Enviro markets monthly review - Part 2

This is the second part of this month's NextGen environmental and electricity markets review, examining large-scale renewable energy certificates or LGCs and also the market for wholesale electricity. Part 1 yesterday dealt with small-scale renenewable energy certificates (known as STCs) and energy efficiency certificates.

Large-scale Generation Certificates (LGCs)

Recent years have seen very few renewable energy project commitments, owing principally to the presence of a considerable oversupply of LGCs (formerly known as Renewable Energy Certificates or RECs) and the resulting softness in prices that have resulted.

Having experienced a steady rally across the first half of 2011, the spot market eventually traded as high as $42.00 in December. Rather than bringing about a continuation of that trend, which many believed would need to happen given the LGC value required to make wind projects competitive with their fossil fuel alternatives, 2012 has seen the spot market soften once again.

This continuing softness highlights a temporal mismatch or, to put it another way, the fairly myopic nature of the spot market. On the one hand, 2012 needs to be the first year in which a substantial number of major renewable projects are committed (more than 1000MW of wind are required per annum, for the rest of the decade) in order to ensure that new LGC supply comes online by 2015 (being the point at which the current oversupply is expected to have been eroded).

Yet because of the extent of the current oversupply, there are many liable entities in the market who have covered much of their short to medium term obligations and hence have little to do in the immediate future. This has manifested itself in an absence of short run demand and has provided little reason for the market to strengthen.

Yet the issue of project commitments remains. If the market pricing signal does not provide the financial case for project commitment, liable entities will have one of two choices: a) enter into long term Power Purchase Agreements anyway and pay an implicitly higher price for LGCs than the market is reflecting (essentially in anticipation of what is to come), or b) do nothing and take the risk that some form of regulatory or technological change will occur to prevent the spot price from eventually moving toward the post-tax penalty level ($92.85) as a reflection of the looming scarcity.

It should also be noted that the uncertainty surrounding the future of the carbon price as well as the review of the Renewable Energy Target which will take place in the second half of this year are providing plenty of conceptual fodder for those looking at long term PPAs.

After an extended wait, a major project commitment was finally reported to the market last week, with Origin Energy signing a Power Purchase Agreement for full off-take of the power and LGCs which will come from Trust Power's 270 MW Snowtown II wind farm.

Despite a steady recovery across late March/early April, the spot market currently sits around the $38.00 with trade activity having fallen to levels not seen since 2008. Sporadic activity continues in the forward market with the most recent transaction in the Cal 15 (delivery Jan 2016) at $45.30.

Wholesale Electricity Update

Electricity pool prices have been elevated since the start of the second quarter as plant maintenance and cool weather conspired to keep the spot around $30 in all nodes, compared to the mid $20s for the summer months. This trend is expected to continue as we get closer to winter.

Trading in forward contracts remains subdued ahead of the much heralded start of the carbon tax. Uncertainty over how much carbon impost electricity generators can recover via the pool price has most traders staying on the sidelines until they actually see the impact from July. So far futures contracts are pricing in about $19 dollars' worth of carbon uplift.

In longer dated contracts the market saw a drop in price for contracts from July 2013 onwards as continued Government turmoil saw further uncertainty about the price of carbon in the future. July –Dec 13 contract prices fell about 50 cents at the start of the week and while they recovered some ground later, they remain 20-30 cents below the previous week's level.

Marco Stella is a Senior Broker, Environmental Markets and editor of The Green Room at Nextgen, a wholesale energy and environmental brokerage firm.

Dan Foster is Head of Energy Products at Nextgen, www.nges.com.au.