California Carbon Markets: An overview of the trading activity in California s cap and trade market

Transcription

1 California Carbon Markets: An overview of the trading activity in California s cap and trade market Prepared by: John Battaglia, VP, Evolution Markets Inc. Prepared for: UC Davis Urban Forestry Workshop June 6, Agenda i. Evolution Markets the Basics of Who We Are, What We Do ii. Market Overview a. California Carbon Product Overview Instruments Contracts /Exchanges Settlements b. Market Pricing, Liquidity and Volumes c. Price Drivers 2 1

2 Our Service Offerings Intermediation Professional OTC brokerage services for energy and environmental markets (intermediaries and regulated entities) Serving both exchange cleared and bilateral marketplaces EvoScreen electronic transaction platform EvoAuction online auction platform Advisory Transaction and compliance strategy support Investment due diligence Business opportunity assessment Market entry support Renewable energy project development advisory Monetization of environmental commodities Structured Transactions Environmental asset origination and sales Energy supply sourcing and off take agreement structuring and sales Power Purchase Agreement (PPA) negotiation Carbon credit project origination Carbon finance investments Logistics and physical delivery transactions Market Data/Analytics evo.id online market data and risk management resources evo.db energy and environmental markets price database Energy and environmental market analysis Customized assessments and transaction support 3 Our Markets Energy Financial and physical coal Renewable energy, including US REC markets and renewable PPA structuring/negotiation Federal and state energy efficiency credit markets Emissions Global carbon compliance markets, including carbon offset project origination US federal and state NOx and SOx allowance markets, including ERCs and RECLAIM Clean Fuels Global biomass and biofuel markets Nuclear fuel supply, risk management and hedging Physical natural gas Water US water rights and wetlands banking markets; Ecosystem services Weather Weather derivatives, risk management and hedging products Natural catastrophe securities EMISSIONS CARBON RENEWABLE ENERGY COAL NATURAL GAS BIOMASS ENVIRONMENT ENERGY FINANCE STRUCTURED PRODUCTS CARBON FINANCE WEATHER ENERGY EFFICIENCY WATER NUCLEAR FUELS BIOFUELS 4 2

3 Evolution Markets Leadership Since Evolution Markets was founded in 2000, we have received more than 125 awards for excellence in brokerage. Below you will find a sample of our most recent awards from For the full list our awards, please visit Annual Customer Survey Annual Commodity Rankings 2011 Best Broker, Options (EUAs, CERs) Best Broker, Spot & Futures (EUAs, CERs) Best Primary Originator Kyoto Project Credits Best Broker, Secondary Market Kyoto Project Credits Best Broker, North American Markets (California) Best Broker, North American Markets (RGGI) Best Broker, Renewable Energy Certificates, North America 2011 Best Broker, U.S. Coal Best Broker, European Biofuels Best Broker, US Biofuels Best Broker, International Biomass Best Broker, US Renewable Energy Certificates Best Broker, US Weather Derivatives Best Broker, European Weather Derivatives Best Broker, European Union ETS Allowances (EUAs) Best Broker EUA Options Best Broker, SO 2 Best Broker, NOx (Reclaim) Best Broker, NOx Best Broker, NOx (Houston/Galveston) Best Broker ERCs Best Broker, Weather Risk Management, North America Best Broker, Weather Risk Management, Europe Best Broker, CERs Secondary (CDM) Best Broker, Voluntary Carbon Emissions Reductions (US) Best Broker, US SO2 & NOx House of the Year: U.S. Coal (2010) Specialist Broker of the Year (2008) House of the Year: European Emissions (2007) Annual Awards House of the Year: Weather / Emissions (2004) Best Broker, Weather Risk Management, Asia category runner up 5 The Four Buckets of CA Carbon Products Active Participants Commodity Traders Hedge funds Banks Power generators Industrials Offset Project Developers California Carbon Allowances (CCAs) Exchange cleared & OTC bilateral forward/futures/option contracts California Carbon Offsets (CCOs) Physical delivery of CARB issued offsets meeting AB 32 compliance requirements. Can be program contingent Early Action Credits AB 32 eligible CRTs convertible into compliance offsets (CCOs) subject to a desk review by a CARB accredited verifier Potential Early Action Credits ARB is expected to approve additional protocols from Offset Standard Bodies such as the Climate Action Reserve, American Carbon Registry and potentially others 6 3

