The realisation of a seismic shift in the LGC market’s fundamentals caused a substantial increase in prices across the second half of the year across a range of vintages.
Meanwhile, the STC market experienced some volatility within a narrower trading range, with climbing submissions as well as a major blow out in STC creation times causing the pending registration figure to climb.
Large-scale Generation Certificate (LGCs)
2018 in the LGC market was one of descending prices; at first gradual, then later acute. Talk of project delays and a potential supply squeeze, though present across this time, was not enough to stop the sharp decline in LGC prices. The Clean Energy Regulator (CER), likely following heavy pressure from a Minister desperate to show results in his quest to reduce power prices, took on what many perceived to be an advocate’s role for lower LGC prices. Gone were the days of the CER threatening the biggest liable parties to ensure full compliance with the scheme.
The new political reality, as well as the fact that it saw the 2020 target as ultimately being reached, saw the CER encouraging liable parties to shortfall to ease a potential supply squeeze. And so they did
With the spot LGC market having tanked from north of $80 in early 2018 to the mid $30s in early 2019, this supported a type of ‘mission accomplished’ mantra being proffered by both regulator and government. Yet 2019 has turned out anything but predictable with a raft of supply constraint issues fundamentally altering the supply/demand balance and creating sufficient uncertainty to bring buyers back into the market.
Normal project construction delays, connection agreement delays, negative marginal loss factor adjustments, issues with Basslink and negative wholesale prices at times in Queensland and South Australia have combined to reduce LGC supply in 2019.
Forecasts which 18 months ago suggested a surplus of LGCs following the 2019 compliance year of 6-8m LGCs have progressively declined, to the point now that it appears 2019 may actually see a deficit of LGCs before any shortfall in surrender is taken into consideration. This would seem a wicked irony given the highly inflated LGC pricing experienced across the 2016-2018 period resulted from the expectation of such a shortfall, only for a dramatic slide to occur last year when it seemed a surplus was likely.
Yet the key here is the surrender behaviour of liable parties. With the CER having given its stamp of approval for liable parties to shortfall, the risk of reputational damage from doing so has severely diminished. The surrender/shortfall strategy of major liable parties is now what will determine whether the spot/Cal 19 price will soar or tumble over the 2 remaining months to compliance.
With these issues as a backdrop, the spot and Cal 19 LGC markets rallied sharply from the high $30s in May to the low $50s in September, only to then soften dramatically back to the low $40s in Oct before again rallying. These significant swings in the market reflect perceptions of the change in the supply demand balance and the jumpy reactions of participants to the potential for either of the potential outcomes.
While the Cal 19 market saw plenty of highlights, the Cal 20 contract has been equally as interesting with the price roughly doubling from the stability of the low $20s which prevailed across the first half of the year, to a high of $45.50 in November. At the time of writing the market has eased back to $41.50.
The same factors which caused the reduction in the forecast Cal 19 surplus have also impacted on Cal 20. Previous estimates of 8-13m surpluses having proven considerably overstated, with the figures progressively declining to the point that some expect the actual surplus to be less than 5m. Once again however, Cal 19 surrender behaviour will play an all-important role in determining what happens in Cal 20, with a major under surrender in the former also likely to substantially ease supply pressure in the latter.
The Cal 21 and Cal 22 contracts took longer to get moving, and with the size of the forecast surpluses in those years it is not a surprise to see why. Yet the bullish sentiment which captured the earlier vintages also took hold, particularly the Cal 21s which climbed from the $14s in September to reach $23.50 by late November.
While it’s likely that general bullish sentiment surrounding delays and the shorter run contracting cycle of the market have impacted the later vintages recently, they may also have been buoyed by the discussion around voluntary demand for LGCs. With the 2020 target met (short run supply constraint aside), the existing renewable energy target has ceased to be a driver of new investment in renewables.
In recent times, there are those who have claimed that voluntary demand will be the saviour of a market that is becoming increasingly oversupplied with no limit on new projects’ ability to create LGCs. And that the price of the Australian Carbon Credit Unit (ACCU) market, which is another source of voluntary surrender, will act as a price floor for LGCs.
GreenPower sales, the tradition source of voluntary LGC demand has been in sharp decline across the last decade, with Green Energy Markets (GEM) illustrating in its latest Quarterly Renewables Report that sales have dropped close to 75% since 2010. No doubt the introduction of a carbon price, perceptions of high electricity prices and very strong LGC pricing all played a role in this. With a resurgence in climate change awareness and the reduction in LGC prices that is flagged in the forward curve, it is entirely likely that voluntary surrender of LGCs will grow in the coming years.
With total voluntary demand (GreenPower plus other voluntary surrender) for 2019 forecast to reach around 3m LGCs and further small increases (owing mainly to state and territory government initiatives seeing it climb to 4m) within a couple of years, a healthy additional boost in demand from the private sector could increase this significantly.
Yet asserting that somehow this additional demand will be enough to outweigh the enormous increases in supply that are coming online appears highly ambitious. From 2020 onward the growth in the LGC surplus is circa 10-12m LGCs per annum, with GEM forecasting a 25m surplus LGCs by 2022 and 63m by 2025. Voluntary demand may well increase in the coming years, but it’s going to have to do so at a monumental rate to have any lasting impact.
The assertion that the ACCU price will act as a price floor for LGCs has also a contentious one. Firstly, ACCUs are denominated in tonnes of carbon dioxide equivalent, not megawatt hours like LGCs. Meaning those aiming to offset their emissions with LGCs would need to surrender more LGCs per ton of emissions to account for the emissions intensity of the state in which the LGC was generated. Secondly voluntary demand for ACCUs in 2018 was circa 400k, a fraction of the current voluntary demand for LGCs.
It may in fact be the case that unless the safeguard mechanism is tightened – which Labor had planned to do, but the Coalition Government seem wistfully unconcerned about – it may just be that the LGC price will instead prove a price ceiling for the ACCU market.
Small-scale Technology Certificates (STCs)
Having spent most of the middle part of the year trading between $36.50 and $37.50, Q3 compliance saw the spot STC market break free of that range on its way up to the low $38s. once Q3 compliance was done however, the market then fell sharply back into the high $36s.
It was at this time that one of the major events across the period took place, with a dramatic slowdown in STC approval rates, which blew out significantly across late October and early November and also coincided with a sharp increase in STC submissions.
Market participants had become accustomed to rapid STC approvals across 2019, measured in days, rather than weeks. When this abruptly changed in the latter part of October it caused significant challenges for participants trying to deliver into forward contracts and caused a sharp contraction in STC trade volumes as those who were lucky enough to have any STCs on hand held onto them to ensure they would have be able to meet any upcoming forwards they might have had. The STC price climbed over this period from the high $36s to mid $37s.
The price might have increased considerably more than that were it not for the fact that early November is not usually a busy period for the scheduling of forwards as well as that the issue was bad enough that many buyers took the somewhat unusual step of allowing deliveries to be delayed.
As is often the case, STC submissions began to climb in October, with November seeing continued growth. The 1m weekly submission figure was also surpassed for the first time since the final week before Christmas 2018 and only for the 2nd time since July 2012. At present it appears that the STC surplus after Q4 surrender will likely be in the region of 7-8m STCs.
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.