Enviro markets update - STCs and Efficiency Certificates

Small-scale Technology Certificates (STCs)

The new financial year in the STC market brought with it a growing sense of the implications of the Queensland feed-in tariff (FiT) reduction. The reduction provided a two week window in which households could apply for grid connection in order to ensure eligibility for the 44 cent rate. By the end of the period approximately 100,000 applications had been received by the state's network businesses.

Importantly, these applications do not constitute sales or guaranteed installs and estimates of the rate of conversion of the applications to installs have been as broad as 30-80 per cent. The surfacing of the Inverter Energy System (IES) application numbers coincided with a sharp fall in the spot price during the second week of July, which ultimately saw the market fall to $26.00. Not for the first time in recent months however, the spot then rallied steadily, owing principally to thin supply. By the end of the week the spot market was back into the low $27s where it then remained for most of the month in the lead up to the final second quarter compliance date (28 July).

With the passage of the final second quarter compliance date, it indeed appears that exemptions under Section 38AF of the legislation again applied. Rather than the 11.2 million STCs that would have been surrendered if all went according to the formula in the legislation, there were instead only 10.5 million STCs which were acquitted. Assuming that this is not the result of a shortfall by any liable entity, it appears approximately 700,000 extra STCs will now need to be surrendered against the fourth quarter liability to make up the difference.

These exemptions need to be added to those that already applied in the first quarter of the year, during which roughly 900,000 fewer STCs were surrendered when compared with the expected target.

The chart below shows (in green) what the quarterly surrender would have looked like according to the 44.79 million target and the legislated quarterly weightings (Q1 35 per cent, Q2 25 per cent, Q3 25 per cent and Q4 remainder with true-up). Against this, the actual surrender for Q1 and Q2 is shown in purple with an estimate of what actual Q3 and Q4 surrender would look like if Q2's result was repeated in Q3.

Looking ahead, the market awaits the next update by the Clean Energy Regulator (CER) of its non-binding estimate of the 2013 Small-scale Technology Percentage (NBESTP). In late July 2011, the scheme's regulator released an NBESTP update which essentially corresponded with the final Q2 compliance date. The announcement was a cornerstone part of the market's recovery across the second half of the year. An immediate price impact was also felt, with the spot price at one point in the following trading session up 22 per cent, before falling to settle around 12 per cent above the pre-announcement level.

Much of that bounce could be explained by a key message that was taken from the NBESTP update by a market which at that stage had little confidence in the mechanics of the STP calculation. The key message was that the oversupply of STCs which was building rapidly in 2011 would in fact be added to a genuine ‘base' target for 2012; a proposition which had always been implicit in the scheme's design, yet which many in the market were far from confident would actually eventuate.

Having adhered to that process in subsequent updates and remained true to it in the setting of the final 2012 STP, the market this year has a far greater degree of confidence that the process will continue. This means the spectacle which came following last year's NBESTP is less likely this time around.

Having said all that, it is unlikely that the release of another NBESTP update will harm confidence in the market as it confirms the procedure for calculating the STP will again be maintained. The update will also be important because, unlike in the last update released in late May, this one will likely include an estimate of the 2012 oversupply to be added to the 2013 base figure. The last update to the 2013 NBESTP came on 30 March and predicted an STP of 7.94 per cent, equivalent to 15.07 million STCs surrendered for the year. The upcoming update to the NBESTP for 2013 appears likely to be released in 4-6 weeks.

Energy Efficiency

In the New South Wales ESC market the major talking point in recent times has remained the modest rate of ESC creation. Spot and forward prices had softened progressively across the early part of the year, reaching a low of $24.50 in early July. The softening reflected expectations that the prevailing ESC scarcity – which has to-date seen the market either short or very closely balanced in each compliance period since 2009 – would come to an end in 2012 largely thanks to creation from commercial lighting.

While considerable work is taking place on the ground, the rigidity and complexity of the compliance regime which creators must navigate to turn activity into ESCs has been a major handbrake on creation. The principal cause of delay appears to be the process of surpassing audit hurdles which, until achieved, prevent the creator from producing more ESCs.

With less than 400,000 created thus far for the 2012 vintage year, the expected increase in supply has so far failed to materialise. Yet because it remains essentially impossible to know how many as yet uncreated ESCs currently sit in the backlog, it is a guessing game as to whether or not 2012 will break the scarcity trend.  

While the ESC market had been quiet across the second half of July, activity in the forward market last week took place around the $26.00 mark, constituting a 5 per cent recovery off the market's low. The spot market itself has failed to trade in recent weeks yet the forward transaction and the bid/offer spread suggest the market is somewhere around the $25.50 mark.

In Victoria's energy efficiency market, the new financial year coincided with a rash of transactions in both the spot and forward markets. The early trend was for further softening with the majority of activity taking place at $21.00. The spot market eventually hit a low of $20.80 before recovering to $21.00. In recent days the market has traded back to $20.90. The short forward market was also particularly busy during this time with a significant number of forward deals reported, the most recent of which also at $21.00.

The softening in price has reflected the growing number of VEECs being created, particularly from standby power controller installations (SPCs) which earlier in the year appeared likely to suffer regulatory changes that would severely alter their appeal to consumers. In the end, this did not occur and VEEC creation has continued to surge with an average of just under 500,000 registered per month between Feb and July. There are now 4.4 million VEECs either registered or pending registration (keeping in mind that some may be refused registration). Meaning the market is already a considerable way toward meeting its 2012 target of 5.4 million.

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 The content above is sourced from excerpts taken from The Green Room.