November 23, 2016 by Harry Horner
Summary: The ninth WCI joint auction held on November 15, 2016 was slightly undersubscribed for the current auction with a bid-to-cover ratio of 0.88, the advance auction saw a subscription of 0.10. Consequently, both auctions sold at the auction reserve price of $12.73. A total of 72 entities qualified to bid from both jurisdictions. This result was in well within the central band of market expectations. Notably, at 76,690,000, this auction recorded the highest current vintage volume cleared in the history of the WCI.
No. of Qualified bidders: 72
(61.9% of the total covered emission for California and Quebec represented*)
California Qualified Bidders: 54 (43.3%)
Quebec Qualified Bidders: 18 (19.4%)
Revenue: Total – USD 992,685,400;
State (USD 480,241,771); Utility consignment (USD 512,443,629)
A current vintage subscription of 0.88 was very much in-line with market expectations, consequently there was no dramatic response by the secondary market for CCAs to the auction results. Directly after the results being published, the front price dropped $0.03 to hover in the $12.82 region; more than 500,000 of volume was traded in the immediate aftermath. In all, a marginally neutral-positive result was met with a neutral response on the market.
This auction can, and arguably should, be framed not in bid-to-cover ratios, but instead in volume cleared. On this metric, the current auction set an all-time record for the WCI at 76,960,000. This extra volume is derived from the carried-over unsold consignment allowances, these swelled the consigned offering to almost double its ‘normal’ size. In one sense at least, for the market to digest such a large sum of allowances is display of strength.
The incoming batch of auctioned allowances has served to increase the market’s cumulative, quarterly-adjusted surplus. This stood at just over 60 million before the auction, but is now sized at 78.4 million. For perspective, this is down from its peak at the beginning of 2016 of more than 127 million.
Whether we see heavy volume traded in the coming fortnight will depend on how many compliance entities choose to keep the fresh CCA’s on their books, and how many roll them back to the market to carry until next year’s end. At least with such a large incoming volume, there is a chance of heavy activity – unlike the previous two auction occasions where only far fewer allowances entered the system.
Several brokers alluded to the recent timing of the oral arguments for the crucial ARB vs CCC auction case on Jan. 24, 2017, and how this overhanging uncertainty is leading compliance entities “to do the bare minimum purchasing for compliance”. Indeed, February’s auctions, three weeks after the oral arguments, will be heavily overshadowed by the prospect of an initial verdict, despite the expected consequent path up to the State’s Supreme Court.
Finally, one anomalous metric this time around was the percentage of future vintage allowances purchased by compliance entities, at just 60.8% this is well beneath the norm of 95% or above. Obviously the total volumes are small, but this demonstrates that some market participants are willing make more long-term investments in the WCI carbon market.
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