The winter months appeared to usher in a change for the LGC (Large scale generation certificates) market with a recovery in pricing and some improvement in liquidity in July amid concerns surrounding potential project delays.
By late August however, some familiar issues had returned. Meanwhile, the period also saw the federal Liberal Party opt to tear itself apart rather than agree to an energy and climate policy that was custom designed to satisfy those with the most modest emission reduction ambitions and thus ensured the waste of more years on the vexed issue.
The month of July in the LGC market began as an extension of the preceding months, with the spot and forward vintages maintaining its downward trajectory. It took until the middle of the month with the spot price around the $74 level for support to return and when it did the reaction was strong.
Within a week the market was back above the $77 mark and by month’s end had surpassed $79. The Cal 18 and 19 vintages which had fallen to lows of $75.25 and $65.30 respectively, also enjoyed a bounce rebounding to highs of $80.00 and $72.50.
Yet eventually the recovery faltered, with the market beginning to lose ground across August with the spot and Cal 18 contracts being hit the hardest. What happened late in the month however was the most concerning with spot and Cal 18 contracts tumbling across the final week from the $77-78 range to sit just above the $70 mark by month end.
The Cal 20 vintage had drifted as low as $21.00 before it too rebounded in steps to a high of $33.00, before ultimately closing the month at $26.20.
The recovery of the LGC curve may simply have reflected prior overshoot, with the market having maintained its negative momentum across the first half of the year for far longer than many expected. Yet the recovery also coincided with mounting rumour surrounding project delays, with a significant development being the recognition from the head of the Australian Energy Market Office that delays to connection agreements for new projects are occurring.
The delays are the result of a serious backlog of new projects which were unleashed in an investment boom over the previous 18 months owing to the years of stagnation caused by a lack of bipartisan support for the renewable energy target.
On top of the connection delays are other factors which, ex post facto can threaten the financial viability of projects, including recent the changes to marginal loss factors along with additional technical requirements that are being put on projects by the market operator to ensure grid stability in certain areas is maintained.
Rumours abound that some seemingly very solid projects that had been assumed to be going ahead may no longer be doing so, though no official record of this yet exists.
As outlined earlier, of note across the latter part of August was an apparent disconnect in the forward curve between the spot and Cal 18 vintages and the Cal 19 (and in particular) the Cal 20 vintage.
The resurgence of the Cal 20 vintage highlights the calculus being undertaken by market participants to determine whether the scheme will in fact remain in surplus across the Cal 19 bottleneck vintage and then continue to be from then on.
The above-mentioned connection delays along with the shuffling of obligations between Cal 19 and subsequent periods via penalty payments are the two mast important issues for this period.
Perhaps of equal note amongst market participants however, the issue of low liquidity appears to have returned, with frequent periods of modest trade interspersed with significant step change movements in which the market has moved dollars on single trades.
Why exactly this is happening is not clear, beyond the simple observation that participants are happy to bide their time. On the one hand differing views on the supply/demand balance in Cal 19 and 20 may be leading participants to hold back in expectation that the market will turn in their favour.
There are others who believe the federal government’s shambolic handling of climate and energy policy and the desperation that has emerged to put downward pressure on electricity pricing has led consultants who advise many larger customers on their contracting strategies to recommend holding back in the hope that prices will come down.
While this approach may prove the right one, as July showed the liquidity problem can work both ways, with a return of buying interest resulting in a rapid upward movement in prices.
Finally, the most vexed political issue of the modern era, national energy and climate policy. A matter that has made the GST and immigration debates look like school yard quarrels, and one which is intimately linked to project development.
It beggars belief that after having repealed a long term policy mechanism in the carbon price over 4 years ago, then having ruled out a number of next best alternatives including the Clean Energy Target devised by a very pragmatic and politically aware Chief Scientist, the federal Liberal Party opted to tear down a popular Prime Minister, rather than agree to a policy that was custom designed for the climate sceptics in the party.
And it was a policy that had received widespread industry support, if only out of desperation for regulatory certainty.
The lack of awareness of the impact of a decade of said uncertainty on electricity prices is staggering and appears all the more hypocritical given the justification offered for the whole mess was a desire to see prices lower. Were it not occurring, one would scarcely believe it was possible.
Small-scale Technology Certificates (STCs)
Strong STC supply figures, concerns that the Coalition Government was set to announce plans to abolish the Small-scale Renewable Energy Scheme and a surprise subsidy announcement from the Victorian Government saw the STC price crash across July and August with large trade volumes amid frenetic market conditions.
The lead up to Q2 compliance (28thJuly) had roundly been expected to see STC prices increase, yet the softening that began in June only worsened across July with the spot breaching the $37.00 mark several times as the unusual pattern of STC supply growing across the winter months was repeated for the second year in a row.
Having settled in the mid to high $36s for several weeks, the next big step down came on the back of rumours that the Coalition Party Room meeting was set to see the adoption of the recommendations outlined in the ACCC’s report into the electricity industry, which included the recommendation to abolish the SRES.
In the end, the bitter dispute over the National Energy Guarantee that would ultimately bring down the Prime Minister crowded out discussion on any other matters, and no formal position was adopted on the SRES.
The scuttlebutt, however, was nonetheless enough to see the market crash though the $35s into the $34s on the back of extremely large trade volumes. By late August the spot sat in the mid $33s.
Also contributing to the losses was the surprise announcement by the Victorian Labor Government that if elected it would implement a policy to subsidise the installation of 650,000 photovoltaic installations over the coming 10 years, along with 60,000 solar hot water installations over the same period.
Irrespective of who wins the Victorian election, the Andrews Government committed to covering half the cost of solar installs for up to 24,000 homes by 30 June 2019 and contributing $1,000 toward 6000 solar hot water installations. The headlines were enough to further impact an already jittery market.
Both of these issues appear quite negative on the surface, yet they are more nuanced than the headline may suggest.
In terms of the actual impact on STC supply, there is little doubt The Victorian solar policy will encourage significant activity in the Victorian residential sector. Yet in determining the impact on the supply/demand balance there remain several issues to consider.
Assuming the target setting process for 2019 remains unchanged from previous years, then the Clean Energy Regulator will factor the policy into its estimations for 2019 and hence will increase the target based on any additional STCs it expects to be created.
It is, however, possible that the policy will make the forecasting of STC numbers for 2019 and beyond more difficult, and thus may make it more likely that the target will again end up being set incorrectly.
On the issue of the Coalition’s intentions to abolish the SRES, precisely what approach it takes and over what timeline is not clear. On the one hand it could take the policy of repealing the legislation to this Parliament, but it appears highly unlikely to have the numbers in the Senate for it to pass.
It could instead take the policy to the next election, though again recent events have greatly damaged its electoral prospects.
The real concern however amongst market participants is that in its desperation to satisfy the more right-wing elements within, it may instead adopt a more aggressive approach to change, such as a reduction in the Clearing House price – which can be achieved via the far more easily achieved changes to regulation.
While no one knows if this option is likely to prevail, it is reducing the appeal for liable parties and others to do what has been done in previous periods of oversupply by gobbling up surplus STCs to carry forward into future periods where the target would likely be corrected. With less short term demand, growing supply and regulatory uncertainty the STC market is in a difficult place right now.
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.