Victorian Energy Efficiency Certificates (VEECs)
While the wait continued for confirmation of the proposed introduction of discount factors for commercial lighting, there were few in the VEEC market who believed the change would not be introduced. Across October and November, both VEEC pricing and submission numbers reflected this fact.
The rally in the VEEC market across the last 5 months has been massive and it has come almost exclusively on the back of first speculation and then hard evidence of the scheme administrator’s intent to reduce the attractiveness of some commercial lighting products.
Having reached a low of $10.50 in mid June, the spot VEEC market finally broke through the $20.00 mark in late November, the first time it had reached such a level since May 2016.
In truth though, most of the hard work was done in the first four months of the new financial year, with spot VEEC prices oscillating within the $16.50-19.50 interval across October and only late in the month of November managing to break free and surpass the $20 mark.
Whilst a 95% bounce is something one would more likely expect to see in a crypto-currency market these days, the very same has occurred in the VEEC market despite surging VEEC supply.
The fact that VEEC submissions have jumped should come as no surprise, with those active in the commercial lighting arena clearly incentivised to get their installations done before the proposed new rules come in and result in the 10 or 15% reductions that were outlined in the discount factor consultation paper.
Submissions for that paper closed on 1st of November and many participants had expected to receive confirmation of the changes very quickly.
Yet, by the end of November there was no news and prices had increased anyway, reflecting the fact that very few believe any credible arguments against the changes have been made.
Note: confirmation of the changes did in fact come on 1st December, with a month delay to the timeline announced. From 1st February 2018 the first tranche of discount factor reductions will take place (10% for T8 and T12s and 15% for high intensity discharge lamps), with the full reduction coming now on 1st May (20% for T8 or T12s and 30% for high intensity discharge lamps).
The surge in VEEC submissions have meant it is now likely that there will be sufficient VEECs in the system to meet the 2018 target by mid January. But what impacts the future of the market will depend heavily on what happens from 1 February after the transition to new factors begins.
There are those who believe that the VEEC price must continue increasing to ensure VEEC submissions do not fall dramatically, given the discount factors themselves will mean a significant reduction in the number of VEECs created per install, as well as an increase in the price to consumers and hence a reduction in the number of sales that are likely.
But there are also those who argue that the jump in prices seen late in November should allow the giveaway model to continue at least across the period when the first tranche of the transition takes effect (1 Feb- 31Mar).
Ignoring the fact that it will already be met by the surplus, the 2018 target of 6.1m VEECs requires 117k VEECs to be submitted per week across the year.
Each week that the figure is above that will result in the surplus growing. Each week below it will see it reduced. Precisely where we end up in late March or April will provide a good indication of what is to come after the 1 May changes.
If VEEC submissions are way down, the market may indeed have further to run. If they are not, the gains may be harder to come by.
New South Wales Energy Savings Certificates (ESCs)
The ESC market enjoyed a busy period across October and November, with the forward market generally trading within a $20-$23 interval.
As the wait continued for confirmation of the proposed changes to the commercial lighting methodology, a modest increase in the registration rate across the period saw participants ponder whether the lower registration levels seen across late 2017 are a true reflection of activity taking place in the scheme.
Pricing in the ESC market has strengthened dramatically across the second half of 2017 with both ESC registrations having softened and changes to the principal creation source (commercial lighting) brought firmly on to the table.
With spot having reached a low in early July at $11.80, the recovery continued into early October with the market reaching a high of $22.40, a 90% turn around. From there however, the spot settled into a relatively tight trading range which saw it remain between $20.00 and $22.00 all the way to November’s close.
The major talking point across this time related to ESC registrations. While a gradual increase in weekly ESC registrations (which averaged 63k across the two months, up from 54k average between July and September) was seen, the outcome was still well down on the 115k seen across the first 6 months of the year and still circa 14k per week below the figure required by the 2017 target if the surplus is ignored.
The big question remains whether the figures across the second half of the year can be taken at face value as a true indication of installation activity during that time, or whether there is a backlog building in the system owing to the more strenuous audit regime that came into effect from 1 July.
The discussion surrounding the proposed introduction of a new method for calculating commercial lighting installation, which would see a dramatic reduction of the number of certificates created per install in premises such as offices and retail (owing to the greater frequency with which such premises are refurbished), while at the same time giving effect to a small increase in the number of certificates in industrial premises, have brought forward differing opinions as to what it will mean for ESC supply.
Under the consultation document released by the department, a timeline for the changes was given at 6 months from the expected date of gazettal in April, meaning they would become effective October 2018.
On the one hand, there are those who believe that the threat of changes coming in to sectors such as retail and office space will result in a flurry of activity across 2018, as sales people put the hard word on customers to commit to avoid a significant cost increase.
The thinking also then follows that for industrial premises, where most of the current activity is taking place, the changes will ultimately bring a small increase to the number of certificates per install.
Against this reasoning are those that say that sales people are always putting the hard word on and that the threat of changes may not prove an effective enticement for customers in those premises and, that by the time the changes come in October, activity in the industrial sector will have reached a saturation point.
If this is true, and assuming the changes go ahead in their present form, then from late next year within the commercial lathing methodology, the alternative to high bay installations in industrial premises will become dramatically less attractive. And this is a source of concern to many participants.
The other matter to consider is the current state of oversupply. At the time of writing almost 6.2m ESCs were registered to meet a circa 4m target for 2017, with another 5 months left to register more before compliance, buyers can be forgiven for taking their time to ponder the current situation.
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.