Victoria energy efficiency market rides wave of optimism, NSW hopes to follow | RenewEconomy

Victoria energy efficiency market rides wave of optimism, NSW hopes to follow

After an eye-watering rally, VEEC market settles in mid $30s awaiting government’s response. Meanwhile, a waiting game of sorts is also playing out north of the border.

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After what seemed an eternity for those closely watching the market, the release of the consultation process to look at the next phase of targets (2021-2025) for the scheme finally came in December, with the proposed outcomes far more dramatic than even the most bullish of participants expected.

In the period since, the VEEC price has rallied strongly, though volatility has been a big feature. With less than two months for the consultation process to run its course, there is plenty of speculation surrounding whether anything will change. The coronavirus and its potential impact on lighting stock
has also been a matter of considerable discussion in recent times.

With a matter as highly speculated upon as a scheme consultation for future targets and activities, the actual outcome can sometimes fail to live up to the hype. In the case of the VEEC market in late 2019, that was most certainly not the case.

While many expected some interesting news around the targets, there was also a belief that there may be changes to the major source of VEEC creation (lighting). When the consultation papers were eventually released, they included both of these and much more.

The consultation is being run via two documents, the first regarding lighting activities, which have been the principal source of VEEC creation over the life of the scheme and remain so today. The lighting paper proposes to phase out all residential lighting and part of commercial lighting either completely in October 20, or in a two-step process in August 20 and then completely in February 21.

The basis for this position is that LED technology has now become business as usual and hence does not meet the principal of additionality and hence should no longer be supported by the scheme.

The second paper concerns the future targets which are proposed to increase by 200k per annum, starting at 6.5m in 2021 and reaching 7.3m by 2025. While such proposed increases are hardly controversial, there are other matters that have had a significant impact on the market.

Firstly, the calculation used to determine how many VEECs are created per install involves a coefficient that represents the emissions intensity of the Victorian electricity grid, known as the emissions factor. For the life of the scheme to date, that has been set at 1.095 tonnes of CO2e per megawatt hour, a number that whilst correct at the time the scheme was set up, has ever since been wrong.

With more and more renewables coming into the electricity system and coal departing, the Victorian government is seeking to correct this figure. However, the rate of the proposed correction sent shockwaves through the market with the figure proposed to reduce to 0.8055 in 2021 and 0.516 in
2022, thus meaning that the same activity undertaken in 2022 would create less than 50% of the VEECs that is does in 2020.

The paper also proposes an increase in the scheme’s shortfall penalty rate from $50 to $112, in order to increase the ceiling price for the VEEC market to ensure there is enough room to allow prices to move as the number of VEECs per install is dramatically reduced because of the emissions factor changes, whilst also allowing room for other activities that may require a higher price to enjoy some take-up.

Rather than outlining the next big creation methodology, the paper instead proposed a number of new options that most in the market felt were unlikely to fill the void that a removal of lighting would create, or that would be far enough into the future so as not to present any short to medium term supply pressure relief.

The prospect of increasing targets, which are exaggerated greatly by the proposed emissions factor changes, as well as the removal of the activities which have been responsible for over 90% of VEEC creation had an immediate impact on VEEC prices, with the spot moving from the mid $24s to above $28 within two days in early December and reaching $30 before Christmas.

In the New Year, the upward run continued, with the market progressing through the mid $30s with a consistent momentum that was fuelled by the seemingly unlimited upside that these changes appeared to represent.

Sellers, seeing the daily upward moves held back, ignoring the fact that even if the changes go ahead as outlined, in the short term the increase in prices made the existing activities highly profitable. With the spot price at $38.60 and the bids seemingly having run out, the market then turned abruptly, falling $5 in two days as sellers piled in to lock in large volumes of forwards.

The market has since sat in the $33.50-$36 range as speculation circled as to whether the government will listen to the many appeals to temper the changes or instead hold fast to its proposed position.

A response from the Department of Energy, Land Water and Planning (DELWP) on both lighting and target consultation processes will be forthcoming in April.

Lingering in the shadows of the consultation process is another issue that has arisen in recent weeks, the potential impact on the availability of lighting stock owing to the interruption of manufacturing in China because of the coronavirus.

With the current stock in Australia having been bought up by those anticipating shortages, the question now arises of whether the return to manufacturing will be quick enough to avoid a period of activity-halting stock shortages. Should the stock issue impact on installations, VEEC submission numbers could be reduced at some point from late March onwards. The matter will be keenly observed in the coming weeks.

A lesser degree of volatility has none-the-less impacted the ESC market over recent months as participants await the flesh on the bones of the NSW Energy Minister’s surprise announcement late in 2019 on plans to extend the ESC scheme into the long term, whilst also creating a new scheme aimed at tackling peak demand.

Following an initial spike in prices following the NSW Energy Minister’s announcement of to extend the Energy Savings Scheme from 8.5% of relevant energy sales in 2019 to 13% by 2030, which saw the spot ESC market up from $22 to north of $24.00, an increase in ESC registrations steadily weighed on the market.

The market closed the year at $23.25 yet, after the break, was buoyed by the optimism that captured the VEEC market and a vague sense of expectation that changes to that scheme may be replicated north of the border.

The spot market peaked in late January at $26.80, before abruptly softening back to $25.00 to coincide with the sharp decline in the VEEC market at the time. In the period since, the market has sat between $25.50 and $26.25, repeatedly oscillating between the upper and lower ends of that range.

The contagious optimism that saw the ESC market follow the VEEC market up was likely underpinned by those that saw the Victorian government seeking to phase out lighting and expecting that the NSW government would look to do the same.

While the dominance of lighting has not been as great in the ESC market, it is still comfortably the leading source of ESC supply and any move to remove it would be significant. Yet the NSW government has not shown the same concerns with lighting that its southern sibling has, meaning its anyone’s guess as to whether there are changes looming in that area.

Peak demand reduction is one of the most topical issues impacting the electricity market at the moment and it is more than just a buzz phrase. The benefits from avoided investment in new infrastructure are enormous and the NSW government’s decision to tackle the issue with a new scheme shows both considerable foresight and a preparedness to face the big issues in an innovative way.

In terms of the way in which the new scheme would operate, one option being discussed would be include a peak demand certificate multiplier for existing ESC market activities to allow them to create both ESCs and whatever the new scheme’s certificates are to be called (PERCs is one suggestion).

The behind-the-scenes legwork would need to be done to establish the peak demand reduction benefit of existing activities in specific locations, as well as to identify any new activities which would have an impact. It would therefore be possible for eligible activities to create both ESCs and PERCs, provided the correct criteria are met. Hence it is possible that rather than creation of PERCs crowding out ESC creation, its possible it may support it.

In terms of what the target will be for this novel scheme, no one yet knows. Indeed, the market is still waiting for specifics on the expanded ESC target and it will be rolled out. The consultations for the former will be more complex than the latter, though there is hope that there will be some additional information forthcoming this financial year.

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.

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