Victorian Energy Efficiency Certificates (VEECs)
The general stability that had characterised the VEEC market across much of 2018 came to a dramatic end in August as concerns about future supply from residential sources, the Victorian election and the Andrews government announcement on solar hot water combined to startle the market.
The VEEC market had not been without volatility across 2018 though price movements in the spot were generally contained within a $22-$25 range across most of the year. Having continued in much the same manner across July and early August, things changed dramatically from there. It appears there was no single issue that caused the shift, but rather a combination of multiple factors that ended up coinciding.
To begin with, a build-up of forward selling interest – which had remained relatively patient over the latter part of July and early August – ultimately began to weigh on the market. The approach of the Victorian election (late November) had also begun to feature more prominently in people’s minds, with the expectation that the Coalition would move to abolish the scheme should it win government.
While VEEC submissions had fallen, creation numbers remained comfortably above the figure required to ensure the target is met out to the 2020 compliance year.
For those interested, 74k VEECs are required to be submitted per week from now until January 2021 to see the scheme in balance by that point. 77k per week would ensure a 500k surplus left over after surrender, which would be the bare minimum required to ensure liquidity should the scheme continue beyond 2020.
There was also plenty of discussion surrounding the ‘fresh start’ proposed in the new regulations which will take place in December and would eliminate the issue of duplications that has been a major impediment to residential activity in recent years. Rumours also continued to abound on the potential inclusion of LED replacements of compact fluorescent lighting, without concrete detail on how and when any changes would take place.
And then the Andrews Government announced its solar policy, which would facilitate the installation of 6,000 solar how water units by 30thJune irrespective of who won the election, and another 54,000 from that date in the event it was returned in November, many of which would be eligible to create VEECs.
Needless to say the reaction was swift, the spot market opened on the Monday following that announcement at $23.20 and by the middle of the week it hit a low of $18.60 in the midst of a highly agitated period of activity. The price represented the lowest spot trade since November 2017.
While forward trades had been hard to come by on the way down, very large volumes were agreed in the low $19s, before the spot market then recovered gradually back above the $20 mark. By month’s end the spot sat at $20.30.
The frenetic trading conditions and massive price movements did coincide with a period of similar conditions in other markets, most noticeably the Small-scale Technology Certificates (STC) market.
When the dust settled participants began to try to contemplate the lay of the land. If anything, the circus unfolding in Canberra has made things significantly harder for Matthew Guy and his Coalition colleagues, with federal political issues (namely the leadership coup) suddenly a big negative for the Liberal party at a state level.
Whilst no specific commitments have been made, there is an expectation that a returned Andrews Government will announce the expansion of the scheme beyond 2020 sometime next year.
While Labor’s odds have shortened and the prospect for the survival of the scheme have grown, VEEC submissions have also more recently rebounded, assuaging some concerns about a continued reduction in supply.
Yet while there may yet be a further reduction in commercial lighting activity to come, the question that many are pondering is whether the residential sector is about to begin making a more significant contribution to supply after years of playing second fiddle, or whether these ambitions are overstated.
New South Wales Energy Savings Certificates (ESCs)
Having pushed to new highs for the year during July, the spot ESC market too lost ground during August with a Berejiklian government energy efficiency announcement, changes to the Home Energy Efficiency Retrofit methodology and perhaps some contagion from other jittery commodities having an impact.
With the very large ESC registration figures observed during June it was expected that (as in previous years) supply would tighten across the following months. It is true that the weekly registration figures fell during July– the 4-week average reaching 63k for the month – well below the punchy 101k weekly average of the first half of the year.
Nonetheless there were those who had thought it would be lower. Despite this the spot ESC market climbed to a 2018 high of $25.00 with healthy forward volumes trading along the way.
From there the spot retreated, first into the $24s, then rapidly through the $23s to reach a low of $22.30 in the latter part of the month, before recovering once more to close August at $23.00. This left the market very much in line with the June close level. The forward market was particularly active during August with most of the volume agreed around the $23.00 mark.
The decline in price across August appears to be impacted by several factors some of which remain important looking into the near future. The first is the announcement of a $72m package for energy efficiency upgrades by the Berejiklian government, most of which will be targeted towards the manufacturing sector and residential rental properties.
It appears the pool of money will be available on top of ESC creations (where eligible). What is not yet clear is whether the government will take the approach it did earlier in the year and contract directly (via auction) with Accredited Certificate Providers (ACP) for the upgrades and acquit ESCs associated with those jobs voluntarily, thus avoiding an increase in ESC supply. A consultation will be undertaken this month in which further information will be revealed.
Another contributor was changes to the definition of small offices under the Home Energy Efficiency Retrofit (HEERs) methodology, from a spatial benchmark to a consumption threshold, which appear set to open a larger pool of activity for the methodology. This is significant because the upfront cost for the customer under HEERs is a flat $33, rather than the $5 per MWh of energy saved minimum co-payment that is required under the commercial lighting methodology.
Whilst there are high hopes for ESC creation under this methodology moving forward, it is far from guaranteed that it will have a fast start. To begin with there are only a handful of ACPs who have an accreditation under this methodology.
They will have to go through the usual process of starting with a very small audit limit (5k ESCs) and then having to navigate their way through a their first audit – which can often be tricky and very time consuming, as the expectations of the regulator become understood.
If the methodology is successful it may go some way towards compensating for expected reductions in ESC supply from commercial lighting once that methodology shifts to its new structure on 1stNovember, another factor that may impact ESC prices in the short to medium term.
Finally, as noted previously, August was a particularly jittery period across the environmental markets with significant price movements in all commodities including VEECs, STCs and LGCs.
During such periods of flux, both the psychology and financial position of traders can be impacted and it is possible for the sentiment of one seemingly unrelated market to impact on other With the federal government now essentially missing in action on climate policy and state governments with elections on the horizon left to fill the avoid, there may yet be further surprises around the corner.
Marco Stellais 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.