Policy change may hit Australian CCS
Lack of consultation about recent changes to Australia’s Emissions Reduction Fund and an uncertain policy environment could spook investors in CCS, a non profit has said.
Future investment in new carbon capture and storage (CCS) schemes under consideration in Australia could be at risk after the government announced changes to its Emissions Reduction Fund (ERF). Significantly, the lack of consultation about the new rules and uncertain policy environment could spook investors, a non profit has warned.
The ERF provides businesses with the opportunity to earn Australian carbon credit units (ACCUs) for every tonne of carbon dioxide (CO2) equivalent a business stores or avoids emitting through adopting new practices and technologies.
However, the Australian government’s new rules, effective 4 March 2022, enable carbon offset project developers to exit their fixed contracts under the country’s ERF to cash in on higher prices in the secondary spot market.
“The change was introduced to address an unsustainable situation in the carbon market. Prior to the announcement, the price of ACCUs in the spot market had increased from A$17 (US$12.7) at the start of 2021 to near A$50 on 3 March 2022 — creating a large divergence between market prices and ERF fixed contract prices,” a spokesperson for Australia’s Clean Energy Regulator (CER) told Gas Outlook.
Some contract holders were considering defaulting so that they could sell their carbon credits at higher prices on the private market, which would have obliged the government to pursue legal action.
“A disorderly exit of this nature would inevitably lead to disputes over damages arrangements for each failed delivery. In contrast, the exit arrangement available to ERF contract holders provides a measured and orderly transition from the fixed delivery contracts,” said the spokesperson.
“The key point is that the abatement will still be delivered, but if the exit arrangement is taken up by contract holders, taxpayers no longer need to pay for the ACCUs through ERF contracts,” added the regulator.
Crucially, in response to the policy change, the Carbon Market Institute, a Melbourne-based non profit, underscored its concerns regarding the lack of consultation and transparency, which they believe may spook investors and operators about further intervention without consultation.
Following the government’s announcement prices collapsed 38% to A$29/tonne, recovering to just over A$31 on 30 March. This collapse, as well as “the withdrawal of support for the ACCU scheme is yet another example of carbon policy instability in Australia. Investors will be wary of investing in CCS as a result,” Bruce Robertson, an energy finance analyst with the Institute for Energy Economics and Financial Analysis (IEEFA), told Gas Outlook.
According to carbon market analysts RepuTex, the sudden availability of a large volume of offsets – and the resulting low-price environment – will immediately delay investment in new emissions reduction projects, including the government’s own priority technologies, such as CCS.
Matt Steyn, manager of Asia Pacific advocacy and communications at the Global CCS Institute, an industry lobby group based in Australia, told Gas Outlook that “we are yet to see what, if any, impact, ACCU spot price volatility, will have on proposed CCS projects. There is still large voluntary demand and subsequent pressure on supply. More than that, CCS projects and the economics that underpin them are diverse. For instance, Santos has forecast a lifecycle cost of less than US$24 per tonne of CO2, meaning current spot prices are still favourable, even if less so than in late 2021.”
“While the ability to earn ACCUs is certainly a positive incentive for CCS project developers, it is necessary to look at the full range of incentives for development, including investor and public pressure to decarbonise, internal net-zero targets, and the opportunities inherent in establishing CCS networks as operators are currently seeking to do,” he added.
Among Australian gas developers, Santos has been a leading proponent of developing CCS to help decarbonise its LNG business and please carbon-conscious buyers in Japan and South Korea, although not without some controversy. Santos has been accused of “double-counting” emissions reductions. In addition last month, Korea Eximbank put on hold its decision to provide economic support for the Santos-operated Barossa-Caldita gas field, which environmental groups say will generate excessive carbon dioxide emissions.
Last November, Santos announced a final investment decision on the Moomba CCS project, which is expected to store 1.7 million tonnes of CO2 per year, making it one of the world’s biggest CCS projects.
Santos is also looking to make a final investment decision on a giant CCS project at the Bayu Undan field offshore East Timor. The project would store CO2 from its Barossa gas development that will backfill the Darwin LNG export terminal in northern Australia. The CCS scheme, currently in the front-end engineering and design phase, is designed to capture 10 million tonnes of CO2 per year.
Barossa has full approval to proceed without a CCS element attached. Indeed, “production is scheduled to occur prior to the vaguely proposed Bayu Undan CCS project starting,” said IEEFA’s Robertson.
A senior research analyst at an investment bank that covers Santos, who asked not to be named, told Gas Outlook that the government will likely continue to enter new ERF contracts, which could underpin any new CCS projects for Santos. “The latest policy change does not mark a material change for Santos given they were always going to sell into the ERF at fixed prices, not the spot market,” said the analyst.
Wood Mackenzie, an energy research company, reported that Australian producers need to be at the forefront of carbon-neutral LNG to remain competitive. CCS is seen as one strategy for Australia, which is home to some of the most emissions-intensive LNG plants in the world, to achieve this, though detractors argue that firms are sometimes guilty of greenwashing, using CCS as an excuse to continue producing fossil fuels. Others say that CCS technology is costly and not yet proven at scale.
As the energy transition gathers momentum countries with carbon neutrality pledges now make up 30% of global gas demand and 75% of LNG demand, according to Wood Mackenzie. The list includes some of Australia’s largest LNG customers, China, Japan, and South Korea.
Aside from Santos, Japan’s Inpex, which operates the Ichthys LNG project in Australia, as well as Woodside, a major Australian LNG developer, are also studying the feasibility of creating CCS hubs in the country.
Australia has huge potential to build out CCS and become a major supplier of carbon storage services, Prakash Sharma, head of markets and transitions APAC, at Wood Mackenzie, told Gas Outlook, but cautioned that it needs “clear policies.”