In an effort to respond to the increased popularity of the voluntary carbon market and boost participation in the Federal Government’s Emissions Reduction Fund (ERF), the Clean Energy Regulator (CER) has introduced new “optional delivery contracts”.
How does the ERF auction process work?
Under the ERF auction process, you can enter into a contractual arrangement (a carbon abatement contract) to sell Australian carbon credit units (ACCUs) to the CER if you are successful at an ERF auction.
There are now two types of carbon abatement contracts offered through the ERF auction process, fixed delivery and optional delivery contracts.
Fixed delivery contracts
By entering into a fixed delivery contract, you agree to deliver a set number of ACCUs by a set date and at a set price for the duration of the contract.
If you cannot deliver the required number of ACCUs to the CER by the required date, you can negotiate a revised delivery schedule or you can purchase additional ACCUs on the secondary market. In the worst case scenario, you may be liable to pay damages to the CER.
Optional delivery contracts
By entering into an optional delivery contract, you are given the right (but not the obligation) to sell ACCUs to CER at a set price within a set timeframe.
If you do not deliver ACCUs against a scheduled milestone, the right to deliver those undelivered ACCUs by the end of that milestone lapses but, unlike fixed delivery contracts, you do not need to source the undelivered ACCUs on the secondary market to deliver to the CER.
Optional delivery contracts are only open to new projects or projects that have not previously contracted with the CER. All ACCUs delivered under an optional delivery contract must be sourced from a single project that is identified during auction qualification process.
Prior to the introduction of the optional delivery contracts, the ERF had seen a substantial decline in participation with only three projects and 59,000 tonnes of abatement secured at the July 2019 ERF auction.
While optional delivery contracts have only been offered at the last two auctions, it is clear that participants are favouring the new offering with 29 optional delivery contracts entered into in the September 2020 ERF auction compared to 6 fixed delivery contracts.
The amount of abatement the CER committed to purchase also substantially increased in the September 2020 ERF auction. The CER committed to purchase 7 million tonnes of abatement in the September 2020 auction which was up from 1.7 million tonnes in the March 2020 ERF auction and 59,000 tonnes in the July 2019 ERF auction.
Option delivery contracts provide participants with a mix of income certainty (by delivering ACCUs to the CER at a set price) while still allowing projects to take advantage of any uplift in price on the secondary market.
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