Yield expectation – NSW Poles and Wires – for sale.

Ok, the NSW poles and wires lease sale is now into the detail phase. Well actually that detail is reported to be already decided. What are not known are what will be said to the public, and that should be not too far away from being known. In fact the Premier has not wasted any time in encouraging ‘mums and dads’ investors to take out shares. As with all investments the price must be attractive to encourage you to buy. But there is another side of the coin. The institutional buyer must know the price to the user is higher enough to guarantee a return before they buy into the infrastructure. How is that done?

In the case of the energy utilities: It is the federal body, the Australian Energy Regulator (AER). It happens that the AER, and very shortly after the NSW Election where the mandate has been won to sell off the 99 year lease of the ‘Poles and Wires’ to highest bidder, will be setting the price for the future with an interim decision by April 2015 or very near to that date. That decision would determine network prices for the next five years.

So if you think about that you can see that the NSW Premier is technically right – no price movements will be because of the ‘sale’. You might also see why the oversea of the ‘sale’, the former ACCC chair, can say prices will not be greater than the regulator (AER as it turns out) determines. You could find it argued you will pay more, but it is not the sale process that increased the prices. That may be a slight of hand from the politics, but it is still a fact.

Then to put a balance on what an investment might be expected to return, we have a story – Is the search for yield becoming unsustainable?

By business reporter Stephen Letts, 30 March 2015. “The rotation out of investing in high-yield dividend companies into ‘growth’-focused enterprises is gaining momentum. The past month has been particularly striking. One of the key engines of the yield story – the utilities sector – has gone into reverse, falling on average 1.5 per cent this month after a solid 12 months of outperformance.

At the same time, investors exiting the yield play are piling into information technology and industrial stocks hoping for more exciting returns.”

Co2land org now considers: Is the NSW Government too late in getting the float of the poles and wires to market. We use the story above again to quote: “Manufactured yield is not sustainable.” Also quoted is: “Goldman Sachs says the low risk approach is to avoid companies that have been “manufacturing yield” by relying on debt, assets sales and underinvestment in their businesses. Interestingly many of the companies with the largest “cash shortfalls” are the utilities that have been at the forefront for the search for yield. Leading the pack is the power utility and network operator, AusNet Services. Goldman Sachs has found AusNet Services experienced at a $2.2 billion cash shortfall over the past five years, which represents about 62 per cent of its average market capitalisation over the period.

Duet and APA – who are in the same line of business – have shortfalls of $1.1 billion and $650 million respectively.”

Therefore we see an ominous gathering of indicators that suggest the NSW float might not be the good it is promoted as being.

We think the ‘real’ issue will be the pressure to reduce the price by the user. The providers for a ‘demand response’ should also be persuasive to avoid prices rising by virtue they can determine the demand needs for energy. Why the later because, they have the power to defer capital investment needs assuming the network growth need dictate investment in the failings of the system.

The ‘elephant in the room’ is there too! It is of course the remodeling of the energy networks business model and the rise of cheaper embedded energy networks with renewable energy sources.

Tis interesting times!

A Quandary – Nit-pick or constructive critique of CFI ERF

The quandary for most of us when we express our thoughts is we can be regarded as excessive or obsessive for seeking out an agenda – the agenda to change that might be procedurally correct, but fails to address the main issue. For instance the Emissions Reduction Fund – Irrigated Cotton draft determination and associated documents (the consultation process closed 12 December 2014). The main issue, as with other Carbon Farming Initiative methods, is that it is harder for leading growers to be rewarded, as there is no recognition of past improvements.

In the main we found the draft cotton determination, draft cotton explanatory statement and the draft cotton equations, as is, to be sound. It has its process thought through well enough and while we could say some of the flow could be improved any further submission could appear to be nit-picking as opposed to constructive criticism.

Was there room for constructive critique? Yes, but these are areas we might like to adjust the eligibility criteria. Also a little tweaking of what appears too broad in the descriptions. They are areas that could be argued as wrong, but they really are areas for the regulations or legislation to be adjusted. When you access the process of a determination your role amounts to comment on the process that is laid out in the draft determination. It is not the appropriate place to express frustration with the rules. Expressing your frustration is really the domain of the politics.

