Property sector cautious on new ERF methods

Reputex Market Insider

It has been an indifferent start to the year for the Abbott Government, with the clean slate of 2015 tarnished by the Australia Day "Knightmare' and the poor Queensland electoral result for the LNP, while leadership speculation continues to swirl around the Prime Minister amid growing support for a Bishop-Turnbull ticket.

The bumpy start to the political year has been echoed in environmental markets, with the release of new Marginal Abatement Cost (MAC) data indicating that Australia's long-term emissions reduction opportunities are much smaller than previously estimated – just 15 per cent by 2030 (down from 60 per cent estimated in 2008) – with climate policy uncertainty over the last seven years leaving the economy with fewer options to cut domestic emissions, and a much higher cost of action.

Removing opportunities above $100 per tonne, abatement potential in 2020 is further reduced to just a 2 per cent decline, increasing to just 8 per cent by 2030.

The report also indicates that Australia will be able to achieve a 5 per cent reduction in domestic emissions by 2020, however, the cost of these cuts is forecast to be $5.3 billion, more than double the $2.55 billion allocated to the Emissions Reduction Fund.

Energy efficiency to play a key role

While carbon abatement opportunities across the Australian economy are lower, the news is good for energy efficiency, with our latest Market Briefing indicating these projects are expected to play the largest role in reducing greenhouse gas emissions.

Notably, energy efficiency activities are forecast to contribute over 40 per cent of all emissions abatement in the Australian economy by 2020, and will account for 51 of 88 abatement activities across the economy.

Analysis also suggests that energy efficiency will play a key role in the new ERF, with the broad emissions reduction potential of energy efficiency and the number of cost saving opportunities likely to see these activities become a dominant mover in the ERF as industry begins to ramp up project development.

Property sector cautious on new methods

While energy efficiency projects may be among the first industry-driven projects to enter the new ERF market, businesses remain cautious on the impact of three new methods regulated on January 14.

The new methods enable projects to be developed for commercial buildings, alternative waste treatment and landfill gas within the ERF, with criticism coming from the property sector, which is likely to face high barriers to enter the ERF. Under the commercial buildings method, minimum bid thresholds and the required NABERS star rating improvements are likely to create barriers for small property owners, suggesting that the market may be more favourable for aggregators and firms with larger portfolios such as property trusts.

Inversely, larger property players are likely to find the going tough to improve the performance of their premium assets, with high transaction costs and competitive pricing under state-based white certificate schemes likely to limit ERF activity unless abatement prices are able to encourage widespread participation.

As a result, the ERF may simply be more red tape for the property sector unless firms are able to lock in higher ERF contract prices by engaging in bid-shading (more on that here) – seeking the higher clearing price rather simply bidding 'at least cost'.

For these firms, fortune may favour the brave – particularly before the major energy and metals players enter the market.

The RepuTex Market Insider publication is a monthly review of the key events and activity shaping the Australian emissions markets. It was originally published by RepuTex under its Australian emissions markets research service. For more information please click here.