Certificates Market Update: March 2024

ENVIRONMENTAL CERTIFICATES UPDATE

Spot and 2023 LGCs saw high prices prevail in Q3 2023, somewhat disconnecting from the later vintages. Near-term prices were driven by three major factors:

• Expectations of high voluntary demand;
• Lack of clarity around whether major participants who could short-surrender (and therefore reduce demand in the short-term) would do so;
• And increased demand from key market participants who had to make up for their 2020 short surrender to receive a shortfall penalty refund.

LGC SPOT AND FORWARD PRICES

However, the significant growth in LGC creation year-on-year came into the market in force towards the end of 2023, relieving the significant demand pressures and prices.

The following chart breaks down the supply-demand balance for the 2023 target.

LGC MEETING 2023 COMPLIANCE

In green, we can see the certificates were supplied from:

• The surplus from 2022;
• Actual creation from renewable generation;
• And certificates that were not surrendered to the regulator to meet that year’s obligation.

Creation in 2023 saw significant year-on-year growth in all quarters.

While demand from liable entities for the 2023 compliance surrender remained the largest, redemptions (certificates surrendered to make up for past short falls) and voluntary surrender from non-liable entities were, once again, notable drivers of demand. Indeed, voluntary surrenders broke the record set the year before.

As prices in the front-end of the LGC curve declined, demand and therefore prices for 2025 certificates remained fairly sustained. Participants continued to price-in RE100 voluntary demand. That is, the demand driven by 100% renewable energy commitments made by many large corporates, with most commitments commencing in 2025.

The 2026-2030 certificates saw increasing levels of trading activity as market participants accounted for: RE100 commitments, lagging construction of new large-scale renewables and supporting transmission infrastructure, and potential short-surrender opportunities. However, prices took a significant hit in November 2023 when the Australian Government announced an expansion to the Capacity Investment Scheme (CIS). Through the expanded CIS, the government would provide long-term revenue support to new projects which bring 9GW of dispatchable capacity and 23 GW of renewable capacity online across the nation. This significant increase in renewable supply expectations led to a rapid decline in prices. However, prices shortly recovered as the lack of clarity around the scheme did not outweigh the clear demand drivers in those years.

STCs have seen lots of excitement since our last update. From November 2023 until February 2024, STC prices had declined by almost 80 cents.

STC PRICES 

This was significant as STCs, for nearly two years, had largely traded near or at the effective ceiling of the scheme: the clearing house price of $40. However, the growth in heat pump activity, particularly in the NSW energy efficiency and peak reduction schemes had contributed to the notable year-on-year growth in STC creation. The boost in supply allowed for 2023 compliance demands to be met, and for the registry to go back into surplus for the first time in a couple years. The relatively high liquidity in the market, in turn, put downward pressure on prices. However, this was short-lived with the release of the 2024 small-scale technology percentage (STP). The STP effectively sets the amount of STCs liable entities must surrender in the coming year to be compliant. Prices jumped back up as it was unclear to market participants whether the current rates of STC creation would be sufficient to meet this higher-than-expected compliance target.

VEEC AND ESC SPOT PRICES

In previous updates, we discussed how the prices of VEECs and ESCs have moved in tandem due to similarities in scheme design and certificate creation activities.

VEEC AND ESC CREATION

In our last update, we discussed how this relationship had started to unwind due to the elimination of the refrigerated cabinets activity from the Victorian scheme (the highest creation mechanism following the roll-off of the energy efficient lighting methods) and a lack of high-yield creation methods to replace it. In contrast, the ESCs were experiencing high year-on-year creation primarily due to the growth in hot water heat pump projects, leading to notable declines in ESC prices.

VEEC AND ESC PRICES 

These trends have continued into 2024, with VEECs climbing to $95 and ESCs declining to nearly half of the high seen in 2023. VEEC supply has continued to lag, with heat pumps struggling to gain a significant foothold in the scheme and regulatory announcements largely focusing on quality assurance and accordingly, tightening the approvals for some creation methods. However, there was a slight jump in ESC prices towards the end of 2023 due to some regulatory announcements which indicated a tightening of the hot-water heat pump activity yield. However, these changes have so far not deterred the pace of ESC creation, and in turn, the decline in price.

AUSTRALIAN CARBON MARKET UPDATE

Welcome to the first in our new carbon market update series. We’ll provide an overview of the Safeguard Mechanism framework, which underpins the compliance demand for the Australian Carbon Credit Units (ACCUs), before covering the supply side of the market by observing the total issuances of ACCUs by the Clean Energy Regular since the beginning of 2024. Lastly, we will review the prices of ACCUs over the last quarter.

OVERVIEW OF SAFEGUARD MECHANISM FROM 1 JULY 2023

The Safeguard Mechanism underpins the compliance demand for ACCUs. The mechanism went through a major reform in mid-2023. The new obligations came into effect on 1 July 2023 for the financial year ending on 30 June 2024.

Under the Safeguard Mechanism, facilities with annual production related emissions over 100,000 tCo2-equivalent must comply with the requirements under the Safeguard Mechanism. There are currently 219 Safeguard Facilities. These facilities will be required to keep their emissions below a set limit known as a baseline, which is set by the Clean Energy Regulator. In general, baselines are set to decrease at a rate of 4.9% per annum until 2030, with some exceptions for approved trade exposed facilities.

Safeguard facilities that reduce their emissions to be below their baselines may be eligible to apply for Safeguard Mechanism Credit units (or SMCs). These SMCs can be sold or banked for later use. Safeguard facilities that exceed their baseline have several options to manage their excess emissions, including purchasing and surrendering ACCUS or SMCs. The reforms will likely see an increase in the demand for ACCUs (and/or SMCs) if the Safeguard facilities are unable to reduce emissions below the required baseline each year.

ACCU SUPPLY PROJECT METHODOLOGIES AND ISSUANCES

On the supply side, there are more than 1,700 carbon projects registered to date across 9 different method types, with projects located across Australia. The predominant method types are vegetation, landfill and waste, making up more than 55% of the number of projects registered, and over 85% of the ACCUs issued to date.

As at 8 March 2024, the Clean Energy Regulator had issued almost 2.9 million ACCUs since the beginning of the year, comprising of nearly 38% from human-induced regeneration (or HIR), 35% from landfill gas, 15% avoided deforestation ACCUs and 12% ACCUs from other methodologies. This year’s total issuance is significantly higher than the issuances over the first quarter of 2023, which totaled 1.8 million ACCUs.

ACCU SPOT PRICES JULY 2023 TO MARCH 2024 (YTD)

This graph shows the prices for human induced regeneration ACCUs, generic ACCUs and generic (No Avoided Deforestation or AD) ACCUs, being three of the most liquid ACCU pricing categories.

Spot prices for ACCUs have been relatively stable during the fourth quarter 2023, as you can see on the graph. With the spot prices of human induced regeneration ACCUs (HIR) trading between $33 and $36, generic and generic (No AD) trading between $29 and $33.

However, we saw the prices rise gradually over the course of December 2023 and reach a seven-month high in the first week of January, with HIR spot prices reaching $38 and generic and generic No AD ACCUs reaching $35 in the first week of January before softening slightly over the remainder of January. The spot price remained relatively stable throughout February and throughout the first half of March of this year.