Being we mentioned the ERF – Irrigated Cotton draft determination, we should let you know what is it about. The first thing is it is the opportunity for growers to obtain certificates called the Australian Carbon Credit Unit (ACCU) under the Act 2011 called the Carbon Farming Initiative (CFI). The reference to the Emissions Reduction Fund (ERF) is part of the CFI Amendment Bill 2014. The fund is designed to help reduce Australia’s emissions by providing and incentive for business, landowners, state and local governments, community organization and individuals to adopt new practices and technologies which reduce emissions. The ERF does include incentives for business activities and farming practices. To find more go to: http://www.cleanenergyregulator.gov.au .

A bit more about our thoughts on the determination and consultation on the Draft Energy Reduction Fund: Irrigated cotton.

  • The ‘system’ is for irrigated cotton growing mainly in Queensland, NSW and Western Australia.
  • The incentive is to encourage Nitrogen fertiliser use efficiency and efficiency is a measure of the ratio of lint yield to nitrogen applied via synthetic fertiliser (kg lint yield per kg N).
  • An increase in nitrogen fertiliser use efficiency is equivalent to a decrease in emissions intensity from synthetic fertiliser use in irrigated cotton (t CO2-e per kg lint yield).
  • Because nitrogen fertiliser use efficiency is calculated using both nitrogen fertiliser use and yield, credits for emissions reductions can be generated by reducing fertiliser use while maintaining or increasing yield, or by increasing yield without a corresponding increase in fertiliser use. This approach also ensures that credits for emissions reductions cannot be generated through a contraction of yield without a reduction in fertiliser use.
  • The draft Determination therefore enables irrigated cotton growers to adjust nitrogen fertiliser rate according to paddock yield potential in the project area, provided that nitrogen fertiliser use efficiency increases.
  • There is support for a broad range of activities to improve the efficiency (reduce the emissions intensity) of fertiliser use in irrigated cotton, including activities to improve lint yield without a corresponding increase in nitrogen fertiliser application rate, and activities to modify the rate, timing, method and efficiency of nitrogen fertiliser application.
  • Proponents have the flexibility to select management actions that suit their individual circumstances.
  • In this draft, cotton is the only crop in the production system eligible for generating credits for a reduction in emissions from synthetic fertiliser use.
  • Emissions from other crops grown in rotation with cotton, with the exception of green manure, are excluded from this draft Determination.

What is Synthetic fertiliser?

Inorganic are sometimes called synthetic fertilizers since various chemical treatments are required for their manufacture.

Synthetic fertilisers do not include solid or liquid organic products created using waste products of other industries that do not meet these labelling and minimum nitrogen content standards. For example, synthetic fertilisers do not include manures, such as poultry litter or beef feedlot manure, or mulches and composts, such as composted ginning trash.

What is a Green Manure?

A green manure is a legume that is planted in a paddock to improve the soil for a subsequent cotton crop. A green manure crop is not harvested and the above ground growth is returned to the soil. Examples of green manure are vetch, faba beans, chickpeas and annual clovers. Non-legume crops which require nitrogen fertiliser are not included in the definition of green manure

What is Organic fertiliser?

Organic fertilizers are usually (recycled) plant- or animal-derived matter. The main “organic fertilizers” are, in ranked order, peat, animal wastes, plant wastes from agriculture, and sewage sludge.

If you picked up on peat as a organic fertilizer and the reference that it has no nutritional value to the plants, but improves the soil by aeration and absorbing water. You might ask why is biochar not a fertilizer?

Bio char

It gets down to two issues:

  1. Bio char is described as a sequester of carbon and as such binds carbon to its properties.
  2. So broad is the definition that it is seen to be the product of ‘burning’.

The later point is where it gets interesting and frustrating. This is because the technology for fine chars is thermochemical decomposition of organic material at elevated temperatures in the absence of oxygen. In another speak, Bio char is created by pyrolysis of biomass.

We do not argue that is a fertilizer. What we argue is it is an agent to improve the efficiency of fertilizer use.

