Victorian Energy Efficiency Certificates (VEECs)
Booming submissions from the commercial lighting methodology continued to take their toll on the VEEC market across May, with the spot and forward markets losing ground as supply moved rapidly toward meeting the target for 2016.
The rise of the commercial lighting methodology has been meteoric across 2016. Until late 2015, activity under the methodology had been modest. Fast forward 6 months following the introduction of extended operating hours and things have changed completely. Hundreds of businesses have taken up energy saving lighting upgrades and over 1.4m VEECs from commercial lighting (Schedule 34) have been uploaded.
With this incredible success has come continued downward pressure on VEEC prices. The spot VEEC market began May at $20.50 and actually strengthened slightly early in the month to reach a high of $20.80 before the weight of VEEC submissions tipped the market downward again. Across May the 4 week rolling average VEEC submissions climbed above 150k with several instances of more than 175k being uploaded in a week and one of 224k. At the current rate of submissions, it appears the 2016 target of 5.4m will be met sometime in August.
By the middle of the month the spot price had fallen below $18.00 and the market would ultimately reach a low of $17 before recovering to end the month at $18.00. In early June the spot strengthened as delays with VEEC approvals brought many creators back to the market to acquire VEECs in order to meet forward commitments. The presence of forward sellers and the lack of forward buying interest ensured the forward curve would return to backwardation.
While the VEEC target increases to 5.9m in 2017 and ultimately peaks at $6.5m in 2019, in the short to medium turn it is oversupply that is the prevailing force in the market. While submissions from residential down light replacements (Schedule 21C) have fallen (potentially owing to saturation), other residential lighting activities have filled some of the void. Combine this with the success of commercial lighting and concerns about a shortage of VEEC supply which pushed the market so high in the second half of 2015 have vanished.
Instead, the question being put now is how large will the 2016 surplus become and how low will spot/forward prices fall. Potentially impacting further on supply, this week the Victorian Government is holding a consultation day via which it is expected some new methodologies as well as some changes to existing methodologies will be announced. Whether or not they will be able to compete with commercial lighting is likely to determine if they come to make a meaningful contribution over the next 12 months.
New South Wales Energy Savings Certificates (ESCs)
Generally healthy, yet stable ESC registration figures across May initially reinforced the range bound nature of ESC prices across May, though things appeared to change as time went by. Once again the forward market was busy. Meanwhile an increase in 2015 vintage ESCs has resulted in an upward revision of the surplus of ESCs carried forward from 2015.
The spot ESC market began May by softening into the high $26s. However, as has so often been the case over the last 6 months, the market then recovered to edge back above the $27 mark by the middle of the month.
The period was highlighted by a large volume of forward activity for settlements between June 2016 and Sept 2017, generally at 1.5-2.5% escalation above the spot price.
ESC registrations were stable across May with the 4 week rolling average approvals remaining around the 75k across the month. Within those figures however was an interesting trend, with a solid run of 2015 vintage ESCs approved across the month, it now appears likely that the surplus of ESCs carried forward from 2015 will reach the 3m mark by the end of June cut-off date. Were this to occur, then the surplus rolled forward would be roughly equivalent to 80% of the 2016 target.
This outcome appears to be leading some to the conclusion that the pricing stability that has prevailed since late last year may come to an end. Indeed the latter part of May saw the spot turn south again to ultimately close the month at $26.35. The early indication in June is that this may again be the case with the spot price softening below the $26 level for the first time since Nov 2015.
As with its southern neighbour, commercial lighting continues to dominate ESC approvals with close to 60% of the ESCs registered in the first 5 months of 2016 emanating from the methodology. Hence future price movements appear likely to remain dependent on the success of this methodology. There are mixed hopes for the contribution of the Project Impact Assessment with Measurement and Verification (PIAM&V) methodology which appears set to be approved in the second half of 2016.
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.