December 3, 2014 by Rahul Rana
CaliforniaCarbon.info, December 4, 2014: The 23,070,987 current vintage allowances offered at the first-ever California-Quebec joint auction, held on 25 November, have cleared at $12.10. This is a match with the 2015 floor price, which marks a increase of $0.76 over this year’s $11.34. The auction was oversubscribed, with a bid ratio of 1.73.
The 10,787,000 V2017s offered thorough the advance auction also sold out, doing so at $11.86 with a bid ratio of 1.92. This is a nearly threefold increase over August’s 0.70, and the highest ever witnessed in the program’s history (previously 1.69, August 2013). All round, the performance of the advance auction overturned the form book.
The auction saw 83 entities qualify to bid. However, there were some conspicuous absences from the list of qualified bidders. These included the likes of Chevron, CE2 Capital, Citigroup Energy, and NextEra Energy, who have participated in most if not all of the first eight auctions. They missed out on the highest clearing current and advance auction prices of 2014.
Impact of the CP2 entrants?
There were 16 qualified bidders (representing 20 facilities) with emissions covered under the fuels or CO2 sectors. Their facilities were responsible in 2013 for 92,467,305 MMtCO2e under the CP2 entrant sectors, accounting for 45.3% of these sectors’ 204,191,280 MMtCO2e for that year.
10 of these 16 qualified bidders already have emissions covered in CP1. Aera Energy is the only entity for whom CP1 emissions greatly outnumber (by a factor of 10, or 10 million tons absolute) those for CP2. Pacific Gas & Electric (PG&E), Southern California Gas, Vitol Inc., and Phillips 66’s CP2 emissions greatly outnumber those in CP1, by the same definition as above.
Chevron, which did not qualify to bid at this auction, emitted 32,375,880 MMtCO2e as suppliers of fuels and CO2, which is 15.9% of the total emissions from fuels and CO2. Chevron also has 9,669,564 MMtCO2e of emissions covered under CP1.
Bullish or bearish impact?
It is widely believed that the rising floor price has already been factored in by the market. The sustained upward movement of prices in the last few months has been a main driver of liquidity in the secondary trades, and the last price reported on the InterContinental Exchange (ICE) for the V2014 Dec 14 contract is $12.20. Traders speaking to CaliforniaCarbon.info expressed confidence that the inclusion of transport fuels in the program would continue to underpin demand for allowances.
The advance auction cleared with the highest-ever bid ratio and clearing price. This reflects healthy interest in hedging forwards across the market in general. Given that 43% of the combined advance auction offerings for May and August went unbought, this auction may have represented the last opportunity for participants to get out of short positions on the V2017 over the next two years. Even at $11.86, it is likely that larger entities would be able to carry the allowances forwards at capital costs that represent savings over buying spot in 2017. CaliforniaCarbon.info’s econometric forecast model suggests that the average price for the current vintage in 2017 would be near $14 in the primary market.
As the market size more than doubles next year with the inclusion of two new sectors, the number of allowances offered at the current auctions will also be increased (297,102,336 in current auctions, across 2015). If current auctions continue to clear, this could add some length to an already long market. If so, there could be somewhat bearish market impact next February with prices once again approaching the floor, although a few traders have suggested they expect prices to remain more or less flat. The clearing of the advance auction may also cause the early auctions in 2015 to be undersubscribed, if parties cannot dispose of spot risk in the secondary market, or if this simply reflects participants buying allowances ‘early’ before the floor rises.
Secondary market reaction
In the very near term, not much of a price reaction is expected in the secondary market, with both vintages clearing just under their current secondary prices. The V2014 Dec 14 contract yesterday closed at $12.20, $0.10 above the auction clearing; the V2017 Dec 14 closed at $12.05, $0.19 above the auction clearing. Throughout 2014, spot prices have settled in the region of $0.20 above the auction clearing, whereas last year this difference tended to be slightly larger.
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