Enviro markets of uncertainty

Forward electricity prices continue to weaken amid uncertainty in the outlook for carbon. Meanwhile, the spot LGC market softens, with an oversupply of RECs providing ample opportunity for buyers to meet their near-term obligations.

Large-scale Generation Certificates (LGCs)

The short-term focus in the spot LGC market has been maintained with further softening occurring in the market in recent weeks.

With sizeable targets looming in the years ahead and few new project commitments in recent times, it’s not surprising many in the market believed the spot LGC price would enjoy a positive. The year has instead brought with it a steady downward trend, which continued unabated across May, with overall trade volumes also continuing to wane.

The presence of a major oversupply that was not too far shy of 40 million RECs carried over into the Large-scale Renewable Energy Target (LRET) for generation year 2010 and prior continues to provide ample opportunity for buyers to meet their obligations in the short to medium-term.

A review of the Renewable Energy Target (in both its large- and small-scale forms) is set to begin in the new financial year with a report to be made to the minister no later than December 31. Should the review fail to advocate for any major change to the current framework, it appears the long awaited next round of project commitments will be required fairly promptly after that.

In terms of the forward market, which is valued via a cost of carry above the spot market, the most recent activity took place in the Cal 15 vintage (for settlement in January 2016) at $43.20.

Wholesale Electricity Update

Low spot prices have seen forward electricity prices continue to weaken across the curve. The ongoing controversy and poor standing of the Gillard government in the polls has continued to fuel uncertainty in the outlook for carbon, which continues to be discounted from the beginning of calendar 2013.

Anecdotal evidence suggests that market participants are only hedging prices a year out due to the lack of direction on carbon pricing and this dearth of demand has also weighed on prices in the longer dated contracts.

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

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