In a fitting end to one of the most interesting and challenging years in the LGC market’s history, the final weeks of compliance year 2019 brought both large trade volumes and repeated wild swings in the price as the completion of the zero-sum game approached. With the dust finally settling, the
market is now looking to the Cal 20 compliance year as the last potential choke point for LGC supply unless policy settings change.
For a year that many had written off as a foregone conclusion, in which the projected surplus of LGCs would be large enough to keep prices low before the larger subsequent surpluses weighed more heavily on the market, 2019 brought plenty of twists.
As has been previously outlined, a combination of project delays, curtailments, interconnector issues and more led to the repeated downward revision of the projected number of LGCs to be generated in 2019, and hence, to a progressive tightening of the supply/demand balance.
From mid-year onward there were those who believed that full compliance in 2019 would result in a shortage of LGCs, a prospect which might have seen prices skyrocket. Yet with the tick of approval from the Clean Energy Regulator (CER) for those seeking to pay penalty and a backwardated forward curve providing the right financial incentive for those so inclined, there was always going to be an under-surrender.
This scenario afforded participants months and months in which to speculate on which of the outcomes would prevail while also opening the door for significant volatility along the way. In September the Cal 19 forward price surpassed $50 only to tumble back into the low $40s a little over a week later.
Yet within a fortnight after that the Cal 19s (as well as the spot) had surpassed $50 again, where it remained across the first half of November. The market softened considerably into the lead up to Christmas, with the spot and Cal 19s finishing the year around $39.00.
The scene was then set for a busy start to 2020. The Cal 20 forward vintage, though also having rallied across the second half of 2019, remained significantly below the spot/Cal 19 price, meaning anyone left holding 2019 creation year LGCs after the buying was done, was set to see the value of
their holdings fall dramatically.
Yet, depending on the number of shortfall penalty payments, it was also possible that there would be insufficient LGCs available for compliance, hence prices could rally. Perhaps more than any other year in the scheme’s history, there was huge motivation for both buyers and sellers to strategize their approach.
When play resumed after the break, those hoping for a rally were left disappointed, with the market sharply declining on large trading volumes, as the spot/Cal 19 made its way down through the mid $30s to reach a low of $30.50 within days.
Far from being the end though, the sharp price movements were only just beginning, with a rebound in the price illustrating what was to come across the remainder of the run to the February 14 compliance date.
On the same day that the spot softened from $33.00 to $30.50, it rebounded to close at $33.25 and two days later it had reached $36.25. After a little over a week in the $35.50-$36.50 range, the market then resumed its climb, surpassing the $40 mark on its way to a high of $46 at the end of
January.
The final two weeks before compliance were even more volatile, as liquidity dried up and those seeking to initiate a trade became price takers, with $1-3 gaps in the market price the norm.
In the end, an apparent glitch with the registry added an additional sprinkle of uncertainty as to the final surrender numbers, though at the time of writing it appeared that circa 25.8m LGCs were surrendered for 2019 compliance, against the 32m target, leaving 6.2m additional LGCs available for
2020 compliance.
Once assumptions are made for LGCs being held for voluntary surrender, the surplus of LGCs left over after compliance is in the region of 3m, hence without the substantial amount of penalty payments, 2019 would indeed have indeed been short.
Looking forward to 2020 – as everyone in the market has quickly done – and the extra LGCs rolled over due penalty payments will make a significant difference. Yet the narrative of project delays and curtailments, particularly in areas like north-western Victoria and parts of NSW and Queensland
continue to feature, with some believing a similar trend of reduced supply expectations could again leave the market in a tighter than expected position as the year goes by.
Similarly, though, the opportunity to shortfall remains, with the CER of the same mind and the curve beyond Cal 20 considerably backwardated as the table above illustrates. The reason for the backwardation is that with all the new projects coming online in the next 18 months and the target flatlining from this year onwards, the projected LGC surplus soars from 2021 onward. It will likely take a change of policy or an eye-watering increase in voluntary demand to prevent such an outcome from playing out.
A massive surge in STC submissions in recent months was not enough to stop a mild appreciation in STC prices over the same period as Q4 compliance approached. Looking forward the market is anticipating the release of the 2020 Small-scale Technology Percentage as well as waiting to see what impact the coronavirus might on installation activity.
The growth in STC submissions which comes late in the year is a familiar pattern that plays out every year, yet it still manages to spark intrigue in the eyes of onlookers. The ostensible reasons for the late jump include a spring rebound in sales that occur once the sun’s strength begins to be felt by
consumers after winter, as well as the fact that STCs submitted after 31 December will be subject to fewer STC creations.
This deadline both acts to incentivise customers to sign up, but also flushes out the completion of jobs and paperwork that may have been dragging out. The hefty quantities that emerge during this time never fail to surprise people.
As can be seen in the chart below, STC submissions spiked sharply late in 2019, averaging over 1m per week for the 5-week period from late November to Christmas, a 55% increase on the year’s average weekly submissions up to that date. And the numbers have remained strong since, with an average of just over 800k per week across the first two months of 2020.
Interestingly, rather than seeing prices tumble during, the spot market instead strengthened moderately during this time, from the mid $37s to $38.00. As the price crept higher, forward market activity grew, with very large trade volumes occurring at the $38.00 level for strips across all of 2020 and early 2021.
The forward curve however has completely flattened out and at times has even been below the spot (backwardated), illustrating a lack of preparedness among buyers to continue to pay higher prices across the year.
With the passage of the February 14, the final compliance numbers for 2019 are now known. There was a total of 38.1m STC surrender across the 4 quarters last year, 620k or 1.7% above the expected figure.
The key focus of participants now is the release of the 2020 Small-scale Technology Percentage which is due by 31 st March. All signs point to the need for a third consecutive increase to the target, with growth in installation activity last year and a circa 6m surplus of STCs suggesting an increase to the 21.73% (or 37.5m) from last year despite the reduction in the number of STCs per install that will come in 2020 from one less year of deeming.
A back of envelope calculation that many are undertaking is as follows. The average weekly creation for 2019 was circa 700k. Allowing for an 8.3% reduction in deeming would bring that down to 642k.
Adding to that the surplus from 2019 would bring the total obligation to close to 39.5m or an STP of close to 22.5%. The actual figure will almost certainly be different to this, depending on what the consultants’ forecasts suggest for 2020 installation activity. We’ll know in less than a month what
the actual outcome will be.
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.
