A Booming Market Not Many Are Talking about

By ,

In today’s Money Morning…what’s a carbon offset power station?…Australian carbon prices are on a rally…what’s been driving the price of carbon credits?…and more…

It was Super Bowl Sunday last weekend.

While the Super Bowl is a huge sporting event in the US, it’s also really well known for its ads. The ads have been touted everywhere in the last few days, with quite a number of them for electric cars.

But, funnily enough, the ad that caught my attention this week wasn’t a Super Bowl ad. It wasn’t even a US ad, but rather an Australian one.

You may have seen it.

It’s part of EnergyAustralia’s new campaign ‘Doing, Not Just Dreaming’. The ad starts with an energy expert speaking to an audience in a TED-like talk about a future of ‘renewable, affordable, and reliable energy’, one that’s ‘many years away’.

It then cuts to two EnergyAustralia workers overseeing a construction site. They walk to the tune of Fleetwood Mac’s ‘Don’t Stop’, and one says:

 ‘Actually, it’s today. At EnergyAustralia, we’re already building Australia’s first carbon offset power station.

The ad then talks about all the different clean energy options you can have when you sign up with EnergyAustralia. It finishes with a panoramic of the rooftop solar panels installed at the Melbourne Cricket Ground.

But what I wanted to focus on is the offset power station they refer to, which is Tallawarra B.

The plant, which is scheduled to be ready in the summer of 2023–24, will be located on the shore of Lake Illawarra in New South Wales and will be gas and hydrogen capable.

What’s a carbon offset power station?

Here is The Guardian to explain:

‘[I]n reality, what EnergyAustralia is doing in building a “carbon offset power station” is constructing a regular fossil fuel power station, then working out what the emissions are, and then buying some carbon offsets.

To understand how unimpressive this is, think about how you could make the same claim about anything else you chose to construct like, for example, a diesel generator.

As long as you know its emissions, you can magically turn it into a “carbon offset diesel generator” through the purchase of carbon credits.

Australian carbon prices are on a rally

We’ve talked here in Money Morning about some booming trends in the energy transition such as lithium and graphite, but we haven’t yet talked much about the carbon market.

And carbon prices have taken off in the last year.

The way the carbon market works is similar to any other market.

The carbon market connects a company that has too many emissions with another that has a carbon surplus. The large emitter can then buy carbon to offset its emissions from the low carbon emitting company.

In Australia, we have a voluntary carbon market where companies can buy Australian Carbon Credit Units (ACCUs) to offset their emissions and reduce their carbon footprint.

One ACCU represents one tonne of carbon or greenhouse gas removed from the atmosphere. And since there is a limited supply of ACCUs, the more demand there is, the more prices should go up.

It’s basically what’s been happening in the last year. Demand for ACCUs has increased, and so has the price. The spot price for ACCUs has climbed from around $16 at the beginning of 2021 to a high of around $56 earlier this year.

In January this year, the Australian carbon offset market saw close to 550,000 units traded across the spot and forward markets, setting a new monthly record high, according to RepuTex. This is a 56% increase from the previous monthly record set in July last year.

Prices for ACCUs have since come off the highs and are now trading at around $51 a tonne.

There are a few things that have been driving the price.

What’s been driving the price of carbon credits?

For one, there’s the expectation that prices are only going to go higher as the government tightens policies to move towards net-zero. Consequently, many are buying now, while it’s still cheap.

There’s been a push from shareholders and clients to set net-zero emission targets. So companies that have made voluntary emission target commitments are using it as a way to offset their carbon emissions and help them meet their net-zero targets.

As RepuTex Energy executive director Hugh Grossman recently said, courtesy of Stockhead:

In effect large corporates under a bit of stakeholder pressure from investors and downstream consumers are setting net zero emission targets and as part of that they are beginning to procure offsets to meet those voluntary commitments.

When corporates do that, they have the flexibility to use international or Australian credits – so what we are seeing now is a lot of companies are beginning to stockpile ACCUS and contract for ACCUS over a forward delivery timetable.

That increase in forward contracting has basically led to a bit of a supply squeeze in the spot market. As that occurs a sustained period of high prices is anticipated throughout 2022.

While some companies are using ACCUs to offset their emissions instead of actually reducing them, as ACCUs prices increase, that strategy will become more expensive. So it should end up driving more investment into renewables.

But, as RepuTex said, another reason for the increase is that things have been getting pretty hot in the European carbon market.

As they said:

[P]rices in the EU ETS have flirted with the €100 (A$160) barrier over recent days, reaching a record intraday high of €98.49/t on Tuesday (A$157), leading many local investors to view the Australian market as undervalued.

While European carbon credit prices have since dipped to around €90 today, prices could go higher in the future.

It’s what my colleague at New Energy Investor, James Allen, told Callum Newman when they caught up earlier this month. In their interview, they talk about trading carbon for profit, the opportunities in renewable energy, and much more.

You can watch the full interview here.

Until next week,

Selva Freigedo Signature

Selva Freigedo,
For Money Morning

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.

About Selva Freigedo

Selva Freigedo is an analyst at Money Morning. She has a background in financial economics, but what makes Selva´s experiences different to many are the places she has lived and worked. Born in Argentina, she has also lived in Brazil, the US, Spain, and now Australia. She has seen up…

Europe Rethinks Its Energy Supply Chains

REPowerEU will look at importing more liquified natural gas after a ban on all imports of Russian oil and gas by the US

What Happens if the War Begins?

In today’s Money Morning…more than just an energy crisis…a prized base metal…some very deep repercussions…and more…

Top 9 Investment Trends to Watch in 2022 Part 2 – Decarbonisation

BlackRock, the behemoth asset manager, named decarbonisation one of the key trends in its 2022 global outlook.