Large-scale Generation Certificate (LGCs)
Following a generally stable end to 2017, forecasts from a number of sources that the target will be met by 2020 and that the market will avoid a shortfall of certificates in the meantime drew a mixed reaction in the LGC market across January. Forward activity in the Cal 19s was the highlight during this time.
In recent years LGC prices have been inflated, owing to the expectation that the supply and demand would be very tightly balanced in Calendar year 2018 and likely result in a shortfall in Cal 19, owing to the extended period in which project development had come to a standstill.
In recent times, a number of forecasters have proffered that the shortfall would come to an end in Cal 20, with sufficient projects being committed in time to ensure enough LGCs would be available for surrender. Weighing the prospects of such an outcome, the Cal 20 market has always traded at a sizeable discount to the earlier vintages.
In January however, the Clean Energy Regulator (CER) threw a cat among the pigeons by sending out a market update which outlined that it expected the market would remain in surplus out to 2020, thus avoiding a shortfall in the nearer term.
Such an outcome could be expected to have impacted the forward market in the Cal 18 or perhaps more so the Cal 19 vintage, yet it did not, implying that most participants believed that any surplus in Cal 19 would be so small as to constitute an effective shortfall anyway.
The CER’s assessment was based on a natural reduction in the target in the coming two years, some assumptions around shortfall penalty payment and carry forward strategies among liable parties and an appraisal of the project development pipeline (more on this later).
January was a big month for the Cal 19 vintage with close to a million certificates trading and prices generally increasing. Having started the year promptly at $78.25, the market made it to a high of $80.80 before softening back to end the month at $80.25, despite the CER’s update.
The Cal 20 market on the other hand remains affected by a lack of buying interest. Having enjoyed a solid bull run across November in which the market moved from the high $40s to $65, before then softening back to $58.50, buying interest has since evaporated.
The was no reported activity during December or January and a clear lack of buying interest suggests the price likely sits closer to the $50 mark than its last trade level. The absence of buying appears to be a reflection of concerns that the target may be met by Cal20 and hence the LGC price will begin its descent first toward the price implied by the marginal technology cost and, subsequently, towards zero across the decade assuming a sizeable surplus ensues.
Yet there are those who believe that the current projections for project commitments, including those made by the CER, are overly optimistic in terms of both timeline for deployment and firmness of commitment, suggesting the actual number of LGCs that will be available for surrender in particular in Cal 19 and 20 is being overstated.
Across the first half of this year which assessment of the current state of play proves most accurate will become clearer as more information emerges about the progress of committed projects as well as in terms of whether or not some projects being touted as ‘committed’ are truly so.
The Cal 18 and spot contracts remained generally stable across December and into January with both enjoying a rally toward the end of that period. As part of this run the spot market reached a high of $86.50 by January’s end, a level not seen since March 2017.
Small-scale Technology Certificates (STCs)
With a general level of stability prevailing in the spot market and plenty of activity in the forwards, participants in the STC market continue to eagerly await the release of the 2018 Small-scale Technology Percentage (STP) due in March, while taking calculated bets on the future. This happened despite the crystallisation of the final (and very hefty) surplus figure for 2017.
Since early December the spot STC market has remained dependably stable, trading between the $38.30 and $38.75 marks as participants continue to await the release of the 2018 target, which is expected in late March. The forward market during this time was particularly busy with settlements across the 2018 year taking place within the $38.50-$39.00 range. In the 2019 market, which also saw a surprising level of activity over the period, the range was wider at $38.00 to $39.00.
Markets generally present difficult questions to participants, but every now and then there are situations in which for one side deciding is easier. For the forward STC market with its $40 Clearing House price cap, now is one of those times for sellers.
Even for those who believe the target will be set accurately, resulting in the erosion of the STC surplus across 2018 and the return to use of the Clearing House sometime in the latter part of the year, entering a forward at $39.00 means the most they could lose from the trade is $1. This, in part, likely explains why the forward market has been so active of late.
For buyers the dilemma is more challenging; do you lock in $1 of value now expecting the target to be set accurately or take your chances and hope the market dips again during 2018.
With the passage of the New Year, the extent of the surplus of STCs above the 2017 target of 12.45m was revealed. The 22.4m STCs submitted during this time, resulted in a surplus of just shy of 10m STCs. Having accounted for the deficit of the previous year and assuming that Q4 surrender takes us to the 12.45m target then there will be 8.4m STCs rolled forward from 2017 into 2018.
The CER’s own internal calculation of this figure, along with an estimate of the number of systems installed across 2018 should form the basis for the 2018 targe, which remains the primary determinant of STC prices moving forward.
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.