November enviro markets update – STCs and LGCs

For the small-scale renewable market, the STC spot price has made up some of its losses while certainty might be coming to the scheme’s large-scale sibling.

With Q3 compliance having come and gone without any spike in price, the spot STC market first lost significant ground before making up some of its losses. STC submissions have recovered off their winter lows which suggest the Regulator will get the 2013 STC creation forecast almost exactly right, though there will still remain a surplus of STCs available for Q4 compliance meaning the long and arduous wait for those in the Clearing House will continue.

Graph for November enviro markets update – STCs and LGCs

In the STC market the strength of prices early in Q3 (spot price reaching $39 in late August) gave many sellers confidence of further price increases as the end of the compliance period drew nearer.

While the spot did enjoy couple of brief forays into the low $39s in early September (reaching a fleeting high of $39.40 on the 4th), the market was unable to sustain such levels, spending the majority of the month between $38.80 and $39.10.

With Q3 compliance needing to be completed by 28 October, the early part of that month saw sellers once again with high hopes of a spike. It did not eventuate and from the middle of the month the spot was in steady decline as buyers progressively finalised their obligations and withdrew. By late October the market had fallen to a low of $37.90, on its way to a low of $36.75 in the second week in November. From that point on the outlook improved and despite a number of quiet periods the spot had returned to the low $38s by month’s end.

Graph for November enviro markets update – STCs and LGCs

In what can be seen as an achievement of sorts for the Clean Energy Regulator (and some of its forecasters), it appears that the estimate of STC creation in 2013 that was used as part of the ‘base’ component (20.7m) of this year’s  target is to be proven accurate. By the end of November there had been 18.95m STCs submitted to the Regulator for the year.

Graph for November enviro markets update – STCs and LGCs

The accuracy of forecasting of the ‘base’ component does not however mean that there will be no surplus of STCs at the end of the year. In fact a buffer will remain; the result of both an undersurrender owing to falling electricity demand (see chart below) as well as a systemic issue relating to the calculation of the Small-scale Technology Percentage which overlooks STCs ‘pending registration’.

Graph for November enviro markets update – STCs and LGCs

Interestingly, what it does mean is that those waiting for the Clearing House to come into play will need to delve into the patience reserves once again as Q1 2014 becomes the new hope. Yet it must be said that many participants appear to have been aware of this for some time given the steady reduction in the number of STCs in the queue, which now sits at a mere 1.2m, a figure not seen since May 2011.

While STC submissions had been trending downward across most of the quarter (reaching a low of just over 309,000 in early Oct), the period since has seen a steady improvement in the number of STCs delivered to the regulator with the average of the last 8 week sitting at 370,000.

Graph for November enviro markets update – STCs and LGCs
Looking forward, another matter of significance remains the setting of the 2014 Small-scale Technology Percentage (STP). In previous years the Clean Energy Regulator had released a nonbinding update to the STP toward the end of the year to provide a revision to the market on what was a very dynamic STC supply side.

This year it appears an update is unlikely for two main reasons. First the Regulator’s forecast for 2013 has been very accurate to-date meaning a dramatic change to next year’s target (which was estimated earlier in the year at 8.98 per cent or 16.7 million STCs) is unlikely. Secondly the Regulator is dealing with an incoming government and hence a new Minister who is obviously preoccopied with the carbon price repeal efforts. While the Minister obviously needs to sign off on the final 2014 STP, much to the market’s relief it appears that the same process that has previously been employed will continue to be, with a number of consultants commissioned to forecast future STC supply.

Included in the complexity of forecasting is the potential impacts of the Government’s Million Solar Roofs policy which would make an additional contribution to STC supply in 2014, assuming the Direct Action policy is introduced as a result of the repeal of the carbon price.

While there are those who believe the incoming Coalition Government to be hostile to climate change and the existing policies which aim to mitigate it, in the case of the Small-scale Renewable Energy Scheme (SRES) it appears the future may very well be spositive.

While there is concern among some segments of the industry that the Million Solar Roofs policy will see a return to the sale of the cheapest, lowest quality and smallest systems, the policy appears set to provide an additional stimulus to a market which has experienced its toughest year since the SRES began.

