Energy efficiency market report: From a bullish start, to a new normal

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The seeds of a VEEC market recovery planted in September flourished across October, with major price increases on large trading volumes. Meanwhile, has the ESC market found a new normal?

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Victorian Energy Efficiency Certificates (VEECs

Prices as at 31st October 2016

With the spot VEEC market in a seemingly intractable decline across most of the year, there were those who could see no end in sight. Yet the seeds of a recovery planted in September flourished across October, with major price increases on large trading volumes.

With the spot VEEC market having bounced off its sub $14 lows in September, October began with a bullish feel as the opening transaction of $14.75 was promptly surpassed and the spot pushing into the mid $15s early in the second week on good liquidity. From there, after a pause the market really fired up with the spots up as high as $17.00 on minimal volume whilst the 2017 forward market traded consistently in large volume in the mid $16s for over a week across the middle of the month.

While the spot had initially spiked beyond the forward market’s level, it eventually fell back into line, though it was not the only time that the forward curve would appear backwardated across October. In fact, for most of the latter part of the month the spot and short forward market out to Mar17 traded between $0.10 and $0.30 above the forwards across the remainder of 2017. Such a scenario appeared to reflect the fact that, given how far prices had fallen, many creators had opted to purchase back VEECs for their shorter term forward deliveries rather than to create themselves.

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Coinciding initially with the VEEC market’s rally were several lower submission weeks (circa 120k per week) which only further fuelled the sentiment that the market had likely bottomed and that a new upward cycle had begun. By the middle of the month however, VEEC submissions (blue columns in the chart above) were back up to 150k and to end the month a hefty 173k week was registered. This increase was enough to muddy the waters, with the spot closing back at $16.25, short term forwards at $16.40 and longer term forwards (Apr17 and beyond) at $16.10.

As is so often the case, VEEC submission numbers will be critical to the market’s plight in the coming weeks, with any evidence of a slowdown likely to buoy buyers and a continued resurgence likely to see them sitting back. By the end of October there were close to 2 million surplus VEECs already in the system (registered plus pending registration). Assuming an average weekly submission rate of 130,000 (which would need to consider the quieter weeks around Christmas and New Year along with any rush to create VEECs before the vintage cut-off date in late January), then the surplus of VEECs rolled over from the 2016 vintage would be in the vicinity of 3.7 million, or 63 per cent of the 2017 target.

New South Wales Energy Savings Certificates (ESCs)  

Prices as at 31st October 2016
Prices as at 31st October 2016

An active month in the ESC market saw both increasing prices and solid trade activity, though it ultimately also yielded strong registration numbers, prompting discussions as to whether the softness in the early part of the financial year was an aberration rather than the new normal.

The spot ESC market opened the month at $22.50 and traded sideways for about a week before gradually creeping to the $23 mark by mid month. The spot activity was however completely overshadowed by the volume of forward market action which took place at healthy escalations for settlements from early 2017 to early 2018.

As October continued the spots climbed to a high of $23.15 with short term forwards for early 2017 peaking at $23.45 and longer term forwards at $23.50.

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While ESC registration numbers (blue columns in the chart above) across the first 6 month of 2016 had surprised many participants (averaging 76k during that time), the first 3 months of the new financial year had brought a dramatic reduction, with a weekly average of only 36k between July and September. These softer figures were no doubt a reflection of the blowout in audit times that was caused by the tougher (and in some cases retrospective) measures taken by the scheme regulator to ensure the integrity of the $5/MWh minimum customer contribution rule.

Yet the prolonged nature of that period did have some wondering how long it would last, with the net effective of such a slump being a gradual erosion of the large surplus (3.3m) rolled forward from the 2015 compliance year.

Yet across October the status quo changed, with weekly ESC registrations averaging 98k across its 4 weeks. Looking to the future, whether or not the recent strength in registrations continue will have a significant bearing on whether the large 2015 ESC surplus can be eroded across 2016. As it stands, the run rate required by the 2016 target is 73k per week. As of the end of October the average weekly ESC registrations sat at 66k. Should such an average be maintained, then the 3.3m 2015 surplus will only have been reduced to 3m after 2016 compliance.

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.

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