Large-scale Generation Certificate (LGCs)
Illiquidity and persistent downward momentum have been major factors in the LGC market in recent months as the spot market reached 3-year lows. Participants have been left to ponder whether this is the beginning of the end for the market or something that will quickly change when the time is right.
Q3 in the LGC market has been a continuation of the conditions seen across much of the year, with prices in steady decline on low liquidity levels. Genuine buying interest has been hard to come by and the market has been divided between periods of no activity and periods of softening, frequently via gapping price movements.
The spot price enjoyed a mild recovery across September, going from $70.50 up to $72. Yet October saw these gains rapidly undone with the market falling to close the month at $62.75, a 3 year low.
The Clean Energy Regulator’s regular market updates and commentary, which continually assert that the target is met and that a healthy surplus will remain, has clearly had an impact this year. If perhaps not on the liable entities themselves, then on many of their customers, who read the headlines and see a decreasing price and assume that the prophecy is playing in accordance with fundamentals.
Aside from the question of supply and demand, the very low liquidity levels of recent times should also be of concern. Price movements of $1 per 5k trade are a problem on the way up just as they are on the way down and should some serious demand come to the market, it may have a serious impact.
Whilst it could come at any time, the flashpoint will likely be the Cal 19 vintage, which is important for several reasons. Firstly, it is the year in which the steadily reducing surplus of LGCs is expected to reach its lowest point, before much of the new generation will come on line. It is also the year after which the largest inter vintage price differential in the market’s history exists.
The Cal 19 vintage has lost considerable ground across 2018 softening from the $80 mark in January to close October at $58. Despite this price decline, the differential between it and the Cal 20 contract is still over $30, meaning there remains a strong incentive for liable parties to shunt their obligation from one year to the next via whatever means available to them.
Yet there are many who believe that the shrinking surplus of LGCs – which in Cal 19 is generally expected to fall to a figure in the 4-6m range – will result in a squeeze, with the liquidity float becoming too small given the size of that year’s obligation (34m). Should this be the case, then prices would likely jump as participants scramble to acquire sufficient LGCs to meet their obligations.
Presently however, the mood in the market remains bearish. The question is whether that will change in the short to medium term or whether instead the slide will continue.
October also saw the first trade in the Cal 21 vintage in 4 months which took place at $18.00, a $9 drop on the previous level.
Small-scale Technology Certificates (STCs)
Mounting concerns that the Coalition government was intent on announcing fundamental changes to the Small-scale Renewable Energy Scheme (SRES) led to considerable price volatility and ongoing jitters in the STC market across recent months. Meanwhile the end of year surge in STC submissions appears to have begun.
For several months the STC market has waited with baited breath for the much-anticipated news that the Energy Minister had decided to make fundamental changes to the scheme, namely a reduction to the Clearing House price. Over and over Coalition figures trundled out to media conferences to decry the over-subsidisation of renewables connecting them to power prices being too high.
It was as if the Morrison government was trying to build up the courage to pull the trigger. Many of these public comments resulted in sharp yet often short-lived price movements with the spot market repeatedly tumbling from the low to mid $34s into the $33s, only to promptly recover, often within 24 hours.
The lead up to Q3 compliance (28thOctober) did see a healthy recovery in spot STC prices with the market strengthening to into the mid to high $35s across the month as buyers returned. Given the size of the burgeoning STC surplus there were many who were surprised by how late participants had left their acquisitions.
Yet it appears the threat of a potentially seismic drop in STC prices that would have resulted from a decision to reduce the Clearing House price led many to be cautious.
Perhaps most interesting however was the final week in the lead up to compliance in which the spot market had begun to come off, reaching the $35 level with buyers seemingly having concluded their Q3 buying. Energy Minister Taylor then gave an interview to an unlikely media outlet in which he promised no changes to the SRES.
The move seemed to hail a victory for the pragmatists inside the Morrison Government over their ideologue colleagues, with recognition that attacking solar was unlikely to anything but cost votes that it cannot afford to lose.
The market reacted immediately by rallying sharply and in large volume, making it all the way to the low $36s. That the threat of major changes was now off the table seemed a massive change to the STC market’s prospects and worthy of an impact on price. Yet this rally was short lived and within several days the market had softened back below the $35 mark.
The incident also coincided with the year’s largest weekly submission figure of 708k, the second highest weekly creation rate since 2012. Many participants had been expecting a significant jump in STC submissions in the back end of the year; an outcome that occurs most years as the return of summer and the prospect of a small reduction in the deeming period from 1stJanuary spur sales.
Yet in a year as turbo charged as this, participants are watching closely to see just how big the next two months will be and how large the oversupply for 2018 will become.
The Clean Energy Regulator in its most recent STC market update forecast an STC surplus for 2018 of 10m, meaning a figure considerably larger than last year’s surplus.
This figure is important for what it means for the 2019 target as much as what it says about the number of STCs slushing around the market in the short term. A surplus of 10m, combined with the current rate of creation means the 2019 target is going to need to increase from 29.29m in 2018 to something like 40m or above.
Assuming the Coalition is still in government in March next year, then it will be the so called ‘Minister for Lower Energy Prices’ that will sign off on a 35% increase to SRES charges on people’s bills. And that’s where participants start to get antsy and speculation begins surrounding whether there will be any interference in the target setting process.
Such concerns are often raised, though the evidence to date suggests that this has not been a factor in previous target setting processes. The cynics say it won’t be a factor until one day it is.
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.