STC, VEEC and ESC market update - November

Prices for small scale renewable energy certificates stayed relatively steady in response to announcements from the RET Review and the regulator's estimate of next year's SRES target. In Victoria's energy efficiency scheme stand-by power controllers are driving high levels of supply, while prices in NSW's scheme continue to rise.

Small-Scale Renewable Energy Certificates (STCs)

Expectations in the nation’s small-scale renewables market surrounding two pivotal regulatory developments which were due in October had been mixed. As it stands, the release of the nonbinding estimate of the 2013 Small-scale Technology Percentage as well as the Climate Change Authority’s RET Review Discussion Paper have coincided with one of the quietest periods of trade activity in the STC market’s history.

With activity levels subdued across the early part of October, expectations had grown and then been deflated each Friday as the update to the nonbinding estimate of the 2013 Small-scale Technology Percentage (STP) failed to materialise. On the 19th however, the patient wait finally came to an end and participants were rewarded with a number that was very much in line with expectations.

The Non-Binding STP figure itself is 18.76 per cent which is expected to be equivalent to 34.45 million STCs. Implicit in this number is an estimate of the 2012 oversupply (the total number of STCs registered as at 31 December 2012 above the 2012 target) of 15.99 million STCs. This figure will ultimately be determined at year end by the actual number of STCs that are registered at that time.

Of more importance was the estimate of the ‘base’ component of the target, or the number of STCs expected to be created in 2013. This figure came in at 18.64 million. While the figure assumes a decline in the number of PV systems installed in 2013 when compared to 2011 and 2012, this number will still ensure the photovoltaic industry does not collapse.

The number is dramatically below the total number of STCs likely to be created in 2012, which will prove to be somewhere north of 38 million. Yet given the additional reduction in the Solar Credits Multiplier as well as the dampening of demand for PV in QLD (which has resulted from the removal of the premium feed-in tariff), STC creations were bound to fall anyway.

This doesn’t mean to say the number will prove accurate. For those banking on the Clearing House coming into the play in 2013 there are certainly no guarantees. Yet the prospects of another sizable oversupply (i.e. 10 million) by the end of 2013 currently appear unlikely. And from a PV industry point of view that is good news for people looking to avoid the kind of volatility that has been witnessed in recent years.

The main point of difference which surrounds this number is what market participants expected it would do to the spot STC price. In late July 2011 the release of the updated 2012 Non-Binding STP coincided with a spectacular jump in the spot market which at one point in the days immediately following the release was up over 20 per cent. The memory of that period has buoyed many sellers leading large numbers to take their chances on this year’s release in the hope that it would bring about a repeat of such movements.

While in the hours leading up to the October Non-Binding STP release the spot market did experience a modest rally ($31.30 to, at one stage, $32.30), the market has since settled into a narrow trading range ($31.40-$31.95). This fact lends support to those that argue that the considerable recovery which took place across August and September had already factored in the STP announcement.

The second major development from a regulatory perspective was the release of the Climate Change Authority’s RET Review Discussion Paper on 26th October. For the Small-scale Renewable Energy Scheme the major concerns relating to the Review were in the areas of the uncapped nature of the target, the potential reduction in the Clearing House Price (the market’s cap) as well as the prospect that the scheme could be rolled back into the LRET. On all these these fronts the Discussion Paper advocates for no change.

There were however, a number of changes recommended in the Discussion Paper. The CCA believes the Clearing House should be renamed and that its method of operation should be altered to only allow new STCs to be submitted when it is in deficit (i.e. when liable entities have purchased regulator-created STCs from it).

While the CCA did not recommend capping the SRES target, it has put forward a range of ‘cost-containment’ options for the scheme. Importantly, the CCA has recognised that reducing the Clearing House Price, which is a power currently held by the Minister, is not a desirable method of containing the cost impact of the scheme. Instead, it has advocated for a reduction in the number of STCs created per installation (a discount factor) in the event that certain criteria are met. This approach – should it be warranted at some stage in the future – would essentially see further reductions in the Solar Credits Multiplier to below 1.

In terms of the certainty that it provides to the market, reactions to the RET Review Discussion Paper have been positive, though there are of course those who had hoped for something different. Interestingly, from the STC market’s perspective, the Discussion Paper combined with the Non Binding STP update appear to have polarised the views of participants, leading to considerably reduced trading activity. While sellers believe the prospect of a more closely balanced market in 2013 combined with the considerable reduction in the risk of a major alteration to the scheme’s framework should bring about further price increases in the near term, buyers who have seen STC creation numbers continually exceed expectations are prepared to be patient. And so the stand-off continues.

Energy Efficiency

 

For the nation’s two tradable certificate based energy efficiency schemes the diverging price paths continued across October, with supply outcomes being the principal driver in both cases.

In the Victorian Energy Efficiency Certificate (VEEC) market, the weight of creations from one particular technology has continued to impact the market considerably in recent weeks. For the second time in the VEEC market’s history a single technology has come to dominate certificate creation.

In 2009/2010 compact fluorescent lamps were the dominant creation source until changes were made which reduced their attractiveness. In 2012 it is the standby power controller (SPC) that is the clear leader having been responsible for over 80 per cent of VEEC creation. The relative contribution of SPCs to VEEC supply is not however in itself the cause of softening prices. It is the fact that SPC VEEC creation has continued to power along at a rate far greater that what many had envisaged. With just under three months remaining for participants to create 2012 eligible VEECs there is already a 1 million surplus of registered certificates above the 2012 target (5.4 million). If one would include the number of VEECs pending registration the surplus jumps to 1.6 million.

Should creation numbers remain at their present levels until the end of January, then it is possible that close to half of the 2013 target will have been met before any major contribution will have been made by a number of new creation methodologies, most notably commercial lighting.

Having softened in the early part of October, the spot VEEC market spent just over a particularly illiquid fortnight at $22.00 before dramatic drop saw the market fall to $20.00. It has since stabilised at that level.

Meanwhile the New South Wales Energy Savings Certificate (ESC) market has continued its gradual climb by reaching the $30.00 mark for the first time since early May. ESC creation also continues on its gradual path, to the point that there are now just under 1 million 2012 certificates in existence as well as circa 250k from previous vintages. According to the latest Scheme Newsletter released by IPART, the 2012 target is still on track to be just over 2 million ESCs. Liable entities are able to carry forward up to 10 per cent of their obligations into the subsequent year. Hence any obligation carried forward from 2011 would also need to be added to this figure before any obligation that will be carried forward from 2012 into 2013 is subtracted.

Liable entities under the scheme have until 18 March to submit their Energy Savings Statements which will determine whether or not they have met their obligations. Recognising the considerable delays experienced by many ESC creators, amendments were made to the scheme’s rules in 2011 which give liable entities until the 30 June each year to acquire and surrender eligible ESCs against any shortfall without paying the penalty. This essentially affords liable entities and creators an extra three months to create, transfer and surrender eligible ESCs to avoid payment of the shortfall penalty.

It also means that, given the current rate of creation, there may indeed be sufficient numbers of eligible ESCs in existence to meet the 2012 obligation by 30 June.

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