Industry trends revealed in our regular update on the Australian clean energy certificate markets.
SMALL-SCALE TECHNOLOGY CERTIFICATE (STC) MARKET
The STC market was defined by a lack of volatility in the second half of 2015, and this trend continued as the year drew to a close, with the price flat-lining through most of November and December. In the lead-up to the Q3 surrender deadline, last-minute buyers, keen to avoid any potential delays by going through the STC clearing house, pushed the spot price back to $40.00. As the deadline passed, the spot price immediately fell to $39.90, where it remained for the rest of the year, with little trade being reported in the last two months.
As has been the case throughout this compliance year, the STC clearing house moved back into deficit a couple of weeks before the Q3 deadline and has remained that way ever since, with the deficit sitting at about 700k heading into the new year despite a slight uptick in the number of submissions. It’s anyone’s guess at this point whether the clearing house will move back into surplus before the final 2015 STC surrender deadline on 14 February 2016.
The effect that the deficit in the clearing house had on the STC market is clearly illustated by the sharp decline in spot trade volumes that commenced in April and continued throughout 2015. Overall, there was a massive 69 per cent drop in the number of certificates trading in the market compared to 2014.
At time of publication, all eyes were on the release of the 2016 Small-scale Technology Percentage (STP), which dictates the demand for STCs for the upcoming year.
In previous years, this has been announced towards the end of the year, but that was not the case in 2015. The size of the STP will give a good indication of what we’ll see in 2016. A smaller number will mean that the clearing house will not play as big a factor as it did in 2015 and we may witness some greater price movement. However, a higher figure may result in yet another year of prices firmly wedged just under the clearing house price.
LARGE-SCALE GENERATION CERTIFICATE (LGC) MARKET
In contrast to the STC market, the LGC market has just completed one of its more interesting years since the beginning of the scheme. This is in large part due to the protracted renegotiation of the Renewable Energy Target (RET), the twists and turns of which spurred activity in the beginning of the year. However, even after an agreement was reached with a lower target, activity remained strong, as a perception of a shortage of certificates in the coming years took hold.
This renewed interest in the LGC market has been reflected by a record-setting spot price and trade volumes more than doubling. After spending much of 2014 in the $20.00-35.00 range, the spot price was sitting at $33.35 at the beginning of 2015 before surging throughout the year. It shot straight past the penalty price of $65.00 and reached a high of $77.05 in early December. There was some softening in the lead-up to Christmas, with the spot price closing out the year at $72.80, a 118 per cent increase year-on-year.
The Spot LGC Trading Volumes chart depicts the monthly trade volumes for 2014 and 2015 and shows the re-emergence of the LGC market while also providing an interesting contrast to the STC monthly volume chart. All but one month saw a larger number of certificates traded in 2015 compared to 2014, with some months posting many times what was seen in the previous year. Overall, the volume of LGCs traded more than doubled in 2015.
Looking forward, we already know that the overall target of certificates to be surrendered in 2016 will be 21,431,000 – unlike the STP, annual LGC targets are outlined in the legislation. Therefore, all eyes will be on project commitments and whether these will be up and running before the current oversupply – which has existed since the expansion of the scheme into household solar – is consumed.
ENERGY EFFICIENCY MARKET
It’s been a wild ride in the Victorian Energy Efficiency Certificate (VEEC) scheme towards the end of the year, with spot prices falling from their perch in the mid $30s in the middle of October all the way down to $22.00 at one stage before rallying to $29.00. And all that occurred in a single day! Since then (surely the most extraordinary day seen in the environmental markets), the spot market has been holding steady between $26.00 and $29.00, with the year closing at $26.10.
The dramatic crash was a combination of a market correction against a surging spot price that was moving against the market fundamentals and the announcement of regulatory changes that will likely result in more VEECs being created.
Despite some pessimism within the industry, VEEC submissions continued to be healthy and consistent – meaning that a shortage of certificates for 2015 compliance was unlikely. Despite this, there were still plenty of buyers willing to push the price up in order to acquire the certificates. Once this buying abated, sellers were left with little option but to follow what little buying remained back down.
The correction was exacerbated by the announcement in late October of proposed changes to Victorian regulations, the majority of which were to take effect from the beginning of 2016. In addition to multiple technical changes to many of the methodologies, the two biggest changes consist of an increase in the greenhouse gas abatement coefficient, which will increase the number of certificates created from abatement measures, and the addition of extended operating hours for commercial lighting projects.
The addition of extended operating hours is expected to have a big impact in the coming years, as the commercial lighting methodology is now a far more attractive proposition. Previously, commercial lighting projects were assessed on the basis of fixed hours of use that in many cases did not reflect the actual use. The introduction of extended operating hours, closely mirroring the commercial lighting methodology already in place in the NSW Energy Savings Scheme, will allow lighting projects in buildings that operate outside normal office hours, such as hospitals and car parks, to create more VEECs.
And rounding out what has been a very good year in the environmental markets, the NSW Energy Savings Certificate (ESC) also closed out the year in a strong position, coinciding with a return to liquidity in the market. The spot price was trading at $24.50 in mid-October, having softened from $28.25 a few weeks previously.
That softening continued throughout October, with the price hitting a low of $22.50 before buying interest returned. This led to gradual rises in November and the first half of December, getting as high as $28.50 before softening once more in the lead-up to Christmas, and closing the year at $27.25. With the spot price beginning the year at $14.50, the market saw an impressive 88 per cent increase year-on-year.
Jonathon Watson is an Analyst for 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. The information above has been provided by TFS Green and relates, unless otherwise indicated, to the spot prices in Australian dollars, as of 4 January 2016.