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ERF - register a project now but bid later?

The second Emissions Reduction Fund (ERF) auction will be held on 4-5 November 2015. Now is the time to get your project registration fast-tracked and keep your options open!

The future of ERF auctions beyond the 2016 federal election is uncertain, but contracts executed with the Government are highly likely to be safe.

$2.55 billion was initially allocated to pay participants who commit to reduce their greenhouse gas emissions, or for sequestration in soil and vegetation. At the first auction $660 million was committed over 7-10 years. Recently another $2.4 billion was allocated  by the Abbott government and is planned to be available from 2018. However, there is a possibility the extra funding will never eventuate with Bill Shorten declaring a Labor government will shut the fund down but honour all existing contracts . Recognising that project registration is a mandatory first step in potential future participation in the auction process, but does not commit the company to actual participation, it is in a company’s best interest to fast-track their project registrations to allow flexibility with participation in future auctions. This is a low risk – low cost strategy that secures a “place at the table”. Further, the company can be comfortable that should they proceed to bid and are successful, the contract will be honoured no matter who is in government.

ERF methods and ACCUs

ERF methods are the rulebook for how Australian Carbon Credit Units (ACCUs) can be created.

There are currently 8 agriculture, 4 energy efficiency, 2 mining, 2 transport, 9 vegetation management and 3 waste and wastewater methods finalised and ready to be used in the next auction . The Government will continue to add additional methods in coming months.

ERF contracts are the way that organisations get paid for the ACCUs they create. A contract is between an organisation and the federal government. The government pays for contracted ACCUs delivered over 1-10 years with 1 ACCU representing 1 tonne of CO2-e abatement.

ACCUs = incentives for doing good things

Access to ACCUs may tip the balance on project viability, however, for many projects it acts as an incentive or “sweetener” for doing the right thing.

Whilst the cost saving generated directly from the project’s energy saving activities are generally worth a lot more than the revenue which can be gained from creating and selling ACCUs it may still be worth accessing this funding mechanism.

Entering an ACCU contract with government

Successful bidders automatically enter into a binding contract to deliver ACCUs according to the defined delivery schedule.

The government’s desired process is that after a successful project registration the proponent(s) enters the upcoming reverse auction with their price per ACCU to deliver according to their abatement schedule. If successful they automatically enter into a contract with the government as the buyer of each ACCU according to the proponent(s) delivery schedule set out in the bid.

There is the option to register a project and start generating ACCU’s before going to an auction and bid with immediate delivery of ACCUs already generated.

There is also the potential of a secondary market emerging where organisations bound by an ERF contract, but who fall short, can purchase make-up ACCU’s from organisations who have over-delivered on their contracts, or never entered into a contract in the first place.

Generate ACCUs without bidding at an auction

ACCUs can be generated from eligible projects without participating in the reverse auction process.

ACCUs must be generated from eligible projects, using eligible methods, but they do not have to be sold to the government under contract at all. They can instead be sold to others who might wish to voluntarily purchase credible carbon abatement.

All that is required to generate ACCUs is to register an eligible project using the specified method, regularly complete a carbon abatement report, and undertake a minimum of three audits. Note that the reporting and auditing required are the same whether bound by a contract or not.

ACCU’s can be generated as an insurance against the safeguard mechanism

The Safeguard Mechanism seeks to ensure gains obtained from Direct Action are not whittled away in other parts of the economy.

An important part of the ERF (at least it was critical to get the ERF through the senate) is the Safeguard mechanism that applies to any facility with emissions above 100,000 tonnes of CO2-e, estimated to apply to around 140 large emitters. It is possible that some of these businesses are planning to increase their total emissions due to growth and may need to submit additional ACCUs in proportion to their increase above a specified baseline. 

An organisation that will be covered by the safeguard mechanism, and plans to grow above their projected baseline cap, can choose to generate ACCU’s from a project registered ERF method as an “insurance policy” to minimise the risk of having to purchase ACCU’s from the secondary market. The detailed safeguard rules and regulations will be released before 1 October 2015 .

For those companies facing the risk of overshooting their baseline strong consideration should be given to participating in the ERF.

Additionality and newness

Do not make any final investment decisions until your project is “declared” by the CER.

One criticism against the ERF is that it pays polluters for doing what they would have done anyway. The government’s defence is that the ERF has what is called the newness and regulatory additionality requirements. The newness requirement states that no final investment decision or a similar commitment to an abatement project can have been made prior to the project being declared, i.e. when the project registration is approved by the Clean Energy Regulator (CER). From the time your project is submitted the CER has the legal right to take up to 90 days to process the registration. Note that the newness requirement is completely independent of whether you choose to participate in an auction or not.

A well-considered registration carries no obligation but keeps your options open

If you are sitting on the fence, take advantage of the next auction’s fast-track offer - register now and commit later.

If you have some energy or fuel saving activities in mind that you haven’t already financially committed to, our advice is to start the registration now to keep your options open. The Clean Energy Regulator has committed to fast-tracking project registrations to be eligible to bid in the next auction on 4-5 November by setting a special registration submission deadline of 18 September.

A well-considered project registration is critical to ensure that you properly describe existing projects and allow for new potential activities within the same project. Northmore Gordon has the experience to help you assess your opportunities, define your participation strategy and assist you at each stage of the process.

Nicklas Lindewald

Nicklas Lindewald is a Principal in Northmore Gordon’s Melbourne office.

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