Boosting confidence among political pundits that the SRES will remain in tact is the fact that regardless of what happens in the remainder of 2013, the Coalition will be able to claim a signficant cost reduction for electricity consumers as a result of the setting of the 2014 STP. A fortunate boast which, whilst owing in no part to its own actions, will result in a decrease in the SRES’ impact on electricity prices in 2014 (when compared to 2013) of in the order of 50 per cent; a fantastic headline which would easily overshadow any decision not to reduce/alter the scheme further.

Looking to the forward market and some escalation above the spot market has returned for forwards settling in the current quarter and Q1 2014, reflecting the presence of demand in those quarters. Beyond that point however, demand is significantly lower, leaving the curve at best flat or even in backwardation and subject to fluctuation.

Large-scale Generation Certificate (LGCs)

Graph for November enviro markets update – STCs and LGCs

For environmental market participants, life in the shadow of regulatory uncertainty is normal; a default position essentially. And the LGC market remains an obvious case in point. As far as the potential changes that the coming 12 months may bring, something approximating a consensus of market expectations appears to be emerging.

For years now potential regulatory changes have clouded the future of the nation’s Large-scale Renewable Energy Target (RET). Despite on repeated occasions in both the lead-up to and following the Federal Election having professed support (in both vague and, on occasions, more specific language) for the current scheme’s design, there is now a clear suspicion among most market participants that the Coalition intends to use the upcoming RET Review alter the status quo.

Unlike the last Review which was undertaken by the Climate Change Authority in 2012, the 2014 Review will be tackled in-house by the Department of Environment, a development which most believe will result in a well stage-managed affair that is unlikely to yield anything other than a reduction in the short term level of the target. Most expect that this reduction will come in the form of a shift in the methodology for calculating the target from the current fixed (legislated) target based upon a pre-established demand forecast to an alternative approach which employs a floating target that would see a ‘real’ 20 per cent renewable energy generation by 2020, rather than the current ‘minimum’. The principal difference between the two models being the latter would take into consideration the recent sustained and previously unpredicted drop in demand across the National Electricity Market.

In practice it appears the current 2020 Large-scale target of 41.85m LGCs could fall to something as low as 31-33 million in the event that such a change was made.

Graph for November enviro markets update – STCs and LGCs
As a compromise for such a monumental alteration many also believe an increased ‘real’ target of something like 25 per cent by 2025 (or 30 per cent by 2030) may be proposed, though views differ as to which is more likely and to precisely what trajectory may result. Whichever the approach taken the net result of such a change would mean considerably less renewable plant committed over the remainder of the decade than would otherwise be the case.

One upside to the in-house Review appears to be the quicker turnaround time it may produce which means it is possible the Coalition Government may very well have concrete proposals for change on the table within the first half of next year.
The other major source of regulatory uncertainty namely the repeal of the carbon price appears all but guaranteed; the question of timing of course being the key. Yet, while the repeal should theoretically lead to an improvement in LGC pricing (as renewable generators receive a diminished subsidy from wholesale electricity prices and hence rely more on LGC prices to make the economics stack up), there is no guarantee of what will happen to prices if the uncertainty surrounding the changes to the RET remains.

While all this regulatory uncertainty would be enough to get even the chirpiest of optimists down, the show must go on for traders. Recent months have brought mixed pricing outcomes in the spot market. The surprise post-Federal Election rally came to an end in mid October having fallen just shy of the $35 mark, with prices generally softening across the following month to a mid November low of $32.50. In recent weeks a recovery of sorts occurred with the market sitting at $33.60 by early December.

Graph for November enviro markets update – STCs and LGCs

The period was also witness to a healthy level of forward market and options activity. Cal 14 and Cal 15 remained the vintages of interest with the former being the particular source of focus in the underlying commodity over recent weeks. The most recent transactions in the Cal 14 took place at $34.85, an escalation of approximately 3.5 per cent above the spot.

Marco Stella is senior broker, Environmental Markets at TFS Green Australia. TFS Green Australia provides project and transactional environmental market brokerage and data services across all domestic and international renewable energy, energy efficiency and carbon markets.

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