Australia: Going once, twice, SOLD: The Emissions Reduction Fund for landlords

The Abbott Government recently passed its much debated climate change policy. Beneath all the political fanfare of the Direct Action Plan is a significant opportunity for landlords to use the funds on offer to invest in the energy efficiency of their assets, which may increase overall property value in the long term.

What is the Emissions Reductions Fund?

The Emissions Reductions Fund (ERF) is the centrepiece of the Commonwealth government's Direct Action Plan. With a budget of $2.55 billion over four years, the ERF will buy the lowest cost emissions reductions offered by running a reverse auction.

Bidders may submit bids that offer a specified quantity of emission reductions from an identified project at a specified price. Successful auction participants will enter into a standard contract under which the Commonwealth will purchase and pay for Australian Carbon Credit Units (ACCUs).The Clean Energy Regulator (CER) will administer the ERF.

The Carbon Farming Initiative Amendment Bill 2014 (Cth) (Bill) which will establish the ERF was passed by the Senate on 30 October 2014. Federal Environment Minister Hunt has announced that the first auctions will commence during the first quarter of next year.

How does this affect landlords?

Landlords can significantly benefit from this new initiative, as projects which improve the energy efficiency of commercial buildings are included in the ERF. After submitting projects in a competitive auction run by the CER, successful proponents enter into contracts with the Commonwealth that will guarantee price and payment for the future delivery of emission reductions.

Essentially, this means that energy efficient activities undertaken by landlords as part of sustainable building management to maintain/upgrade NABERS ratings of their assets, can be rewarded and incentivised by the ERF.

Examples of activities that may contribute to improved energy efficiency include:

1. Upgrading energy-consuming equipment in the building, such as:
2. • lighting system upgrades
   • replacing heating, ventilation and air conditioning systems with more efficient technologies and designs
   • upgrading boilers through more efficient, better controlled designs, or
   • improving the efficiency of transportation systems in the building, such as lifts and escalators.

2. Making changes to the building shell to reduce the energy requirements of the building, including:
3. • improving the insulation value of glazing, eg by installing secondary glazing, or
   • installing additional insulation in walls, ceilings or under floors.

3. Making changes to the way energy is used in the building, for example:
4. • adopting improved energy management systems which automatically manage consumption, or
   • providing information on energy efficiency to building users.

The Bill does not specify activities which must be undertaken in order to qualify under the ERF but instead outlines a general methodology for commercial buildings. This provides flexibility for project proponents to determine which activities are most appropriate for each building asset. These may be initiatives on data collection to improve understanding of energy use, expansion of capital or operational capacity, or streamlining operations platforms for consistency and scalability. Improving the overall energy efficiency of buildings is a long term investment which increases the value of the building in the longer term.

The best way to take full advantage of the ERF is to access the Fund early. Businesses that are ready to participate in the early rounds of the reverse auction are most likely to be successful. Players with significant property assets such as REITs are well suited to the objectives and design of the ERF. Those with the financial capacity to engage in initiatives themselves and purchase ACCUs from other projects (most likely from project aggregators) in the secondary market for ACCUs are more likely to be able to deliver lowest prices for carbon emissions abatement.

It is understood that project aggregation will reduce the administrative burden of ERF participation and greatly increase the chances of winning in the reverse auctions. The Commonwealth has indicated that it has a preference for projects which deliver more significant emissions reductions. The ERF White Paper states that, at its discretion, the Commonwealth may utilise special arrangements to enter into ERF contracts for projects that deliver large scale emission reductions (abatements above 250,000 tonnes of CO2/year).

How does it work?

There are five steps in the ERF process.

1. Apply to the CER to register offsets projects as part of the ERF:

2. The CER will assess each application for "additionality requirements".

   The project must qualify for the auction process (project owners must agree to enter into a standardised Commonwealth contract if successful at auction, provide the CER with a quantity and abatement delivery schedule and nominate bidders to bid on their behalf)

2. Auction

3. The auction is decided on price only and nominated eligible bidders may enter a single bid at auction on behalf of the project owner.

3. Contracting

4. Upon a successful bid, the project owner must enter into a contract with the CER to deliver a quantity of ACCUs for payment.

4. Reporting and auditing

5. Project operators need to submit regular reports on their registered projects, including their emissions reductions, every two years (or five years for sequestration projects). Reports may be submitted as frequently as every six months.

5. Delivery and settlement

6. Project owners must deliver ACCUs according to the schedule in their contract and will then be paid at the price agreed at auction and set out in the contract.

What types of projects will be eligible?

The ERF requires that for a project to be eligible, it must:

• be new. An ERF project (including upgrades and expansions) must not have begun to be implemented before it has been registered (the "newness requirement")
• not be required by any Commonwealth, state or territory law
• not be likely to be carried out under another Government programme
• be commercially ready, and
• be consistent with applicable methods.

What can landlords do now to get involved?

Landlords should review their list of energy efficiency opportunities now, assess the need for funding and start examining methodologies so that they may bid in the reverse auction process.

The transitional provisions of the Bill allow interested participants to provide a "Notice of Intent to participate in the Emissions Reduction Fund" to the CER.

This notice allows potential applicants with new projects to begin preparing their projects before the draft legislation is passed, in order to satisfy the 'newness requirement'.

The CER has been accepting Notices of Intent from 1 July 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.