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Agriculture: RET and CPRS: Fool me Once – Shame on You. Why farmers might be better off getting on with core business.

November 16, 2009

Over the weekend, the willingness of the Government to parlay with the Opposition on the treatment of Agriculture has become clear.  An emerging compromise would be sensible: competitiveness and food security are at risk with unconstrained potential cost increases. 

Actions to enable agriculture to participate in greenhouse gas emissions abatement are also under exploration.  These actions might include a range of direct greenhouse-gas emissions abatement activities, which may be regulated or included as offset activities within the CPRS.  Obviously, farmers want to have their cake and eat it.  But there is reason for caution in pursuing this dream.

Already, carbon forestry looks like an attractive prospect for farmers to generate carbon credits.  However, it is likely that many will respond with distrust to locking up land in forestry following the recent history of MIS, and the rebound in demand from agriculture and mining.

There are also options for land managers and rural industries to generate low-emissions and renewable power.

There have been a few more articles in the press in the last few weeks relating to sugar industry renewable energy developments which are illustrative of how different players are responding to Renewable Energy Certificate (REC) prices in the sector.

On October 5 in the Australian, Nicola Berkovic raised the prospect of two bagasse-fired electricity generation assets closing in NSW as a result of a rapid decline in REC prices.  These assets are relatively new, but now running at a loss as REC prices are substantially below those prices envisaged prior to the passing of the Renewable Energy Target (RET) expansion.

The over-supply of RECs from Solar Hot Water heaters in the Renewable Energy Target has caused the REC price depression.   

It means that, for the next few years, it is hard to see capital-intensive plant continuing to be run at a loss – as reflected by the article in the Australian.  It would appear to represent a pretty substantial policy stuff-up if the RET really was meant to support low-emissions electricity generation – with the consequence that much investment will now likely be shelved.

CSR seem to be in the same boat – the REC price is unhedged, and their corporate literature suggests a more optimistic view of REC prices than we are currently experiencing.  If this is the case, will CSR continue to subsidise the loss-making cogeneration assets?  They are likely to, given that they are integral to core sugar assets, and given the relatively small weighting of cogeneration assets relative to sugar – so relativly low impact of losses from this division – both now and for the de-merged entity.

On the flip side, it is interesting to note the continued confidence in the sugar price re-bound, with expectations of continued strength in sugar values and correlative sugar land values.

Into the mix, North Queensland Bio-Energy Corporation are reported  by the Townsville Bulletin to have purchased 107 hectares of land at Ingham, secured contracts for 2 million tonnes of sugar cane from 2012 with local farmers, and reportedly have made substantial progress being made in off-take and funding (reportedly to the tune of $400m) for sugar, ethanol, and electricity generation.

It seems that this investment reflects a medium-term view of the market – with no assets currently operating at a loss, NQBE can continue to plan assets that will not be on-line until 2012, in the expectation that REC (and electricity) prices will have recovered.  The investment decision may reflect a positive view of future REC market developments, a potential to cross-subsidise through sugar and ethanol components of the plant, and blind faith.  Whether NQBE can secure commercially-viable electricity and REC off-take contracts is yet to be seen.

For prices to improve substantially in the short-term, REC oversupply from Solar Hot Water needs to be addressed.  Eliminating one or other of the existing double subsidy of the direct $1600 Government grant or the REC creation potential would be a good start.  Continuation of current REC market conditions will mean continuation of stalled or cancelled investment in renewable energy generation.

Whether and how much agriculture can substantially benefit from other low-emissions activity investment is likely to emerge though political negotiation, and consideration of market, budget, and scientific considerations.  Of particular interest is clearly the extent to which agriculture might participate in generation of carbon offsets under the CPRS.

However, farmers are unlikely to find an easily-accessible El Dorado through the CPRS in the short-term. 

When one looks at experience to date with the RET, solar rebates, and prevarication and lack of clarity around CPRS thus far, it will not be surprising if agricultural industries are suspicious and less amenable to being ‘fooled twice’ when presented with promises of profit-making market-based opportunities under emissions trading.  No point getting excited quite yet.

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