Victorian Energy Efficiency Certificates and New South Wales Energy Savings Certificates are experiencing a bumpy journey down in price, with plenty of questions to be answered through the rest of the year.
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Victorian Energy Efficiency Certificates (VEECs)
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The history of supply in the Victorian Energy Efficiency Target has been characterised by several waves of dominance from a particular creation methodology, interspersed by a lengthy period of minimal activity. The VEEC market appears currently moving toward the end of the second such wave and with prices in steady decline, speculation remains rife over what will happen next.
The spot VEEC market has experienced a bumpy ride across the last two years. Following a boom in domestic incandescent light globe replacements in 2009/2010, which led to a significant VEEC surplus as well as to falling prices, a series of rule changes and system enhancements eventually squeezed out the creation methodology. What followed was an extended period of minimal VEEC creation as other creation methodologies struggled to fill the void with spot prices in the sub $10 region.
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Following extended delays in the approval of the standby power controller (SPC or power board) methodology, the spot market eventually rallied sharply in 2011 with a shortfall in supply appearing almost guaranteed. The spot market eventually broached the scheme’s then $40 penalty price before coming crashing down once it was clear the SPC rollout had achieved the unthinkable and prevented a VEEC shortfall.
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Since that point in early 2012, the SPC creation methodology has remained the dominant form of VEEC creation, with just under 80 per cent of VEECs in the 2012 creation year coming from that methodology. Yet because of the nature of the device and the ease with which it can be removed by unhappy householders, there has long been concern surrounding the veracity of emission reductions arising from its installation.
The issue first arose early last year when the scheme’s regulator (the Essential Services Commission, ESC) commissioned a study into the methodology. Contrary to much of the speculation at the time, the study’s results found that suggestions of both widespread incorrect installation by installers as well as the post-installation removal of the SPCs by householders were exaggerated.
And so the SPC juggernaut rolled on with an average 515,000 VEECs being created each month via the methodology across the 2012 compliance year, despite frequent reference to market saturation along the way. The SPC boom has been so significant that as of today, less than two months into the 2013 creation year and with the 2012 target of circa 5.4 million VEECs already met, there is a sufficient surplus of VEECs either registered, or pending registration to meet just under 90 per cent of the 2013 target.
With this boom in VEEC creation has, of course, come falling prices and persistent speculation that a change to the SPC creation methodology (akin to the one which was made to compact fluorescent globes in the early days of the scheme) is in the offing.
The spot VEEC market has traded progressively down to reach the $17 mark, a level not seen since March 2011.
With the spot price falling and the market pushing towards a substantial oversupply, creation from other methodologies such as commercial lighting is becoming progressively harder.
To-date no official announcement has come on any changes to the SPC creation methodology, yet there are few who do not suspect that there is something in the pipeline. It is not clear whether the scheme’s regulator is indeed preparing for change or instead is relying on saturation of the Victorian household market and the increases in VEEC creation rejections from duplications to do the job instead.
Anecdotal evidence suggests that SPC saturation is beginning to have a tangible impact on the cost of SPC installation given duplicate installs are on the rise which, combined with the low VEEC price, is fast reducing the financial viability of the methodology.
The major questions ahead for the VEEC market remain what further impact the SPC methodology will be able to make and precisely how low spot prices can fall as a result. Beyond that, the issue of which other creation methodologies will be left to fill the post-SPC void is also a very pressing matter.
New South Wales Energy Savings Certificates (ESCs)
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For an environmental market which has consistently bucked the trend of oversupply common to almost all its siblings, it appears the ESC market is currently divining a period of adjustment ahead for those who have become accustomed to the elevated pricing which has been a reflection of that scarcity.
For most of the last three years the spot ESC market has defied the trends of other environmental markets by managing either very small surpluses or deficits in certificate creation. This has in large part been a reflection of the stringent requirements put upon the accreditation process under the scheme as well as a certificate creation process which sees creators go through a complex audit process following each batch of ESC creations. It has also reflected the fact that, unlike in Victoria, there has been no contribution to supply from mass, domestically focused giveaway programs.
With such conditions being implemented, a tight lid has been kept on supply which has ensured ESC prices have remained at scarcity levels, i.e. above the scheme’s nominal penalty rate (for 2013 $25.45 before adjustments). That is, at least until now.
Following another year in which the supply/demand balance appeared tight, the latest update to the scheme regulator’s supply projections for 2012 suggest a surplus for that vintage of between 680,000 and 867,000, a substantial increase from the last projection. While there are of course no guarantees that this figure will be accurate, it has certainly added to a change in sentiment in the ESC market in recent times.
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For a commodity which has long bucked the oversupply trend, it appears the ESC market is currently implying that the time may have finally come for change. Across the early part of this year the spot price (for 2012 vintage ESCs) has gradually dropped from $31 to somewhere in the $25-26 range, a persistent premium above the 2013 vintage.
Meanwhile prices in the 2013 vintage (via transactions in the forward market) have also decreased dramatically over recent months. Recent trades for settlements across the remainder of the year have occurred around the $22.40-$22.55 level. There have, as yet, been no trades reported in the spot market for 2013s.
While conclusive evidence is not necessarily there to suggest that the 2013 compliance year will yield a sizable surplus, the fact that the spot ESC price has till now remained at scarcity pricing levels means the market has plenty of room to soften as expectations shift.
In 2012 a similar pattern emerged with expectations of an oversupply seeing prices soften across the first half of the year before slow creation numbers eventually saw the market recover across the second half.
It is far from clear whether the now growing expectations of oversupply will actually materialise in 2013. There are certainly those out there who question the scheme regulator’s projections for the 2012 vintage year. There are also those who believe that any further increase in creation in 2013 will not be so dramatic. The year ahead therefore appears set to be defined by who is correct on the latter of these issues.
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.