Market eyes fixed on RET Review

With the RET Review underway, trading activity in the LGC market has been sporadic, while prices in the wholesale electricity market remain firm on reduced capacity.

Large-scale Generation Certificates (LGCs)

The overwhelming focus in the LGC market across the last month has rested on the Review of the Renewable Energy Target (RET) and the conceptual battle being waged both in both the public and private spheres for the future of the key renewable target. Trading activity during this time remained sporadic with prices fairly stable.

In what turned out to be Kevin Rudd’s final days as Prime Minister in June 2010, the Enhanced Renewable Energy Target legislation was finally passed in the Senate. It was a heady time for watchers of federal politics and not only because of the drama surrounding the change in PMs.

The countdown was on for the passage of the Enhanced RET before what many believed would be the last sitting days of the Parliament. Horse trading took place in order to see the legislation over the line and, in the end, the final Bill contained amendments from the Government and Coalition as well as The Greens and Senator Xenophon. The serious time constraints ensured the process was at times perplexing, yet the amended legislation was finally passed. Aside from bringing about the separation of the existing market into large and small-scale offshoots, the legislation made a range of other changes including shuffling forward the large-scale target and instilling the requirement for a review of the entire RET legislation every two years from 2012.

Two years on, that review is being undertaken by the newly constituted Climate Change Authority (CCA). Its presence, many perceive, has opened the door for those who would like to changes made, with a number of high profile identities speaking out. The most prominent argument for change is founded on the fact that the electricity demand forecasts upon which the (legislated) 2020 target is based now appear to be inaccurate and that in order to ensure that a 20 per cent renewable energy target by 2020 is maintained that a percentage based (floating) target should be used instead of the current (fixed) version.

Simultaneously, the calls for change have forced others to speak out warning of the dangers such change would represent to the investment pipeline in the renewable industry. That two of the nation’s leading electricity retailers were on either side of the debate, only heightened peoples’ interest.

In general, talk of regulatory change in the LGC market is greeted with dismay by a market place altogether too familiar with the corollaries which follow. For that reason the RET Review was always going to prove an interesting advent. On her part, the head of the CCA has acknowledged the potential impacts that changes to the RET could have on investment in the industry, and has stated that any decisions taken would be done so with due consideration. Importantly, both the Gillard Government and Coalition have said they will be guided by the recommendations made in the Review, though the incumbent Government has been talking down its appetite for change. An issues paper is set to be released by the CCA in the coming weeks to consult with stakeholders. A Discussion Paper will then be forthcoming in October before the final Review is handed to Government by 31 December.

Despite the contention surrounding the future of the scheme, activity in the LGC market remained fairly subdued across the last month, with pricing particularly stable. Spot trade was confined within a $37.25-$37.75 range across July including several large volume parcels.

There were also several LGC Call options transacted in recent times, the latest taking the following structure: $42.00 strike with expiry in May 2013, which traded at a premium of $0.92. The buyer in this case paid the upfront premium for the ability to by 25k LGCs in May 2013. The volatility implied by the trade was 15.2 per cent.

Wholesale Electricity Update

Spot prices remained firm during July as reduced capacity and winter weather allowed generators to bid strongly into the pool. This, in turn, led to a re-rating of future generator behaviour and forward prices rallied. Prices for Quarter 4 base load contracts rallied $1.50 per MWh across the NEM while Calendar 2013 rallied around $2.00.

A carbon tax uplift of approximately $20.50/MWh was being built into 2013 prices but that drops away in subsequent years as uncertainty about the continuance of the scheme, its possible alteration or early replacement with a trading scheme discount the impost. Calendar 2014 base load contracts include approximately $17/MWh and that drops to $12 for Cal 2015 trades. However, due to the uncertainty, liquidity in these periods is very thin. Anecdotal evidence suggests that end users are contracting for shorter periods due to the lack of clarity on the matter.

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

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