Marco Stella from CORE Markets has provided a snapshot of Australia’s clean energy market.
Large-scale Generation Certificate (LGC) market
After the relative stability seen across July and August 2023, LGCs saw the current year’s vintages soften steadily across September and October. Conversely, the further-out vintages climbed, with Cal26 leading the charge.
This would suggest some obligated entities have been implementing the so-called “shortfall strategy”, where they opt to pay the penalty for the 2023 obligation instead of surrendering LGCs, and purchase cheaper Cal26 vintage units in the forward market, with the intention to deliver the units in three years’ time to make good on the deferred 2023 obligation and be refunded the penalty cost.
It is interesting to note the middle of the curve (Cal24 and Cal25) held up relatively well during this period, finding itself caught between the declining spot/Cal23s and the rising Cal26. Resultingly, for the first time in years, Cal23 forwards were trading at or below Cal24, upsetting the usual strong backwardation from the current compliance year.
At the time of writing, the last prices were:
• LGC spots: $48.60.
• Cal23: $48.50.
• Cal24: $49.
• Cal25: $46.
• Cal26: $37.25.
Small-scale Technology Certificate (STC) market
The STCs saw the clearing house make a long-awaited return from deficit to surplus in mid-September, in the lead up to Q3 compliance, with a sharp reduction in the deficit occurring in the first two weeks of the month as creators rushed to submit STCs to receive the $40 clearing house price.
The brief surplus brought an increase in trading activity, with spots trading from $39.90 to as low as $39.77, and back, by the conclusion of the month. Forwards saw volume trade for 2024, with $39.75 being the reoccurring level for Q2 onwards.
After a month of market activity, the deficit clearing house returned by late October, yet at only 1.5 million it is far smaller than that seen after the Q2 surrender. It will not last long, meaning the market will likely see a return to activity by mid-November. Given Q4 represents the smallest quarterly obligation for the year and the biggest quarter of creation, the market may remain in surplus all the way to the Q1 2023 surrender in April.
Energy Efficiency Markets (VEECs and ESCs)
The current situation in the VEEC market is an unusual one, with creation well down, little confidence about new activities, strong but stable pricing and little carry in the forward curve. Across September and October, the spot VEEC market was incredibly stable, in the $85 range. The forward market showed a little more variation in September, with very modest escalations (carry) above the spot being witnessed, and sometimes even a discount at play.
This type of spot/forward relationship would normally occur when expectations of future supply are significant. Yet in the VEEC market right now, that is not the case. Actual VEEC supply has been tracking well below the required run rate for most of the year and, based on the status quo, there will not be enough VEECs available to meet the 2024 obligation if nothing changes.
The main reason for the price not climbing further towards the $128.50 tax-effective penalty appears to be the belief that some regulatory intervention will occur given the impact of high VEEC prices on electricity bills.
While the VEECs were largely stable during September and October, ESCs were a tale of two polarising months. September was choppy, with the spot price moving from its open at $25.50 to $30.50, before settling at $27 by the beginning of October.
The market then remained virtually dead-flat for the rest of the month before stepping down to $26 on the back of sustained high creation, where we remain at the time of writing. Strong creation from the heat pump method is largely responsible for softer pricing across this year, but consultations announced during this period seem set to reduce ESC creation from this method, as well as usher in the long-awaited phase out of commercial lighting.
The above information has been provided by CORE Markets and relates, unless otherwise indicated, to spot prices in Australian dollars as of 2 November, 2023.
The above information has been provided by CORE Markets and relates, unless otherwise indicated, to spot prices in Australian dollars as of 25 August, 2023.