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. Here, Mr Stella outlines the current market trends.
Large-scale Generation Certificate (LGC) market
It has proven a mixed beginning to 2016 for the LGC market. A solid start across the first two months of the year saw the spot market climb into low $80 territory in February, only to soften back to a low of $75 by late March as buyers disappeared from the market in the period following the end of 2015 compliance. Across April, the pendulum once again changed direction, with the spot market creeping back up to surpass the $80 mark in late April.
On the pivotal issue of project commitments, very little has changed. Only 200 MW of projects have been committed in recent months, making an already highly ambitious build requirement appear almost impossible to meet in time to avoid a squeeze in LGC supply in 2017 and a shortfall in 2018. To avoid such an outcome, by the end of 2016 more than 4000 MW of new projects need to be committed. On this basis, the spot price appears likely to track towards the tax effective penalty level just shy of $93 for Cal 2017 compliance (early 2018). Right now, the only thing that appears likely to prevent such an outcome is regulatory risk.
On that front, Labor has confirmed its commitment to a 50 per cent renewable energy target by 2050, though it appears prepared to consider measures outside the existing Renewable Energy Target to achieve this. More detail on this policy will be keenly sought should the Opposition manage to oust the Coalition at the upcoming election.
Small-scale Technology Certificate (STC) market
There has been little change in recent months to the STC market with activity taking place sporadically around the $39.90 level. Concerns held by some about a considerable reduction in the scheme’s target (Small-scale Technology Percentage or STP), proved unfounded with its eventual release in March reassuring participants. At 9.68 per cent, expected to be equivalent to 16.95m STCs surrendered across 2016, it appears unlikely that 2016 will yield a material STC surplus. Indeed, weekly submissions to-date have fallen short of the target’s requirement
and the Clearing House continues to spend extended periods in deficit.
Energy efficiency market
A substantial shift is currently underway in the Victorian Energy Efficiency Certificate (VEEC) market with the rise of commercial lighting. Across its history, the VEEC market has been dominated by residential activity. Yet the recognition of energy savings in commercial premises that operate beyond standard office hours has opened up a new world of opportunities, to the extent that commercial lighting has gone from representing a negligible proportion of VEEC creation 12 months ago to contributing over 40 per cent of VEEC creation in April.
While the spot market strengthened across March to reach a high of $24.50 in the middle of the month, growing supply ultimately took its toll, sending it back below $21 by late April. Should the current rate of creation be sustained across the year, it appears likely the surplus carried forward from 2015 for circa 1m VEECs will more than double across 2016. Activity levels in the VEEC market remain high.
In New South Wales, the Energy Saving Certificate (ESC) market continued to be bound within the $26-$28 range across March and April. Despite this, the period proved one of the market’s most active in recent years, with both buyers and sellers seemingly happy to contract across the coming 12 months at prices in the $27-$28 range.
ESC supply across the period was strong following a modest beginning to the year. Despite a surplus of ESCs in the vicinity of 2.5m at the end of the 2015 compliance year, the expanded target for 2016 (7 per cent or approximately 3.6m ESCs) was expected to reduce this surplus across the year. Stronger ESC creation numbers in recent months seem to imply that any reduction in that surplus may only be modest.
The scheme has thus far failed to see a major contribution from the residential sector despite numerous changes having been made to the Home Energy Efficiency Retrofit methodology. Commercial lighting remains the dominant contributor to ESC supply.
The above information has been provided by TFS Green and relates, unless otherwise indicated, to the spot prices in Australian dollars, as of 29 April 2016.