Few surprises should be in store for this week’s quarterly auction of California Carbon Allowances (CCAs) as the WCI market continues to coast through an extended period of low volatility on weak fundamentals.
Traders said they could see no reason for allowances to stray from the auction’s reserve price of US$12.10 during the May 21 auction, the third to be held jointly with the Canadian province of Quebec.
The auction will include nearly 77 million allowances covering the 2013-2015 compliance period and more than 10 million vintage 2018 allowances.
“The market is waiting for a signal,” said one trader, adding that he expected the sale to be fully subscribed but not to trade at a premium to the reserve price.
All units on offer were sold at the previous sale in February, where the 2015 vintages cleared 11 cents above the floor and the 2018 vintages exactly at that minimum.
The benchmark Dec-15 futures prices fell 19 cents to $12.65 on ICE after the results were published a week later, and have barely budged since, closing at $12.71 on Friday, down 3 cents week-on-week.
If nothing else, recent activity – along with underlying market fundamentals – should be a reliable indicator of what lies in store for the market in the near-term, another trader said:
“Generally speaking, it’s been a dull market. I can sense the market is moving a lot less than in 2013 and early 2014.”
The trader pointed out that the decreased volatility is at least in part the product of depressed prices for electricity and natural gas, the commodities to which carbon prices are most tightly linked. He also noted the market is already well-supplied with allowances.
Peter Weisberg, program manager for Portland, Oregon-based offset developer The Climate Trust, said the market will continue to hold few surprises on price without further reform details.
“As long as the current system is in place, the market is over-allocated and will stay at the floor,” Weisberg said, adding that one recent development could eventually lift the market: California Governor Jerry Brown’s executive order earlier this month requiring his state’s polluters to reduce carbon emissions to 40% below 1990 levels by 2030.
“The 2030 targets might help prices come above the floor,” Weisberg said, explaining that compliance entities could be tempted to buy allowances to bank for later use.
While low snowpack in the Pacific Northwest is on the mind of market participants, the resultant reduced availability of low-emissions hydroelectricity imports into California due to low water to the north is not a significant enough development to buoy current CCA prices.
“People are thinking about it, but it’s not much of a factor for the market right now,” one trader said.
Another trader noted how the rapid growth of solar generation in California has so far mitigated the impact of low hydro up and down the west coast.
“If this were 2010, low hydro would be a bigger issue,” the trader said. “But a lot of stars have aligned. In hindsight, a lot of what California has done [developing renewables] has worked.”
About 6,700 megawatts of solar generation is now connected to the state’s transmission system. California’s grid operator recently said the state is prepared to meet summer power demand even in the face of deepening drought, as solar increasingly displaces the need for hydroelectric output during daylight hours.
Over 93.5% of the allowances sold at the previous carbon auction were picked up by compliance buyers and Weisberg from The Climate Trust said there were few signs that speculators were stepping up their participation.
“We’ve been more interested in why more speculation isn’t happening – because we have this floor,” Weisberg said. “It seems the market is too risky [for speculators], even with the floor.”
By Robert Mullin – email@example.com