Chicago exchange to list REC futures
New York,16 April: Market participants embraced the Chicago Climate Futures Exchange (CCFE) decision to list renewable energy certificate (REC) futures, but there are questions about the potential liquidity of the contracts.

On 17 April, CCFE will launch REC contracts representing 100MWh to meet renewable portfolio standards (RPS) in Connecticut, Massachusetts and New Jersey and a 1,000MWh voluntary REC contract to meet Green-e Energy national standards for renewable electricity products, pending certification from the Commodity Futures Trading Commission.

RECs represent the environmental benefit of renewable energy and can be sold, separetely from the power, to utilities with RPS compliance targets or organisations wishing to 'green' their electricity usage.

Connecticut and Massachusetts contracts will be listed on a January, April, July and October cycle through 2009 and the next five years, while New Jersey futures will operate on a monthly contract for the same time period. The voluntary contracts will be listed on a quarterly basis on a March, June, September and December cycle during that timeframe.

“We’re definitely looking forward to trading them,” said Jay McCall, vice president, origination and trading for San Francisco-based 3Degrees, which provides Green-e Energy RECs and third-party verified carbon offsets to businesses and individuals.

Compared with the over-the-counter market, the new contracts could lower transaction costs, generate transactional efficiency and enable short-term buyers with compliance obligations to hedge more efficiently than they would with smaller, less efficient counterparties, said Kedin Kilgore, a New York-based principal of Co2Capital Partners, which manages environmental and energy commodities and assets in market-based programmes.

“I think that the regional REC markets have been extremely inefficient and have been very hard for projects to secure long-term sales of their renewable energy credits,” Kilgore said. “A futures market has the potential to provide long-term certainty for renewable energy projects on REC pricing that they have not had to date.”

But the problem with REC trading markets is that there are numerous states with different RPS standards as well as the voluntary REC markets, said Peter Fusaro, a carbon market expert at Global Change Associates in New York.  CCFE’s decision to list four contracts “is not a game changer”, he said. “The bigger question is whether these new contracts will attract liquidity or will that trading continue to remain in the more opaque over-the-counter bilateral markets.”

The selection of these particular states may help from a liquidity perspective as the New England markets have historically been the most liquid and have sufficient compliance obligations to make trading the contracts worthwhile, market participants said. And pricing in New Jersey is strong, with solar RECs currently trading at $675 on the Flett Exchange, an Internet-based trading platform.

CCFE's listings notably excluded Texas, which has a liquid REC market although pricing is fairly low, McCall said. But fundamentals in the Texas market could drive the CCFE’s voluntary contract because of links between the state and voluntary markets.

CCFE’s voluntary contract could clear the path for an efficient REC market ahead of a national RPS, market participants said. “I think that is just on the horizon," McCall said.

The exchange will probably offer standardised options contracts for RECs at some point, which would help market participants because customisation creates a “structural nightmare” for OTC bilateral contracts, McCall said. “I certainly hope that’s hot on the heels.”

The CCFE already lists futures and options contracts for four types of carbon credits: Regional Greenhouse Gas Initiative allowances; Carbon Financial Instruments, the credits traded by CCFE’s sister exchange, the Chicago Climate Exchange; and certified emission reductions, issued by the UN’s Clean Development Mechanism (futures only). In February, CCFE began listing futures contracts for carbon offsets registered under the US Climate Action Reserve.