Another potential for confusion is linking soil carbon to bio char. Soil carbon is a condition and bio char is a conditioner. If you think one is the constant and the other the agent for change it makes sense does it not?

That leaves the issue of if it is helpful why is it excluded from the incentives?

Maybe the question is better put this way: Plants don’t need carbon, soils do. Biochar is but a hazardous waste from pyrolysis, looking for a below-the-radar application. Do we have that application? But that is for another discussion and a case study!

Makers – a Viable CFI methodology

Recently a discussion group was asked for information on the area needed to make a Carbon Farming Initiative (CFI) methodology viable. I follows the answer is not as simple as it should be and part of the problem is the rules can change and even the responsible entity itself might change. This statement is not an example of a remote possibility, it is very much what is likely to happen.

First issue: The market.

Currently a Australian Carbon Credit Unit is reported as holding steady at approximately the Carbon Price Mechanism expectation of $23 (actually ACCU spot price is $22.60 at 4 April 2013). Compared to the trading prices of others. For example the Carbon + Market Daily (www.cedaily.com.au) shows European Union Allowances (EUA eligible on Australian Scheme from mid 2015 – June 2016: AUD $7.48 – no change) 
* Certified Emission Reductions (CER eligible on Australian Scheme from mid 2015 – June 2016: AUD $0.67 – up 6.4%) 
* New Zealand Units (NZU spot can’t be used to meet liabilities under the Australian scheme: NZD $1.97 – down 2.5%) 
* Australian Carbon Credit Units (ACCU spot Kyoto units issued under the CFI that can be used to help meet Australian scheme liabilities: AUD $22.60 – no change). They also report of conflicting market drivers, and this is in addition to the Coalition threats to dismantle the carbon price mechanism, that the European market is struggling to hold above EUR5 on moderate volumes. Problems include:

1) An increasing likelihood that backloading will be passed as more countries come out in support of the proposal; and

2) High auction volumes relative to emitter demand.

3) Increased selling in the New Zealand market as more participants’ look to switch out of their NZUs and into cheaper international units.

4) June 2016 prices for EUAs and CERs reflect the cost of these units to an entity liable under the Australian scheme’s floating price phase.

5) The EUA (December 2013 contract) is a focus as this drives price movements and is a key indicator of EU (European Union) market sentiment.

Conclusion – first issue: Transactions involving carbon give rise to substantial risk (including regulatory risk) and are not suitable for all investors. It is recommend that you seek your own independent legal or financial advice before proceeding with any investment decision

Second issue: Carbon Auction Rules.

The Clean Energy Regulator is likely to be required to offer 60 million carbon units in 2013-14 under draft carbon auction rules. The potential is the opening price is at 60% of the international market price. Follow the link of the

exposure draft of a carbon auction determination, and it will outlines arrangements for auctions that are set to begin next financial year.

If you are relying on an incoming Coalition Government to repeal the determination, you should note s113(9) of the Clean Energy Act allows the Regulator to hold auctions even without the determination. It might not be so simple as a statement to win votes – it is written in stone so to speak.

Conclusion – Second issue: Without control of the senate, or if the senate is hostile, a Coalition repeal instrument would be disallowable. This introduces additional risk, and additional to regulatory risk. As in the first issue it is recommended you seek your own independent and financial and legal advice.

Third Issue: ACCU methodology.

It costs up to $1M to develop a methodology acceptable under CFI. Once accepted the transaction cost to create the ACCU’s is said to be about $70,000. Although it is not a definite cost, it can be less but a reasonable guide and it requires you to look carefully at the potential yield of each project and whether you can smear the transaction cost across the entire project to determine the minimum size for it to be a worthwhile program.

One way to develop a methodology and reduce your cost base is to apply to the 

Methodology Development Program (MDP) for a grant to develop the methodology. The 

MDP is a 
$19.6 million for the development of methodologies for use in the Carbon Farming Initiative. The fund is administered by the Department of Climate Change and Energy Efficiency (DCCEE).

However, recently the Government has moved from 26 March 2013 that DCCEE be in transition to be part of a new super department called the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education. 

