Victorian Energy Efficiency Certificates (VEECs)
Instability in the Victorian Parliament, strong creation numbers and a large volume of forward activity all made their mark on the VEEC market during June. Precisely what the future looks like remains unclear.
The spot VEEC market began the month at $19.00 and by the middle of the month it reached a high of $19.90. From there strong submission numbers appears to weigh on the market with the spot then softening to the mid $18s by month’s end.
Of note in the latter part of the month and indeed in early July was the presence of backwardation in the forward curve, a situation where the value of the forward market is less than the spot. In compliance markets where certificates are purchased for surrender against an obligation at some time in the future it is unusual to see backwardation in the curve because a forward purchase implies a cost of carry saving.
The presence of strong spot buying interest combined with a large amount of forward selling interest conspired at various times over the last 10 days to produce a forward curve that at times was backwardated by as much as $0.50. Indeed the forward market has dominated proceedings during this time with an almost unprecedented amount of activity reported for settlement between September and February 2015.
June also witnessed an increase in submission numbers with a weekly average of just over 68k, including the week abbreviated by the Queen’s Birthday public holiday. Of particular note was the highest single weekly rate of submissions (93k) since the announcement of changes to the standby power control methodology in November last year.
Of note in the submission numbers has been the strong showing from the 21C methodology which has previously been the subject of changes. It was expected by many that the changes would result in a drop in supply from that methodology. That has not yet occurred, though it is possible that a drop may be on the way if the submissions to date have been dominated by installs completed before the rule change.
The future of the VEEC market remains clouded with the flailing Napthine Government who, according to the polls, is heading for a dramatic defeat in November’s election, remains intent on trying to pass legislation before the election that would bring the scheme to an end after a 2m 2015 compliance year. Victorian Labor’s position has still not been revealed, though most expect it will support the continuation of the scheme it first introduced.
Yet should the Coalition fail to pass repeal legislation (a situation which would not be beyond the realm of possibility, given it is now reliant upon the casting vote of the Speaker to pass legislation in the Lower House until September when suspended MP Geoff Shaw can return to the Parliament), significant uncertainty exists as to what the target for 2015 would be. The legislation stipulates that if a target is not gazetted by 31 May then the target for the previous year would apply. There is however, some uncertainty as to whether this would apply in the instance that the scheme finds itself at present, that is, in between three-year phases and waiting for the next phase of targets to be set.
NSW Energy Savings Certificates (ESCs)
Modest levels of trade activity and generally stable pricing dominated the ESC market across June, while the run of strong registration numbers continued allowing the market to chip away at the 2015 target.
The spot ESC market began June at $11.40 and traded a high as $11.90 before the middle of the month in generally quiet conditions. That pricing level was not maintained for long however and form there the spot progressively softened to end the month at $11.30.
In the forward market October was of particular focus with a handful of trades taking place across the month in the $11.70-$12.00 range. Interestingly the ESC curve has maintained its contango with the forwards trading a cost of carry escalation above the spot of circa 4%.
As creators continue to attempt to clear the pipeline of ESCs before rule change deadline, the sheer number of previously uncreated ESCs is becoming apparent. Recent weeks have seen the very strong registration rates continue with one week yielding a record of almost 250k
Having met the 2014 target in May, the market is now chipping away at the 2015 target with circa 600k of it already met.
While there has been much work done on the alteration of existing and introduction of new methodologies, there has been no further word from the Baird Government as to whether it plans to expand the target beyond 2015. A new increased target together with a reduction in the rate of ESC registration could dramatically change the status quo in the ESC market which at present shows no signs of improving.
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.