Victorian Energy Efficiency Certificates (VEECs)
Below par submission numbers and a slowdown in the approval process saw spot VEEC prices strengthen dramatically across February as both current and expected supply weighed on the minds of participants. Meanwhile the self imposed deadline for the release of the Napthine Government’s preferred position on the next three-year phase of the VEET has not been met and a Cabinet reshuffle ahead of the election sees a new minister at the helm.
In the VEEC market February was all about determining how VEEC submissions would look once the industry was back up and running following the Christmas break. Given the size of the surplus being rolled over from 2013, approximately 60-70k (depending on one’s view of the size of the working surplus required to ensure compliance for 2014) VEECs need to be delivered to the Regulator each week until 31 Jan 2015. Across February, it became clear that for the time being, supply is below that level (the average weekly rate of submissions for February was just over 44k).
Combine this with a slow-up in VEEC approvals which has seen many creators grumbling and the conditions were ripe for the market to strengthen. What eventuated however was an impressive 16 per cent increase which came, for the most part, on the back of very modest trade volumes.
Having opened the month at $17 the spot really got moving in the middle of the month with the market moving from its mid month level of $17.65 to $19.75 by month’s end.
The early part of March only saw this trend continue with trade volumes on the rise initially in the spot market and eventually in the forwards.
The absence of any indication from the Napthine Government on what its intentions are for the next three-year phase of the scheme is an unwanted source of uncertainty for the market. While early indications suggested the Coalition Government was genuinely considering abolishing the scheme after the current three-year phase concludes (2012-2014), it now appears such an extreme approach is no longer on the table.
However, adding to the uncertainty was the announcement of a Cabinet reshuffle which sees the existing Minister Nicholas Kotsiras (who is retiring at the election) replaced with Russell Northe. It isn’t clear what the incoming minister’s views on energy efficiency are, though there is sure to be plenty of speculation in the coming weeks. It is also unclear whether or not this will further delay the release of the government’s preferred position.
New South Wales Energy Savings Certificates (ESCs)
In New South Wales the decision to delay the hard cut-off of date for compliance rule changes provided a much sought after reprieve for creators, while the spot and forward market remained generally stable across February around the $14 mark despite hefty ESC creations.
Activity in the ESC market across February was patchy with numerous clusters of activity occurring. The spot and forward market both traded with stability across the month with $14 being the commonly accepted level.
Several busy periods witnessed short forward activity across the 2014 curve at that level before a modest rally at month’s end saw the spot close at $14.50. The early part of March saw some escalation return to the curve with the forwards trading at a modest cost of carry above the spot, which stands at $14.60.
The dominant issue discussed in the ESC market across February surrounded the cut-off date for the implementation of new rule changes surrounding certificate creation. The scheme’s regulator (IPART) had originally flagged a April 1 cut-off date for the removal of several creation methodologies as well as for changes to extended operating hours. As has come to be the approach adopted in NSW, a hard cut-off date for the creation of the ESCs was being proposed, meaning not only did the activity have to take place by that date with all the paperwork completed a submitted, but the ESCs would also need to be created in order to be eligible under the old regime.
Such a timeframe resulted in a significant degree of anxiety among creators who often experience a considerable time lag between installation and ESC creation. To the appreciation of many participants the Regulator acknowledged these concerns and appears to have effectively granted an additional 4-6 weeks for creators to get their act together with the new changes to be gazetted in mid/late April to become effective the next month.
It is expected that the already very healthy rate of ESC creation experienced across recent months will only be bolstered in the coming months as creators work to ensure their eligible ESCs are created under the existing regime.
By the second week in March there were over 4m ESCs left un-surrendered in the scheme. Once the 2013 target of circa 2.3m is taken into consideration a surplus of 1.7m ESCs exists to go toward the 2014 target of circa 2.5m ESCs.
Average monthly creation across the last three months sits at approximately 300k, hence three more such months would see the 2014 target met sometime in June. Such an outcome, however, may not necessarily occur for several reasons. Firstly the Dec-Apr period is typically the busiest period for creations as participants attempt to register their ESCs in time for compliance. Secondly there has likely been a rush to create in order to meet the rule change deadline. Once that deadline ticks over, creation will become more difficult and potentially costly and there are those of the view that believe a clear, if not sharp decline in creations will then be seen. As is frequently the case, only time will tell how this story ends.
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.