Victorian Energy Efficiency Certificates (VEECs)
Generally stable pricing, variability in VEEC submissions, the surrender of certificates to meet the 2013 liability and radio silence form the Napthine Government on the scheme’s future were all features of the VEEC market in April.
The spot VEEC began April at $18.50 and in the early part of the month moved above the $19 mark. The Easter/ANZAC Day Break then saw the market fall quiet, eventually resulting in a sharp, though short lived sell down at the conclusion of the month. The early part of May has seen volatility in the spot market.
VEEC submission numbers varied considerably across April with the rolling average of circa 45,000 ultimately maintained despite large variation in the weekly numbers. Weekly submissions (blue columns) are calculated net of withdrawals (red line) which are generally in the 3000-8000 range per week, with a number of obvious exceptions.
Surrender for 2013 compliance took place across April with just shy of 5.4m VEECs surrendered across the month. The surrender showed just over 3.2m VEECs remaining after 2013 compliance with another 610,000 pending registration. Assuming, (conservatively) that 100,000 of these fail to be approved (but the rest get through), then the market currently has 3.7m VEECs to meet the 5.4m 2014 target. The calculation that then gets made is to work out how many VEECs must be submitted to the Regulator between now and the end of January 2015 in order to meet the target.
Depending on whether or not there is a VEEC market in 2015 will then determine if a meaningful surplus of VEECs (say 300-400,000) is needed above the target. In the event there is an obligation for 2015, this surplus will go some way toward providing liquidity. In the event that the scheme is not continued in 2015, the required surplus is far smaller, perhaps something less than 100,000.
Hence, in a scenario in which the scheme continues into 2015, a weekly rate of submissions of roughly (55,000 week plus a conservative margin for withdrawals, say 10,000) 65,000 is required.
In a scenario where the scheme ends in 2014 then roughly (45,000 per week plus a conservative margin for withdrawals, say 10,000) 55,000 per week is required.
Both the 65,000 (scenario A) and 55,000 (scenario B) can therefore be seen as the required run rate. As can be seen in the chart above the four-week rolling average of VEEC submissions has been 40-50,000 for most of the last three months, hence VEEC submissions have remained below the run rate during this time.
The reason this has not resulted in any further increases in the spot price is that the deficit in absolute terms is relatively modest and there remains plenty of time for an increase in supply to follow.
For its part the Victorian Government has remained silent on its plans for the future of the scheme leaving everyone to speculate on what will eventuate. Though due to inform the market of its preferred position in February, no further information (other than a somewhat confusing leak to a Melbourne tabloid) has been forthcoming. With the election now less than seven months away and the VEET legislation requiring a decision by the end of May, time is running out for the state’s Coalition Government to reveal its plans.
New South Wales Energy Savings Certificates (ESCs)
The weight of ESC registration and the building surplus it implies finally had an impact on the ESC price across April. As the ESCs churn through, participants are looking to the future for the impact of compliance scheme rule changes and any word on the scheme’s expansion for relief from the status quo.
The general trend in the ESC market across the last 18 months has been negative; a reflection of a scheme consistently supply constrained that broke free of the shackles. While there have been some ups and downs (including a rally in late 2013 following the announcement of compliance rule changes for creators), all the way the number of registered ESCs has been growing rapidly.
Recent months, which are typically the busiest for registrations anyway, have been boosted by the rush to ensure ESCs are registered before the new compliance rule changes take effect (expected to be later this month).
As can be seen in the chart above a run of 100,000-plus registration weeks have seen the supply of ESCs left over from 2013 come close to meeting the target for 2014. Against an expected target for 2014 of circa 2.5m ESCs, there are already over 2.3m ESCs available for surrender with at least 12 months to go during which ESCs for 2014 compliance can be registered.
While technically the ESC market is not yet in 'surplus' for 2014, the fact that the target is already all but met with a full year of registrations still to come has clearly weighed heavily on the spot price. With average weekly registrations across the last 10 weeks sitting above 100,000 a massive surplus appears not far away.
In such a context, the steady decline in ESC prices that took place across April (the spot market lost 13 per cent across the month, with further losses posted in early May) can be easily explained.
Yet precisely how large the surplus for 2014 will be is hard to assess. For starters the registration boom which has occurred across the early part of this year will likely drop once the new compliance rules take effect, with a number of methodologies that formerly contributed to supply to be removed and compliance for a number of other methodologies to become more stringent.
Lower ESC prices are also likely to impact on supply and hence many will be looking to the registration rates post June for a sense of where the market is at.
Beyond this there is the Review process which is currently taking place and which may yet result in an increase to the target at some stage in the future. No further information on the scheme’s expansion is expected before the middle of the year but an increase in the target, depending on what other changes it would bring and its timing could be positive for prices.
Regardless of these factors which may turn things around, with the strength in registrations continuing it is still possible that things in the ESC market could get worse before they get better.
Marco Stella is Senior Broker, Environmental Markets at TFS Green Australia. The TFS Green Australia team provides project and transactional environmental market brokerage and data services, across all domestic and international renewable energy, energy efficiency and carbon markets.