After an initial period of volatility, the contracted ACCU price at Emissions Reduction Fund (ERF) auctions has steadily increased since 2016. This upwards trend has recently been supported by the 2020/2021 federal budget which has allocated a further 2 billion dollars towards these ERF auctions over the next 15 years.
With many organisations looking to purchase and surrender ACCUs each year to meet safeguard obligations, many are wondering if the ACCU price will continue to rise.
Key players in the ACCU market appear to be betting that it will. The outstanding volume held by ACCU trading intermediates, as well as business and government enterprise has seen large growth in recent years. The increased volume held by trading intermediates may also indicate that more brokerage or trading services are coming online showing the growing strength in the ACCU market.
From our perspective the reasoning behind this stockpiling of ACCUs is sound. Commonwealth demand is reliably increasing with a long-term funding commitment to the ERF. Demand in ACCUs from non-Commonwealth sources has also increased from 3% to 6% between Q3 2019 and Q32020. The increasing demand from these other parties is an added tailwind to the ACCU price that remains somewhat unpredictable in scale going forward.
ERF Auction ACCU Demand
The 2019/2020 federal budget allocated a further $2.0 billion over 15 years from 2020/2021 to the CER to fund the ERF auctions over this timespan. This adds underlying support to the price of ACCUs in the long term. For context, here is a chart of the recent spending by the CER to show how significant this allocation is.
If averaged out over the 15-year period, this $2.0 billion represents a significant increase on the lows in CER spend seen through the late auction to the early 2020 auction. Also note that there was only one auction in 2019. Through this period there has also been a significant jump in outstanding ACCU balance. This balance includes all generated ACCUs that have not been surrendered or committed to a contract with the CER. As the CER is the largest demand source for ACCUs it makes sense that this outstanding balance of ACCUs grew significantly during the low CER auction spend. These outstanding ACCUs may be held by:
- Owners of ACCU generating projects where ACCUs have been generated beyond the level contracted to the CER.
- Organisations holding ACCUs in anticipation of utilising them to offset emissions to comply with their Safeguard limit. This group may have generated the ACCUs through their own registered projects or purchased ACCUs privately.
- Intermediate organisations that may facilitate the transfer of ACCUs between ACCU generators and other parties seeking to surrender ACCUs either voluntarily or to meet their Safeguard limit.
The interesting thing is that this increase in outstanding ACCU balance from 2018 onwards has not driven the price of ACCUs down, either at auction or in open markets transfers. This implies that organisations and individuals currently see the value in holding ACCUs and are bullish long term about the demand and price of ACCUs. The figure below shows a steady increase in ACCU price at ERF auctions in the face of an increasing outstanding balance of ACCUs.
The above figure also includes the forward estimates of ACCU supply and demand. These forward estimates are from the September 2020 Quarterly Carbon Market Report released by the CER. The supply is the forecast supply of ACCUs from registered projects across Australia as they are made (and not when they are first contracted for at auction).
The demand is largely made up of the quantities of ACCUs contracted to the ERF for delivery in a certain quarter. For example, there is a relatively large quantity of ACCUs contracted to be transferred to the CER in the second quarter of 2021. The supply side has been forecast to produce surplus ACCUs in the lead up to these contract deliveries, creating a spike in the outstanding balance of ACCUs that is unlikely to affect the spot price.
In the medium term, annualised scheduled demand from ERF contracts is increasing with 11.3 million ACCUs in 2020, 15.1 million in 2021, and 17.8 million in 2022. From 2023 to 2028 the already scheduled ERF demand is between 12 million and 16 million per annum and this is almost certain to increase with further auctions as more ACCU delivery is contracted. Particularly with the $2.0 billion commitment in the 2019/2020 federal budget.
The demand not attributable to ERF contracts in Q3 in 2020 was 6% which represented a substantial increase from it being 3% in Q3 of 2019. This category of demand is likely where you or your organisation falls.
The growth in ACCU demand for voluntary surrender to meet carbon initiative or to meet Safeguard limits is probably not yet large and consistent enough to substantially affect ACCU supply and demand dynamics greatly. This growth does however reveal something important about trends in the ACCU market and psyche of private enterprise moving forwards. The rate at which they are surrendering ACCUs is increasing. Furthermore, not only are savvy organisations stockpiling ACCUs for future use, but they are also banking on the price of ACCUs increasing going forward. Otherwise, they would simply purchase ACCUs as needed in the future.
2021 will be a telling year for the demand of ACCUs coming from Safeguard compliance. A significant portion of the industry has opted to use a 3-year rolling average with Safeguard. Many of these 3 year periods are due to end which is likely to cause further increases in the non-ERF demand for ACCUs.
A steady trend towards the uptake of CSR reporting and carbon neutral initiatives is also very likely to support the price of ACCUs going forward. It is likely that year on year these sources of ACCU demand will grow in significance and begin to affect price.
These emerging sources of demand are also being supported by the CER, which has allocated a further $40.4 million to build an exchange platform for ACCUs to facilitate the trading of ACCUs in a more accessible and open way. In our view this is an important step forward in encouraging the voluntary purchase and surrendering of ACCUs, increasing future demand, and putting upwards pressure on the price. For any organisation with significant GHG emissions, using the carbon market to acquire GHG offsets can be an important part of a broader strategy that also includes implementation of practical emissions reduction measures.