Once the darling of the Australian environmental commodities scene, the LGC market continued to fall from grace in late 2018, which sharp price declines on often thin trade volumes.
Whilst the much-anticipated late compliance rally did come in the New year, it was not enough to compensate for the enormous decline previously observed. When the final 2018 surrender figures emerged, there were some surprises amongst the under surrenders, while the Clean Energy Regulator continued with the soft touch response it adopted last year on the matter.
The spot LGC market began November at $64.00 and managed a brief upward dalliance which saw the market reach a high of $67 later that same day, before the downward trend that had characterised most of the year resumed. By November’s end the spot LGC market sat at $62.25, by Christmas it had reached $48.
Liquidity had already become a problem – primarily amongst the bid side – and as the weeks went by this trend worsened, with overall trade volumes well down, and the price moves in December in particular frequently taking place in $0.50-$1.00+ gaps.
Throughout this period there was plenty of discussion surrounding what impact the persistent downward trend had on buyers who, seeing the clear market direction had decided to stand back and see how low prices would fall. Given the illiquid nature of the market there were many who were anticipating a sharp rebound once buyers returned.
In truth, across January spot liquidity did improve and a rebound in price did also occur, though it was later than most expected, taking place in early February little more than a week before the final compliance date (14 February).
And, despite resulting in the spot price recovering 16% (from $34.50 to $40), it was only enough to get the market back to the levels it had succumbed to in mid-January.
The rally ultimately proved short lived though, with the typically quiet post compliance period seeing the spot softened back to $35.70 by February’s close.
The sharp decline in the spot price was matched in the Cal 19 market which also experienced frequent gappy price movements, opening November at $58.50 and reaching a low of $34.75 in early February.
While the Cal 19s continued to be valued below the Cal18 market across this period, that ultimately came to an end with the passage of the compliance period which saw the spot – Cal 19 relationship return to an intra compliance year escalation.
Across the period the Cal 20 vintage experienced a somewhat different outcome. Opening November at $25.25, the market rallied into the $29s during the month, before softening gradually across the subsequent three months to close February at just south of $23.
Of note late in February were the first reported trades in the Cal 22 vintage which were agreed at $10.50, confirming the backwardated curve profile occurring after Cal 19.
Much of the discussion across late 2018 and early 2019 also included the possibility of liable parties opting to pay the $65 shortfall penalty and under-surrendering LGCs in the hope of buying them back within 3 years at a lower price and thus recovering the penalty payment having made good.
In years gone by this approach was strongly censured by the Clean Energy Regulator (CER) with claims that it was contrary to the spirit of the legislation and constituted a breach of liable parties’ obligations.
In early 2018 (for the 2017 compliance year) though, that attitude appeared to change, with a major liable party opting to pay the penalty without rebuke from the CER.
This change of tact was extended during 2018, with what could only be described as repeated encouragement of liable parties to consider deferrals.
First up, the Regulator reminded participants the could carry forward 10% of their liabilities, an approach permitted under the legislation and not considerer a shortfall. Then it announced that because it believed that the 2020 was met, it would not object to additional shortfall in the short term on the basis that they would be made up in future years.
This clearly led to a growing sense amongst participants that any additional under surrender for the 2018 obligation would not draw sharp criticism from the CER. As it turns out, four major liable parties (including one owned by the federal government) did indeed exceed the 10% and received no public dressing down.
The implications of this action are two-fold. Firstly, it left an extra 3.9m LGCs in circulation after the 2018 compliance year surrender, increasing what was set to remain from less than 4m to more than 7m, thus changing considerably the supply/demand dynamics for 2019 compliance.
The part of that number which represents a shortfall need only be acquired and surrendered to the CER by Cal 21 for the liable party to get back the penalty payment.
But the quasi endorsement from the CER to the additional shortfall also sends a strong message to other liable parties that paying the penalty in Cal 19 is worthy of extra consideration, given the brand damage risks which would arise from criticism from a regulator appear to have disappeared.
Thus, liable parties can shunt their 2019 obligation into Cal 22 if they decide it makes financial sense for them and therefore further relieve what appears to be the last choke point for LGC supply.
Small-scale Technology Certificates (STCs)
A burgeoning STC supply was not enough to overcome the recovery in prices that the removal of the threat of a Clearing House price reduction yielded in late 2018, with the market trading in large trade volumes along the way. Anticipation of the 2019 Small-scale Technology Percentage is mounting, with the target set to be announced in March.
Having removed a popular Prime Minister from office, the Coalition’s dire political standings worsened across the latter part of 2018, with the internal pragmatists likely concluding that a war with the solar industry was not sensible so close to an election.
As a result, what had appeared to be a determined push to wind back the Small-scale scheme by cutting the Clearing House price faltered, allowing the spot STC price to recover.
Having opened November at $34.80, the market increased steadily to reach a mid-month high of $36.50, before growing STC submissions saw the market soften to trade between $35.25 and $36.50 across the remainder of the year. Forward trade activity during this time was particularly active with a reasonable price escalation extending out to July19.
As is usually the case, STC submissions grew as Christmas approached, with 7 of the 8 highest weekly submission weeks taking place from late October, including a record weekly figure of 1.1m in the final week before Christmas.
The pattern of strong submissions coming late in the year is one that happens most years. It is the result of installers’ natural inclination to both upload jobs previously installed before the break, as well as complete jobs before 1stJanuary when the deeming period is reduced, and they receive less STCs per installation.
Following the resumption of play in the New Year, the STC market strengthened across January in the lead up to Q4 compliance (14thFebruary), with the spot peaking briefly at $37.80 in late January before the market began to slide. The spot reached a mid-February low of $36.00 before recovering by month’s end to $37.25.
The forward market, which was again very busy across January peaked in the high $37s before the seeming endless amount of selling interest at that level combined with the conclusion of Q4 compliance buying saw the market lower.
The Q4 surrender brought an end to the 2018 compliance year and the figures reveal that ……….m STCs were surrendered against the nominal target level of 29.3m STCs.
The matter on everyone’s lips now is that of the 2019 Small-scale Technology Percentage (STP). Whatever happens, the 2019 STP will be considerably larger than the 2018 STP and likely close to double the non-binding estimate of the 2019 STP released last year.
The 2018 STP of 17.08% was equivalent to 29.3m STCs. The 2019 non-binding estimate released last year was 12.13%. It seems unlikely the target for 2019 will be less than 35m STCs, but it could be as high as the low 40m mark. Hence the 2019 STP seems likely to be somewhere between 20.5% and 24.5%, with many believing it will come in around 22%.
And whilst one could expect an increase of this magnitude to result in high STC prices, the eye watering pace of installations and STC submissions may yet see the 2019 target eclipsed with relative ease. This happens because the setting of the target by the Regulator is based on forecasts provided by consultants in late 2018, using data the received before that.
It is, in essence, based upon a snapshot of what is happening at one point in time. The Regulator cannot continue to update and change its expectations base don what comes after that.
Another issue that is constantly raised is what impact a sceptical minister, who clearly is both no fan of renewables and a believer that the subsidy the STC market represents is simultaneously unnecessary and an excessive burden on electricity prices, can have on the target setting process.
Whilst there has been no evidence of previous ministerial intervention in previous target setting processes, there are many who believe it may yet occur.
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.
