17 December 2015

Volatility and big volumes in green certificates markets

While some US Renewable Energy Certificate (REC) markets traded at record highs this year, low prices persist in Europe, reports Hamza Ali

It's been another year of volatility in the North American RECs markets, with some large moves in prices and big volumes traded.

"I think the interesting thing about the North American RECs markets this year has been the relative volatility and how dramatically different markets have moved," said Scott Eidson, head of origination at 3Degrees, which took the title of Best Trading Company for North American RECs for first time, beating last year's winner Vitol into second place.

A striking example is the PJM Interconnection market, which covers 13 states in the north and eastern US along with the District of Columbia. Over the past 18 months RECs in this region have rallied from around $2 to $21 then fallen back to $12 and are now back up to $17.

One of the reasons for the volatility is changes some states have made to their Renewable Portfolio Standards (RPSs) that require electricity suppliers to source a certain percentage of their electricity from renewables.

RECs, which are essentially proof that a megawatt of renewable energy has been delivered to the grid, go up in price when an RPS target is raised, unless renewables capacity increase in tandem.

The volatility may not be over, as there is continuing upward pressure on prices, according to 3Degrees' Eidson.

"The PJM market is going to be interesting to watch over the next few years. RPS targets are growing quickly and definitely faster than supply is growing in the region," he says. "PJM seems poised to go short in a couple of years, but there are some very big levers that natural players could pull to dampen that. There are not only a large number of banked RECs that could be reintroduced into the market, but also potential RPS changes driven by the Clean Power Plan (CPP) or state legislatures that could be pushed forward."

In the US there are 29 states with formal RPSs, as well as a national voluntary Green-e RECs market for companies looking to boost their green credentials by proving they purchased their electricity from renewable sources.

"REC prices in the compliance markets have been trending up and so has the trading volume," says Izzet Bensusan, CEO of Karbone, which was voted Best Advisory/Consultancy for North American RECs for the third consecutive year.

"In our books we have seen much more RECs traded then in previous years, it may be a function of us gaining more market share or more people participating in the market contributing to its growing size," says Bensusan. 

Izzet Bensusan

Despite steady growth in deal volumes, prices have fluctuated between markets and products.

"In New Jersey, solar RECs (SRECs) are trading at $200-plus because they just aren't building new solar plants to meet the demand, and in Massachusetts its Class I SRECs are trading at ten times the value of the energy it represents," says Andy Ertel, CEO of Evolution Markets, which retained the title of Best Broker for North American RECs.

"SRECs have had a particularly strong year in both Massachusetts and New Jersey, which are the main SRECs markets," says Bensusan. "SREC Class I in Massachusetts did especially well, trading around the $470 to $480 range when, and if, you can find those credits."

This year also saw the US Environmental Protection Agency finalise its CPP, which aims to reduce carbon emissions from the US power sector to 30% below 2005 levels by 2030. But the potential effects of the plan have not yet impacted prices, RECs specialists say.

"We haven't seen any movement yet except some optimism on the part of the sellers. I think that's because the states have not yet submitted their CPP implementation plans and there is still a lot of uncertainty about what the impact will be," says Eidson.

However, he points to the possibility of major shifts in the market caused by California raising its RPS to 50% for 2030 from 33% for 2020, as part of its plan to decarbonise its energy sector.

"The change in California to a 50% RPS will have a major impact on the state's utilities and on generators that can easily deliver to power into California," says Eidson.

Apart from these major changes, 2016 may see the phasing out of Investment Tax Credits (ITC) and Production Tax Credits (PTC). These tax breaks for renewable energy allow some developers and investors to redeem up to 30% of the value of the project. The ending of the tax relief is expected to temper the amount of new projects developed and will come into effect by the end of next year.  

"Solar projects are very much dependent on investment tax credits, so the tax credit being removed at the end of 2016 will have a huge impact and development will take a big hit," says Bensusan. 

Suvi Viljaranta

However, some market players point to the high price of SRECs as being one factor that could drive demand for new renewables projects.

"The potential sun-setting of the PTC and ITC may temper the build rate in the short term, but when you have prices in the SREC markets that are between $200 and $500, that's enough to incentivise new build, at least until the market becomes adequately supplied," says Eidson.

On the other hand, the price of Guarantees of Origin (GOs) certificates, the EU equivalent of RECs, has remained relatively stable, but stubbornly low.

"I think we remain at quite low prices because, with Nordic hydro, which is the main source of GOs, there remains quite a lot supply compared to overall demand," says Suvi Viljaranta a portfolio manager at Enegia, which was voted Best Broker, European RECs, having acquired the GO activities of GreenStream, last year's winner, in January.

"However, it is quite likely that total cancellation volumes will increase again this year which will mean that demand is also higher, keeping prices largely stable and supporting the market," says Viljaranta. Cancellation happens when companies submit GOs each year to prove compliance. 

"Recently we have seen a lot of new countries join the European certificate market, which means there are a lot of new products available" Suvi Viljaranta, Enegia

The EU market is also expanding, with new products and entrants expected to help increase trading.

"Recently we have seen a lot of new countries join the European certificate market, which means there are a lot of new products available," says Viljaranta.

Since 2013, the Czech Republic, Estonia, Ireland, Croatia and Cyprus have joined the European GO market, though these countries are not yet able to engage in international certificate trading. The market is also expected to expand further.

"Spain is expected to join the European GO market in 2016 and potentially Greece too. UK and Serbia are official observers to the Association of Issuing Bodies (AIB) and may join the market later. Discussions with other countries are also ongoing," says Viljaranta

Several countries have also made changes to national legislation while implementing the RES-Directive, similar to the US RPS.

"One interesting example is Austria where they decided that, from disclosure year 2014 onwards, all electricity delivered to final customers needs to be declared with GOs – so-called 'full disclosure'," says Viljaranta. 

Martijn Wilder

Despite the new entrants, the market dynamics currently remain the same with Germany retaining 25% of total volume traded.

"Germany is still a large importer of GOs, one reason being the fact that they do not issue GOs for renewable energy projects that receive the feed-in-tariffs (FiT), which effects the market balance," explained Viljaranta. "If Germany decided to issue GOs for projects with FiTs then this situation could change a lot."

Meanwhile, in Australia the government, after three years of negotiations, set a new Renewable Energy Target (RET).

"We had a long period of uncertainty in the REC market given the government's decision to reduce the renewable energy target," says Martijn Wilder – head of the global environmental markets practice at Baker & McKenzie. "The government ultimately reached an agreement with other political parties to reduce the renewable energy target slightly, but this still requires a substantial amount of new renewable power be built by 2020. The consequence of this is that the REC market has stabilised and the price has recovered, so there is still an ongoing market for RECs in Australia."

For all the results from Environmental Finance's Annual Market Rankings, see Ready for take-off