ERF methods and potential Safeguard Mechanism changes. However, reported spot trading transactions and volume picked up again from early May with prices still averaging approximately $30 per ACCU and two large options trades reported at $35 plus the call option premium.
On 4 March 2022, the then Minister for Industry, Energy and Emissions Reduction announced changes to ERF fixed delivery contract administration. Current holders of fixed delivery contracts will now be able to pay an exit fee to be released from periodic fixed delivery obligations to the Commonwealth. Holders of fixed delivery contracts can opt-in to this arrangement. The exit fee will be calculated by multiplying the contract price by the quantity of ACCUs to be released. This is similar to existing contractual clauses for Buyer's Market Damages (BMD). The new initiative will allow fixed delivery contract holders to be released from delivery obligations in a transparent and orderly process.
The divergence between the average fixed delivery contract price of $11.70 and reported spot ACCU prices of about $50 had led to an unsustainable situation. Some fixed delivery contract holders were seriously considering using the existing contract processes to sell ACCUs to others rather than delivering against Commonwealth contract milestones. If this had happened, first movers may have had an initial advantage and it would have been difficult for the market to determine how this may play out.
The new exit arrangements are transparent, administratively simpler and more orderly than Buyer's Market Damages (BMD) as they operate through 6 monthly application tranches. If approved, the applicant must pay the exit fee to the Clean Energy Regulator and forgo receiving the milestone payment from the Clean Energy Regulator.
Parties with Commonwealth fixed delivery contracts continue to have the certainty of being able to deliver to the Commonwealth at the contract price. Contract holders would need to successfully apply and pay exit fees for milestones. Consequently, it is only commercially attractive for project proponents to pay the contract price exit fee if they can achieve an alternative firm sales option for milestone volumes. This would likely need to be at a commercial premium to double the contract price in their contract with the Commonwealth to make it worthwhile.
The long-term average price of all Commonwealth fixed delivery contracts is $11.70 and the reported spot price appears to have currently settled for the time being above $30 which is a premium above double the average contract price.6 However, it would appear to be commercially risky for project proponents to forgo the certainty of the Commonwealth contract price—and pay the exit fee—in the hope of selling all the volume in the reported spot market at the recent prices. As outlined earlier, relatively little volume is traded in that part of the market.
Typical commercial behaviour to manage financial risk would be to seek to enter into back-to-back contracts. These contracts would allow them to sell the ACCUs to others that match milestone exit applications made to the Clean Energy Regulator, where the negotiated price is at an acceptable commercial premium (to more than double the Commonwealth contract price) to the seller. Some may consider selling a portion into the reported spot market, but likely only if that spot price is at a sufficient premium to any certain contract price that can be achieved through advance contracts with others.
The Clean Energy Regulator does not therefore expect the market to become flooded with ACCUs. If project proponents are unable to achieve suitable alternative sales prices, it is likely they will deliver on existing Commonwealth contract milestones. There is evidence of strongly increasing business demand to use ACCUs to reduce net emissions, and it is expected this will be the key determinant of the uptake of contract milestone exit applications.
Figure 1.4 shows the maximum potential volume—up to approximately 11 million ACCUs—on which the exit fee may be paid for the balance of the 2022 calendar year. The unknown question is, how much of that volume will have the exit fee paid? It is reasonable to presume exit applications are more probable for lower priced Commonwealth contract milestones than for higher priced ones. However, given typical prudent commercial risk management and our
analysis on spot trading, it seems unlikely that a significant volume will be directed into the reported spot market.
The Clean Energy Regulator will provide information to the market before each exit window on potential volume; as well as actual uptake once the window has closed and the outcomes are known. For the delivery window ending 30 June 2022, outstanding potential delivery volume is 6.9 million ACCUs. The announcement of the exit arrangements on 4 March 2022 included a statement that all delivery milestones falling due from the date of the announcement to 30 June 2022 would be extended to 31 August 2022. This longer period allows industry to adjust and make necessary business arrangements.
It is the view of the Clean Energy Regulator that orderly Commonwealth milestone exit arrangements will further the government stepping back from being the biggest demand side player to support and assure the market. As the Clean Energy Regulator has offered optional delivery contracts since April 2020, business relationships are likely to have formed to facilitate alternative sales which could be leveraged to underpin milestone exit applications.
Q1 2022 showed further clear evidence of an increase in voluntary cancellation of ACCUs with 283,000 cancelled, up 62% on Q1 2021. It looks likely that total cancellations for 2022 may exceed the 1.1 million expectation the Clean Energy Regulator set in the Q4 report for 2021.
The majority of ACCU cancellations came from individual entities - comprising corporations and organisations, such as universities that are included in the 'Other' category (see Figure 1.5). These entities cancelled over 70% of the 283,000 ACCUs. A total of 51 entities cancelled ACCUs during Q1 2022, with one-third cancelling ACCUs for the first time.
