Impact of COVID-19 on Carbon Markets

In somewhat a double whammy, the mitigating strategies that are in play to deal with climate changes issues are now being impacted by a separate crisis, COVID-19.

The growing Australian renewable energy and carbon market may suffer some sets back in the coming years which may be directly attributable to COVID-19.

In the Clean Energy Regulator quarterly report, some of the issues and potential issues are identified.

Renewable Energy Projects

The issue of small scale technology certificates (STC) for small renewable energy projects seems to have slowed possibly from the downturn in business activities and financial pressures from COVID-19 which has reduced the number of small scale renewable projects but then, not markedly so. This may be because some of the smaller projects like business and household solar installations were already in train when COVID-19 started to make its impact and there are already sufficient materials stockpiled in Australia to meet the current demand. Also, home improvements actually rose during the lockdown and the installation of solar panels formed a large part of that. While China had slowed production of components, it is now almost back at full capacity. Of course, getting the components into Australia is more difficult given the border restrictions but it appears overall that the impact of COVID-19 on small scale renewable projects at this stage is not significant.

However, the demand to purchase STC increased over the first quarter this year which may also be based on the fact of a slowing down of the economy as a result of COVID-19. Liable entities, which are generally electricity retailers, have an obligation to purchase STCs for carbon abatement and may be getting in front of any future downturn in small scale renewable energy projects being delayed or derailed altogether as a result financial pressures from COVID-19 so that they can meet their STC obligations.

Large scale renewable energy targets for 2020, being 33,850,000 MWH at this stage, is likely to be met this year. However, investment in large scale projects may also slow down as a result of COVID-19 given the impact on the economy and the willingness of financiers to fund long term projects which can also have long lead times before generating any income.

Carbon Abatement 

COVID-19 is unlikely to impact on current carbon abatement projects which are up and running and generating the Australian Carbon Credit Units (ACCU) as these projects are in train and producing. However, some projects which require travel or close contact may be impacted through the social distancing rules and travel restrictions for project proponents and auditors. This may impact on the development of new projects and also the auditing where there are ongoing obligations to meet the requirements under the Carbon Farming Initiative legislation.

Reduction in business activities including travel may also impact on the demand for ACCUs, particularly on the secondary market. Large emitters which buy ACCUs on the secondary market to offset emissions may not have the same level of demand eg airline companies which are essentially grounded. The largest purchaser of ACCUs still is the Clean Energy Regulator through the Emissions Reduction Fund and this is likely to continue to ensure that Australia can meet its obligations under the relevant international agreements on climate change to which it is a signatory.

Emissions Reduction Fund

The 10th Emissions Reduction Fund auction was held in March 2020 which resulted in 12 contracts with the Clean Energy Regulator for the purchase of 1.7 million tonnes of carbon abatement over 11 carbon abatement projects at the average price of $16.14 per tonne with a total value of $27.5 million.  Many of these projects are in regional areas throughout Australia including 3.93 million tonnes of carbon abatement generated in regional Queensland.

Some of the latest projects are based on an optional delivery contract, which will enable the project proponents to deliver ACCUs at the contracted price and in advance of a scheduled delivery date to the Clean Energy Regulator or to sell ACCUs on the secondary market if it is more profitable to do so. This could assist a seller with cash flow during a slump in business activity as a result of COVID-19.

Included in this ERF auction were 20 new projects including projects using the Industrial Electricity and Fuel Efficiency methodology which is a replacement of electricity obtained from the grid with renewable energy generated onsite.

The 11th Emissions Reduction Fund auction will be held on 9-10 September 2020 and proponents with registered projects can participate in the auction. This may be of interest where ACCUs are accumulating in excess of any contracts the proponent may have with the Clean Energy Regulator or other purchasers on the secondary market. The demand for ACCUs is likely to grow and there may be a shortfall because projects are not proceeding or can’t be managed appropriately due to COVID-19.  This would be of benefit to those proponents holding unallocated ACCUs as the market price may increase above average over the next year as a result of COVID-19 impacts.

Safeguards Mechanism

Heavy emitters are required to keep emissions at the baseline or lower than that registered for the facility based on a number of production variables that have been or about to be approved by the Clean Energy Regulator.  However, as a result of COVID-19, the safeguard mechanism has been amended to include COVID-19 as a production variable which has extended the period by which these entities have to have set the baseline for another year.

Future Markets

A number of large corporations in Australia prior to COVID-19 reviewed their carbon emissions policies as a result of the recent bushfires and other disasters and had committed to reducing carbon emissions with a view to becoming carbon neutral operations. If this remains the desired outcome and the impact of COVID-19 is significant, the demand for ACCUs may remain high while the supply of ACCUS may be impacted which would drive up the price based on supply and demand.

Take Away

The carbon market has been growing and the impact from COVID-19 will be felt as a result of the financial stresses on the sector which may slow down the development of new projects. COVID-19 may also affect compliance with the legislative frameworks that regulate carbon abatement projects and proponents will need to consider strategies to minimise the impact to keep the projects financially viable and sustainable.

For more information, get in touch with the team at Preston Law. 

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