NA Markets: Partially sold-out WCI auction a mixed blessing; BNEF ups price forecasts

Published 01:00 on May 7, 2016  /  Last updated at 06:24 on May 7, 2016  /  Americas, Canada, US  /  No Comments

An uptick in compliance buying in California’s carbon market has prompted observers to anticipate that the upcoming auction won’t fully sell out, an event that they said could be bearish in the short-term but bullish in the long run.

An uptick in compliance buying in California’s carbon market has prompted observers to anticipate that the upcoming auction won’t fully sell out, an event that they said could be bearish in the short-term but bullish in the long run.

California and Quebec, which are linked under the WCI programme, will auction 77.75 million allowances on May 18 in the WCI’s seventh joint auction.  The sale will offer 68.7 million vintage 2016 allowances and 10.1 million vintage 2019 allowances, at a reserve price of $12.73/C$12.82.

California Carbon Allowances (CCAs) gained some 1.7% between last Friday and Thursday’s $12.82 close on ICE, climbing back from an April closing low of $12.29 to rise above the price floor.

Several market sources attending this week’s Navigating the American Carbon World conference in San Diego attributed last month’s fall to speculative selling, but noted that brokers were now seeing a number of new compliance buyers looking to take advantage of the sub-floor prices.

“A few speculators are also testing the waters to see if it prompts more buying,” one trader said.

Judith Schroeter, lead analyst on US carbon markets for ICIS-Tschach Solutions, said reduced demand from emitters could translate into less buying interest at the upcoming auction.

Should the sale fail to full sell-out as a result, this could dent market sentiment in the short-term and send prices lower.

However, under the market’s rules, any unsold allowances are withheld from sale for at least two auctions, which equates to a temporary reduction in supply.

In the previous auction, held in February, bidders picked up 77.39 million of the 81.63 million on offer, all at the floor price.

Ray Williams, director of long-term energy policy at utility PG&E, also noted a recent increase in CCA call option purchases.

“People are hedging, looking at the potential for prices to go up,” he said.

But Schroeter said in the interim, she expects prices to ease back below the floor.

“The latest rise isn’t indicative of fundamentals … [and] we’re not at a point where people really need to buy at the moment,” she told Carbon Pulse.

With last year the start of a new three-year compliance phase, emitters regulated under the scheme must surrender carbon units to cover 30% of their 2015 emissions by the Nov. 1 deadline.

BNEF FORECASTS

Analysts at Bloomberg New Energy Finance said that barring any major changes to the programme they expect allowance prices under WCI to rise roughly in line with the market’s floor price, which increases at an annual rate of 5% plus inflation.

“If prices remain at the floor, the market is unlikely to see shortages prior to 2029,” said Colleen Regan, BNEF’s senior analyst for North American power and environmental markets.

“We forecast that prices will rise off the floor in 2025, albeit to only $28, a mere $5 above the auction reserve price. The price increase comes as the market seeks to ward off the potential shortage in 2029.”

BNEF increased its forecasts slightly due to a rise in gasoline consumption by California drivers in 2015.

Regan said she now expects the market’s oversupply to peak at 293 million tonnes in 2022.

California regulators ARB are considering whether to cut the state scheme’s post-2020 emissions cap by using a linear reduction factor (LRF) from 2020 emissions rather than the 2020 cap.

Regan said that in both cases, it would result in a 2030 cap of 203 million tonnes, some 40% below 1990 levels, but basing the LRF on 2020 emissions would result in 87 million fewer allowances.

This, in turn, would advance the start of the market’s supply shortage by one year, to 2028, but push prices up to $45 in 2025.

By Mike Szabo – mike@carbon-pulse.com

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