Victorian Energy Efficiency Certificates (VEECs)
The burden of oversupply took its toll on the VEEC market in February with the forward market in particular breaching the lower end of its recent range in liquid conditions, before eventually finding some support.
The spot VEEC market opened February $0.60 lower at $14.40, yet from there recovered promptly to the $15.00 within a few days. The market the spent a week trading within a $14.50-$15.00 range before losing ground in the second half of the month on its way to a low of $13.90, a price not seen in the spot since September. In a less liquid conclusion to the month the market the spot last traded at $14.25, representing a drop of $0.75 or 5% on January’s close.
As is usually the case, February’s story was more about the forward market activity, which was significant. Trade activity in the first half of the month for settlements generally across the second half of 2017 took place in the mid to high $14s and often on par or at a discount to the spot market. Yet the really interesting part came in the second half of the month as the market breached the $14.00 level on its way to a low of $13.35, a price not seen in the forward market since October 2014.
With VEEC submissions remaining well above the 113k per week that would be required by 2017s 5.9m target (ignoring the 4m surplus VEECs carried forward from 2016 vintage), the surplus of VEECs only continued to grow across February. The ongoing strength of that supply caused the market to lose ground and move into the $13s, a level at which the viability of the commercial lighting giveaway model appears to be in question. With forward prices in the low to mid $13s support did return and a liquid run of activity saw the market back up to $13.65 by month’s end.
While many participants continue to question how VEEC creators can make money at these levels, the failure of VEEC supply to fall substantially sends a signal to buyers that patience is a virtue. There is also the matter of new, more efficient product approvals and increased internal efficiencies that may allow creators to eke out an existence in ways that previously seemed impossible.
New South Wales Energy Savings Certificates (ESCs)
The recent downward trend in the ESC market intensified in February with significant losses on high liquidity across the month as concerns of oversupply continued to impact the market. By the end of the month however, some positive signs had emerged.
Markets are so often impacted by perception and February in the ESC market was a case in point. As has been the case for some time now, the ESC market is considerably oversupplied. The 2016 surrender is due by late April and is expected to equate to approximately 3.8m ESCs. By the end of February there were already 6.2m eligible ESCs available for surrender, implying a surplus of 2.4m ESCs. However because of the lag in registering ESCs, 2016 vintage ESCs will continue to be registered over the coming months and even potentially up until 30th June (which is the cut-off date for 2016 registration), meaning that surplus will continue to grow.
Buyers have been waiting for clear signs that supply is falling for months, yet that has failed to materialise and in early February the perception that things may very well get worse before they get better became palpable.
The month opened with the spot trading in the high $18s (essentially in line with January’s close) but it didn’t take long for the weight of forward volume to begin to have an impact. A week later the spot had reached $18 and a volley of forward activity for settlement between May and Dec17 then followed at similar levels. When the dust settled there were yet more sellers which ultimately precipitated a sharp decline through the $17s and then $16s as sellers continued to emerge and, despite the high levels of liquidity, outweigh the buying interest. The market eventually bottomed in the back end of the month with the spot at $15.00 and the forwards in the low $15s before the selling finally dried up. The spot ultimately closed at $15.20, a drop of $3.55 or 19% on January’s close.
While the losses were great across February, by its conclusion the market certainly had a different feel to it. Overall liquidity levels were high across the month, so many sellers belatedly achieved (at lower prices than many would have liked) the hedging outcomes they had been considering for the coming year.
With sellers thinned out it appeared the market may be ready to continue its recovery. Yet ESC the registration figures will of course remain important. Should evidence of their decline emerge over the coming month then the combination of that plus the lower prevailing prices may be the shot in the arm that many sellers are hoping for. Should supply remain strong however, then the positive sentiment may yet prove short lived.
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.