These developments reflect a world-wide trend of corporations driving voluntary net emissions reduction. An analysis by the Science Based Targets initiative found over 1,045 companies, representing more than $23 trillion in market capitalisation, have responded to a call to decarbonise.7
The Clean Energy Regulator has been informed by reliable sources there are many large entities looking for the opportunity to contract large volumes of ACCUs. This is likely to have been influenced by reports of very little available supply in the reported spot market and much of the ACCU supply already being contracted to the Clean Energy Regulator (see Figure 1.4). The question is whether they will be prepared to pay the price premium project proponents will want to make it worthwhile for them to apply in the exit arrangements.
The potential scale of the demand side opportunity for ACCUs is further highlighted by Certified Emission Reduction unit cancellations (CERs - international offset units) of 2.6 million units in Q1 2022, up from 1.6 million units in Q1 2021, an increase of 62% year on year.8 Changes to Climate Active, and a review by the Climate Change Authority into the use of international units for domestic offsetting purposes, may impact demand for ACCUs. The Clean Energy Regulator expects the Corporate Emissions Reduction Transparency (CERT) report to also drive additional demand for ACCUs beyond the pilot year.
There has been media speculation that the contract milestone exit process, and the resultant reduction in the reported spot ACCU price, will result in less investment in ERF projects. However, the data to date does not support those claims.
The Clean Energy Regulator continues to register record numbers of projects, with 122 registered projects in Q1 (see Figure 1.6). Soil carbon and vegetation projects continue to dominate new registrations.
Auction 14 in early April resulted in 7.6 million units contracted — the highest volume since the 6th ERF Auction held in December 2017 (see Figure 1.7). The volume contracted in this auction was 11% higher than in Auction 13 and averaged a slightly higher price. New optional delivery contracts were awarded to 25 projects with a total value of $132 million and an average price of $17.35 (see Figure 1.7). This likely represents the average price at which it is commercial to proceed with new low cost ERF projects. The Clean Energy Regulator did not offer fixed delivery contracts at this auction. There has been declining participation of new registrations coming to auctions, this may reflect a growing number of projects intending to sell directly to private buyers.
The reported ACCU spot price had been generally averaging in the low $30 range since the announcement on contract milestone exit arrangements until it settled at just over $35 after 23 May 2022. This is a material premium to the most recent auction price and well above the $19.75 price in mid-2021 when the price started its rapid run up.
On balance, the Clean Energy Regulator considers the evidence (including project registration numbers, auction result, growing business demand and reported spot prices at a premium to the recent auction price) points to strong incentives to proceed with new ERF projects.
Total ACCUs held in ANREU accounts increased by 1.4 million in Q1 – an increase of 12% on Q4 2021. This increase has been driven mainly by an increase in holdings by project proponents, up 0.9 million ACCUs (see Table 1.1 and Figure 1.8).
In contrast, total holdings in accounts of financial intermediaries only increased marginally, up 0.2 million ACCUs this quarter.
ACCU issuances in Q1 2022 was 3.3 million (see Table 1.1). The Clean Energy Regulator believes total ACCU issuances for the 2022 calendar year will be over 18 million. After issuances, it is common to see some transfers in ANREU from project proponents to intermediaries - potentially for sale including into the reported spot price market segment. There has been a reduction in these transfer volumes since the announcement of the exit arrangements which could be related to the one-month period where there was a reduction in reported spot market trades.
Project proponents with milestone deliveries falling between 4 March and 30 June 2022 have until the end of August 2022 to submit contract milestone exit applications for the first tranche. The volume on which they choose to apply to pay to exit milestones (to contract to others and/or sell into the reported spot market), versus delivering to the Clean Energy Regulator, will likely depend on the price they can obtain contracting to others and any trend in the reported spot price.
Within a specified period, supply of ACCUs refers to ACCUs issued. Demand of ACCUs incorporates Commonwealth ERF contract deliveries, safeguard mechanism cancellations, relinquishments and state and territory government and private sector voluntary cancellation.
4 The broader ACCU market includes substantial volumes of non-reported secondary market transactions including through offtake agreements.
5 As reported from Jarden and TFS Green
6 Note, there is a significant spread of fixed delivery contract prices.
7 Huusko H. (2021),
Status Report: Business ambition for 1.5°C - Responding to the Climate Crisis, Science Based Targets Initiative in partnership with the United Nations Global Compact.
8 For comparison, 12 million of these units were voluntarily cancelled in 2021.
9 Safeguard mechanism cancellations do not include deemed cancellations. A 'deemed' cancellation occurs when ACCUs issued under an ERF project at a safeguard facility, in a particular year, are delivered to the Commonwealth under an ERF contract.
10 For more information see
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