Why are energy efficiency certificate prices falling?

Over the last few weeks we have seen a significant reduction in the wholesale price for both Victorian Energy Efficiency Certificates (VEECs) and NSW Energy Savings Certificates (ESCs).

The spot VEEC price fell 21 per cent from $17.50 on May 17 to $13.90 on June 21. The ESC price has fallen even further, falling 23 per cent from $23.00 on May 17 to $17.60 on June 21. Since Friday the ESC price has continued to fall reaching $15.25 at last trade on June 25.
 
In this blog we explain why prices have fallen and consider the factors that might impact on future prices.
 
Turning to VEECs first, the market has been significantly oversupplied with the rollout of free standby power controllers (SPCs).

SPCs have dominated VEEC creation, accounting for 75 per cent of all VEECs created since the beginning of 2012. This has resulted in a massive oversupply of certificates such that, by mid-May 2013, sufficient VEECs had been submitted for registration to meet the target for 2013.

The VEEC price remained reasonably stable until the end of April as there was an expectation that the level of SPC installations would start to fall. However, a fall in SPC installations did not occur and we have consistently been creating in excess of the weekly target (refer to Figure 1).
 
Figure 1 - VEEC creation and price since Jan 1 2012

While the level of weekly VEEC creation has started to fall over the last few weeks, it will need to fall significantly below the average weekly target to curb the downward price trend. As demand (i.e. the target) is fixed, the price will need to fall to a level that supports a sufficient level of certificate creation to meet the target.

It is difficult to determine whether we have reached that price level due to lags in the certificate creation process. At current VEEC price levels, it will be less viable to provide SPCs for free so we may well see continue to see a decline in certificate creation.
 
The ESC market has showed many of the same characteristics as VEECs. In the case of the NSW Energy Savings Scheme, commercial lighting has been the dominant activity accounting for more than 80 per cent of ESC creation.
 
The 2013 target of 2.5 million ESCs converts into an average of 48,000 ESCs created per week. So far this year, an average of 67,000 ESCs has been created per week which is 40 per cent above the required target (refer to Figure 2).
 
Figure 2 - ESC creation and price since Jan 1 2012

We are currently tracking well ahead of the required creation rate and on May 21 there were 1.4 million ESCs available to meet the 2013 target of 2.5 million. Liable parties need to surrender ESCs by April 30 2014 so there is plenty of time to create the remaining ESCs.

At this stage, it is not clear whether the ESC price has fallen to a level that slows down the level of creation and it may not be clear for a couple of months. In the meantime, the ESC price will remain under pressure.

Ric Brazzale is Managing Director of Green Energy Markets.