It is reported as a move the Australian Government hopes will be seen as logical and a way to portray that climate change is taken seriously across all of government and across all portfolios. Details changes are yet to be fully announced, albeit it is known the Climate Change Adaptation Strategy has changed with 140 projects, 33 university programs and 100 researchers affected – source ABC.net.au.

Conclusion – Third issue: Before expending too much time on the methodology. The suggestion is you follow up on who would administer the program post transition to the super department, and the will to continue with the program. Any changes will have cost implications for your efforts.

If only we had certainty!

the notion of “water flow uphill”

“They thought there was a communication problem, and that what he was saying (‘Getting the water to flow uphill for the plants’) should not be taken as a literal translation. Interesting that many of us armed with conventional wisdom, with sleeves rolled up and espousing there is only one view of the world. That is a world with a benign bias that is a result of their own ignorance, a bias shared by the establishment where they are happy to “Recognise traditional owners” but completely ignore 40,000 years of stable landscape management as being not scientifically based (due to their own biased view of what constitutes science).

Co2Land is not the author of what is written in the opening paragraph. However, on reflection it is very possible we are ignorant if not wrong for what we believe to be truth.  Truth, like real, prior, could be a synonym or even a proprietary product and still be wrong. We could be ignoring one of Einstein’s greatest tenants (the universe depends on the perspective of the observer).

Looking at the concept of a net movement of water away from drainage lines is possible when you research even at a basic level, like Wikipedia, or as follows as published by http://science.jrank.org/pages/1182/Capillary-Action.html#ixzz2JIvrD9qD:

“The force with which water is held by capillary action varies with the quantity of water being held. Water entering a natural void, such as a pore within the soil, forms a film on the surface of the material surrounding the pore. The adhesion of the water molecules nearest the solid material is greatest. As water is added to the pore, the thickness of the film increases, the capillary force is reduced in magnitude, and water molecules on the outer portion of the film may begin to flow under the influence of gravity. As more water enters the pore the capillary force is reduced to zero when the pore is saturated. The movement of groundwater through the soil zone is controlled, in part, by capillary action. The transport of fluids within plants is also an example of capillary action. As the plant releases water from its leaves, water is drawn upward from the roots to replace it”(Read more: Capillary Action – Liquid, Water, Force, and Surface – JRank Articles ).

This illustrates that science supports what the indigenous know in that water can back out across the slopes due to capillary action and in this way encouraging growth and interconnection of the soil “fungal mat”, and from the perspective of the observer in the drainage line moving the water ‘uphill’.  With a closed mind we might say ‘not possible’ – yet the Romans BC did it with viaducts and manipulating volume pressures to do so.  Should we have an open mind for these things? The answer appears to be it is beyond a cost benefit it is just a big yes.

If we relate this to the methodology process of the Carbon Farming Initiative (CFI) a strong case can be made for inclusion, greater than savanna burning. As told to us we could see success and it opens up millions of hectares of bush to better management part funded by carbon credits generated.  The advocates of this method gave CO2Land org an example of what could happen in an area of 1000ha. Said was: “If patches are prescriptive burnt on a ten year rotation then this would yield 120 tonnes of soil carbon sequestered a year, and if we assume 360 Australian Carbon Credit Units (CFI credits) @23 dollars per tonne. An income boost of +$8000 a year is possible”. If accepted is it noted all of this is possible from this activity without wholesale alteration to the natural balance.

CO2Land org has previously postulated that $7,000 per annum is needed as an enticement for participation in complex methods so this possibility would be enough to offset the liabilities of land ownership (rates, weeds control, land use etc), and give additional benefits that include productivity improvements and/or other opportunities generated.

If you wish to be critical we accept that the bio char method is acceptable under National Resource Management program (NRM). However, out point is in order to incentivize a market for the concept the CFI and ACCU’s are a better way to go and could open up a multi product concept with the potential for the way forward for the sustainable environment and hopefully those faithful to carbon will no longer be in a blue state and that will be because they no longer will be only living in hope and will be able to participate in a reality. We will get a result.