CO2 Group's climate policy buzz
In an interview with Boardroom Radio, Andrew Grant, Chief Executive Officer at CO2 Group – the largest provider of dedicated carbon sink plantings in Australasia, discusses:
-- Changes to the government's carbon pricing scheme.
-- The company's new Asian expansion plans.
-- The impact of the changes to carbon pricing legislation.
Q: We will touch on the international expansion that the company has announced, but before we get into that, what do the changes to the Clean Energy Policy announced by the government on Tuesday mean to CO2 Group?
AG: Well it's been an important week for the company on two fronts. The international expansion, which we'll come back to later, but also the enhancement of a policy by the government.
The most critical part, and ironically it relates to the import of Certified Emission Reductions which we are bringing in from Asia is that the government's tightened up the amount of those that can be used in compliance. So previously it was 50 per cent, it's been reduced to 12.5 per cent of a company's liability and in making that change they've reduced the floor price. And for us that's very, very good news, so we have a position on importing CERs, so even though they've been reduced from 50 per cent to 12.5 per cent, we still get the benefit of that.
But the important change is that by restricting the level of imports it means that domestic abatement, which is the backbone of our business becomes more attractive. It means the price of that will grow over time and therefore the value in what we offer to our clients in terms of providing a medium to long term hedge becomes more important. So we're very, very pleased by the news and we see it as very important for the company.
Well Andrew it's great to hear that that's going to have a positive impact on your business. Now earlier in the week CO2 Group announced its international expansion plans and the JV to establish CO2 Asia. Could you please tell me a little bit more about these expansion plans?
Yes, the decision we took several years ago was to broaden the scope of operations for the company and leverage off our deep carbon knowledge into related services. So we continually look at what other areas of business development can the company enter into, when the timings right and the circumstances are attractive we move.
So several years ago we moved into New Zealand with the implementation of the New Zealand emissions trading scheme, and it's been very successful for the company. We've announced substantial contracts out of that expansion and its generating good revenue growth and good brand over there.
And another very significant carbon market has been the Clean Development Mechanism under the Kyoto Protocol, and it was very mature and there wasn't much of a chance for us to participate, but two big things have happened. Whilst the market's been consolidated and a number of companies have been bought, many of the traditional business models were entering into CDM projects at a very high price, and as the price dropped their business models have suffered, and combined with the financial crisis in Europe that's caused a fairly major exit from this market.
So we've been able to partner with a very experienced operator based out of Singapore and reprice these projects and give the company a very positive upside leverage position to a significant volume of credits from the Clean Development Mechanism, and importantly these are credits that we can use in Europe, in New Zealand and in Australia, so it really diversifies us – diversifies our revenue stream for the company.
Now Andrew how will this new joint venture be impacted by the changes announced on Tuesday by the government?
As I mentioned before, the government has restricted the number of permits from this kind of activity that will come in under the scheme from 50 per cent to 12.5 per cent of the total liability, compliance work that a company could do, so it's slightly shrunk. But we presumed zero imports, we took a very conservative position in our expansion and we looked at the role that Europe would play, we've seen New Zealand and Australia as upsides, so I think the changes may make the scheme more enduring and therefore we're a little more a bullish about what it means for our Certified Emissions Reduction projects.
So again the perception will be one of negative, but actually we're very enthused by it and as I said because we priced the Australian opportunity as zero in that respect.
In the release that was made earlier with respect to the Asian expansion, there are a number of major deals flagged with potential for revenue of around $50 million, can I get you to tell me a bit more about these projects?
Yes, we've got activity in Vietnam and India, principally hydroelectric projects that are in river, in flow projects, so they're not dams, but just diversions. They meet the highest international environmental standards, and they're very significant in scale, so one of them is 400 megawatts in size, the other's a similar scale. One has just been commissioned, another is about to be commissioned, and because they're renewable energy projects there, in the case of the Vietnamese projects are owned by the Vietnamese government, the one in India is owned by the private sector, and our job, the Indian one's already been approved as a Clean Development Mechanism Project, so we have the mandate to sell the credits from that project.
In Vietnam our job is to prepare all the project validation documentation and arrange its registration through the Clean Development Mechanism and then monetise the carbon. So what they give us is very long-term revenue streams, so the deal flow can last up to 21 years. So again back to our strategy of diversification and broadening of markets, it provides all of those things.
And Andrew how have CO2's existing clients reacted to the news about the establishment of CO2 Asia?
Oh look it's very positive because now that we're doing a lot more advisory work, we're the largest originator of carbon in New Zealand, we're the largest trader of carbon in New Zealand, we're the largest carbon forestry company in Australia and New Zealand, and now by being able to add this to the suite of services we could offer our clients, they're seeing that we're more than just a carbon forestry company. We're highly respected in that regard, but we're able to help them on a range of fronts and as their liability grows and their exposure in other markets emerge, you know we're best placed to help them lower their liability and grow the accounts with them.
And just a final point, where do you see future growth will come from for the CO2 Group?
We see it in all of the markets we're operating in. We see substantial growth opportunities in Australia and New Zealand. We see through the changes in the scheme that the government announced and the ability to trade credits on all fronts and our Environmental Trading Group is having a stellar year this year, so we see growth through that and see growth through our advisory work.
So all lines of business at the moment are looking very healthy and the year's performance – the company's performance to date reflects that and you know we're heading to a very good year end result.
Andrew we appreciate you taking the time to talk us through some of the impacts on your business of the Clean Energy Policy that was announced, and also telling us in a bit more detail about the expansion plans that you've got for CO2 Asia.
Thanks James. Thanks for your time today, nice talking.