Australia: First Emissions Reduction Fund auction scheduled for 15 April 2015

Clayton Utz Insights
Last Updated: 26 February 2015
Article by Brendan Bateman and Graeme Dennis

Key Points:

A successful bid means that the bidder automatically enters into a Carbon Abatement Contract with the Clean Energy Regulator on behalf of the Commonwealth of Australia.

Bidders on the first Emissions Reduction Fund auction will have two months to prepare, with the announcement that it will be held from 9:00 am AEST on Wednesday 15 April until 5:00 pm AEST on Thursday 16 April 2015.

The Australian Government also released more information about the auction process.

What sort of auction process is being used by the Clean Energy Regulator?

Bids must be submitted through an online bidding platform.

There is only one round in each auction – so there will be no sequential bidding. Bidders will not have access to others' bids (and there are rules about disclosing your own bids).

Each bid made at an auction will relate to one or more projects registered for the Emissions Reduction Fund.

A successful bid means that the bidder automatically enters into a Carbon Abatement Contract with the Clean Energy Regulator on behalf of the Commonwealth of Australia. Successful bidders will be notified within five business days of the auction's close.

Are you able to bid?

Any projects that were declared and registered by the Clean Energy Regulator under the Carbon Credits Act before 13 December 2014 qualify.

New projects, however, must have the minimum total quantity offered for sale by the participant through that registration of more than 2,000 ACCUs per year on average over the term of the contract.

To bid, you must:

  • get the project relating to the bid registered by the Clean Energy Regulator;
  • be qualified by the Clean Energy Regulator to participate in auctions in relation to the project, including passing the "Fit and Proper Person" test applied by the Clean Energy Regulator, nominating any required conditions precedent, and providing bank account details;
  • have an account with the Australian National Registry of Emissions Units (ANREU);
  • enter into a standardised Carbon Abatement Contract with the Clean Energy Regulator –see below;
  • be registered by the Clean Energy Regulator to make a bid at an advertised auction in relation to the project; and
  • nominate the total volume of abatement to be delivered, the delivery schedule (dates and quantities of ACCUs), and the expiry date (by which all ACCUs will have been delivered).

The standardised Carbon Abatement Contract

Before registering for and taking part in an auction, you need to offer to enter into a standardised Carbon Abatement Contract and commercial terms; the Government will then enter into the contract with the successful bidders.

The standardised contract terms were prepared in a consultative process and are intended to provide a reasonable commercial balance between buyer and seller of ACCUs. For example:

  • prospective sellers can specify conditions precedent for the commencement of delivery obligations (including obtaining third party approvals for the CFI project nominated in the contract);
  • the ACCUs which are delivered can be sourced from any CFI project;
  • there is some scope for sellers to make advance deliveries of ACCUs (and therefore bring forward contract payments);
  • sellers may deliver up to 20% fewer ACCUs than the contracted delivery amount for an interim delivery date without causing a "Delivery Shortfall";
  • there are commercially-oriented force majeure provisions; and
  • a seller's liability for failure to supply is capped at the contract sum.

The commercial terms include giving the Clean Energy Regulator:

  • information about your project registration;
  • an indication of the volume of abatement you would agree to provide as part of the contract;
  • any conditions precedent that you required; and
  • information about your bank account for receiving payment on delivery of ACCUs.

How long is the contract duration?

The Clean Energy Regulator has announced that bidders may select one of three contract durations:

  • immediate – all ACCUs are to be delivered within several days after being advised of a winning bid;
  • short term – multiple deliveries according to a nominated delivery schedule over a period of less than 7 years; and
  • standard term – multiple deliveries according to a nominated delivery schedule over a period of 7 years.

How will the Clean Energy Regulator determine a winning bid?

There are two elements in the Clean Energy Regulator's decision on whether a bid is successful.

First, there's Criterion A (the benchmark price): the Clean Energy Regulator will only consider eligible bids that are less than the benchmark price set for that auction. The benchmark price will not be disclosed.

Bids that meet Criterion A are then assessed under Criterion B (the volume threshold):

  • All bids will be ranked by price offered, with the lowest price bids being ranked first and the highest price bids being ranked last. Bids offering the same price will be ranked equally.
  • Starting with the lowest price bid, the ACCUs offered for sale through that bid will be added to a notional pool of ACCUs. If the total number of ACCUs in the pool does not exceed 80 per cent of the overall volume, then that bid will be selected. "Overall volume" means the cumulative total volume of ACCUs offered for sale through all bids meeting criterion A.
  • This is done for each ranked bid in sequential order until adding ACCUs (offered for sale through a particular bid) to the pool causes the number of ACCUs in the pool to exceed 80 per cent of the overall volume.
  • If adding ACCUs (offered for sale through a particular bid) to the pool causes the number of ACCUs in the pool to exceed 80 per cent of the overall volume, then that bid will be selected and no further ranked bids will be selected.
  • If adding ACCUs (offered for sale through any of two or more equally ranked bids) to the pool causes the number of ACCUs in the pool to exceed 80 per cent of the overall volume, then all of those bids will be selected and no further ranked bids will be selected.

All bids selected under criterion B will be successful for that auction.

Time to prepare

It was originally expected that the first auction would occur in March 2015. The delay in the first auction is likely to provide potential bidders with additional time to prepare projects and obtain registration in order to participate. Further, the approval of additional methodologies currently being assessed may enable more projects with different cost profiles to participate in the first auction.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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