Large-scale Generation Certificate (LGCs)
In a generally stable period for LGC pricing, an active forward market was the highlight across October and November, with the principal exception being the Cal 20 vintage which enjoyed a National Energy Guarantee induced rally.
With liquidity often patchy (especially by spot market standards), across the last two months a number of trends were evident in the spot LGC market. The first was general pricing stability, with the market essentially range bound within the $83-$85 interval, with the exception of a brief interlude into the $82s in October.
The second was the continued reduction in 5k parcel liquidity and its replacement with less frequent, but larger volume parcel size transactions. See chart below.
There are a number of potential explanations for this trend, though the simplest one appears to be that the spot market has been subject to less speculation in recent times, with interests increasingly reflecting compliance type activity.
The forward markets were relatively more active during this period and, with the exception of Cal 20, were also generally quite stable. The Cal 18 market traded between the $85.50-$87.50 levels across the period, while the Cal 19 vintage generally sat within the tighter bounds of a $79.50-$80.75 interval, with both frequently experiencing larger volume parcel size trades.
The standout forward vintage during this time was the Cal 20 which had been previously plagued by illiquidity and in late September still sat at the $47.50 mark.
The considerable discount to the earlier vintages has been a hallmark of Cal 20 trading as a reflection of the additional time the vintage affords project development.
There are few who believe that a shortfall in LGCs will not take place in Cal 19, but by 2020 compliance (the thinking runs) there is easily enough time to get thousands of megawatts of generation over the line from both solar and wind.
Hence Cal 20 pricing had been sitting closer to the marginal technology cost than to the shortfall penalty price.
The release of the National Energy Guarantee then appeared to throw a spanner in the works with the additional uncertainty the new policy brings and the lack of detail in which it was presented.
After its release, the perception seemed to take hold that many of the larger liable parties may delay further project commitments until they properly understood the implications of the new policy.
By late October, when the Cal 20s resumed activity after a prolonged break, it was at $49.50 and from there a solid rally ensued. At times liquid, though also often with large price changes, the market progressed through the $50s on its way to a high of $65 in early November.
As is often the case, the impressive rally came promptly to an end as the market returned the mid $62s before buyers retreated and activity dried up. After a fortnight with no activity the Cal 20s traded on a handful of occasions at $58.50.
Interestingly, during this period a solitary 5k Cal 21 parcel was agreed at $50.00, though both its volume and the surging Cal 20 market (which coincided with the trade) means it is highly questionable whether or not it represents a good indication of where that vintage lies.
Small-scale Technology Certificates (STCs)
The wild ride in the STC market across 2017 continues with the pessimism of the mounting STC oversupply being cast aside in favour of an optimistic outlook for the setting of the 2018 target.
With STC submissions increasing sharply in recent months it has prompted plenty of confusion among participants and ensured an end to the year as perplexing as its start.
Far from the usual winter slowdown which usually afflicts the solar industry, STC submissions continued to grow gradually during that period with spring seeing a further jump.
The first 6 months of 2017 saw a weekly average of 372k STCs submitted. In the 8 weeks across October and November that figure had jumped to 505k, as installations continued to grow with the STC surplus doing likewise.
Yet rather than softening the STC price was remarkably strong during this period with the spot first trading into the $37.00s and ultimately reaching the $38.00 in late November.
The forward market enjoyed a number of busy periods during this time, the first in early October in which large volumes of forwards for settlement across 2018 took place around the $37.50 mark, along with 2019 forwards at a similar prices and again in the latter part of November when $38.00 was achieved across all of 2018.
The stark recovery in the STC price, coming against the backdrop of the sharp uptick in STC submissions highlights a high degree of confidence in the target setting process for 2018.
This prevailing perception devalues the risks present in the overarching political context; namely that power prices are a major political issue and the Turnbull government has been desperate to appear to be acting to do something about them for both internal and external audiences.
Based on current rates of submissions, by its end, 2017 will see close to 22m STCs submitted to the Regulator against a target of 12.45m, resulting in a surplus of more than 9m STCs.
Whilst the reduction in the deeming period from 14 to 13 years from 1 January will naturally reduce supply by 7.5%, adding the 2017 surplus will require the 2018 target to be set to at least 28m STCs (and probably closer to 30m), which would represent an increase of 230% on this year.
Such a scenario will not go down well with large energy users. It will also play perfectly into the hands of Tony Abbott’s simplistic and dependable ‘renewable energy is pushing up power prices’ mantra.
And while Turnbull and co. will not want a fight with the solar industry in the lead up to the 2019 election, Abbott has shown that he has been willing to lock horns if he thinks it will benefit his standing, even if this is at the expense of his own government.
In the interest of nipping such a situation in the bud, the question arises of what the Minister will be willing to do to mitigate such an outcome.
There are plenty out there who believe interference will be the result. Right now the STC market price does not countenance those concerns.
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.