4 Benchmark California Carbon Allowance (CCA) December 2013 V13 ICE cleared CCA $25.00 $24.00 $23.00 $22.00 $21.00 $20.00 $19.00 $18.00 $17.00 $16.00 $15.00 $14.00 $13.00 $12.00 Final C&T regulation adopted LCFS lawsuit announced PG&E GHG RFO release PUC LTTP vote 300, , , , , , , , ,000 75,000 50,000 25,000 Monthly Traded Volumes September ,000 October ,000 November ,000 December ,000 January ,000 February ,000 March ,000 April ,000 May , Aug 5 Sep 12 Sep 19 Sep 26 Sep 3 Oct 10 Oct 17 Oct 24 Oct 31 Oct 7 Nov 14 Nov 21 Nov 28 Nov 5 Dec 12 Dec 19 Dec 26 Dec 2 Jan 9 Jan 16 Jan 23 Jan 30 Jan 6 Feb 13 Feb 20 Feb 27 Feb 5 Mar 12 Mar 19 Mar 26 Mar 2 Apr 9 Apr 16 Apr 23 Apr 30 Apr 7 May 14 May 21 May 28 May Source: Intercontinental Exchange Volume Daily Price Settlement High: $24.25 on 9/7/2011 Low: $13.00 on 1/25/201 Total Volume Traded as of May 31 st : 4,845 contracts (represents 4,845,000 tco2e) Average Daily Settlement $16.10 per contract 7 Offset Market Context Perspective The California offset compliance market is still emerging. All offsets are traded over the counter (OTC) and under bilateral contracts with customized terms. Because the market infrastructure, i.e. registries, verifiers, aren t yet available, buyers/sellers are agreeing to perform based on expected infrastructure. Evolution offers services structuring early compliance offset deals based on the regulations (and anticipated market infrastructure and risks). We help assess the risks/rewards of these various opportunities. Invalidation Risk Defined When a regulated entity in California s cap and trade program surrenders a compliance offset that is later invalidated by the regulator due to fraud or malfeasance during the creation of the credit. In this case, the entity is re introduced a compliance obligation by the regulator for the invalidated offsets. The seller or the buyer must represent and warrant in the bilateral contract who is responsible for replacing invalidated offsets. significant reason why offsets are discounted to allowances today (and likely into the future) 8 4

5 Early Action Credits All approved CRTs (US ODS, Livestock Methane, Forestry, Urban Forestry) are called Early Action Credits and must be converted into compliance grade offsets called California Carbon Offsets (CCOs). Conversion Risk: risk CRTs are rejected at conversion. The process includes the following: 1. Desk review by an ARB accredited verification body 2. If positive review, CRTs are retired and an equal amount of compliance offsets issued into the compliance registry 3. If negative review, full verification is required which could yield a different volume Estimated Add On Costs: desk review: $2,500 $5,000?; regulatory verification: $10,000 $15,000 per verification? Conversion Mechanics Still unclear whether CRT Holders (the Buyer) can convert without the assistance of the developer ARB accredited verifiers available: June July 2012 Registries accredited and approved: July August 2012 Market tracking system available: September California Carbon Offset (CCO) Product: Guaranteed ARB issued Compliance Offset. Traded under ISDA or standard PSA. Settlement: Forward contract resulting in physical delivery of instruments. Delivery: Guaranteed (or Unit Contingent), from Seller's to Buyer's Holding Account on the ARB registry. Pricing: Fixed (or Floating against an Index). Payment: Due upon delivery. Invalidation: Seller/Buyer wear invalidation risk. If Seller ( Golden CCO), they must replace any invalidated compliance offsets. Program Contingent : Seller sells and Buyer buys only if specific program In Force language is met at the time of delivery. This could be negotiated to be the California Market Tracking System (MTS) must be up and running at the time of delivery. If the In Force Conditions Precedent are not met, the parties agree to void, or tear up, the trade. Negotiable Evolution Markets Inc. Proprietary& Confidential 10 5

6 Summary Note: all prices are indicative based on current market/regulatory conditions and are subject to change. December 2013 California Carbon Allowance (CCA) $15.50 December 2013 California Carbon Offset (CCO), Buyer wears invalidation risk $13.60 $11.00 $7.00 December 2013 California Carbon Offset (CCO), Seller wears invalidation risk US ODS CRT, issued, Buyer wears invalidation risk Evolution Markets Inc. Proprietary & Confidential 11 Key California Carbon Price Drivers Macro economic (Fundamentals) Electrical load growth ( % compound annual growth rate, forecasted to be 1.4% driven by population) Economic output growth in California s industrial sectors Power (Fundamentals/Accounting) Hydro season Performance of existing and new Renewable Energy contracts / RES target achievement Outcome of discussion on how imported power will be accounted for under AB 32 (assetcontrolling suppliers, resource shuffling, etc.) Transportation (Fundamentals) Added to cap in 2015; allocations for the sector unclear and several complimentary policies will impact emissions growth in the sector (i.e. clean car standards, LCFS) Auctions (Market Behavior) How market participants bid (or consign) into the auctions 12 6

7 Key California Carbon Price Drivers (Cont d) Short Offset Supply (Fundamentals) Only 4 project types approved by CARB to date (ODS, Livestock, Urban Forestry, Forestry) Estimated 6M tons available to date, anticipated average annual requirement will be 24M Adequate offset credit will help contain costs significantly in CPII and III when the system is expected to be short Linkage with other Programs (Regulatory) If California links with other WCI members, i.e. Quebec California specific Elements (Fundamentals) Already high energy efficiency standards Limited fuel switching High reserve price on allowances ($10/tonne to start, rising 5% per annum) Primary near term Drivers (Regulatory/Legal) Legal challenges (interstate commerce, auction revenue, offsets) Confidence in the first auction taking place in November 13 Contact Information John P. Battaglia Vice President Evolution Markets Inc. 101 California St., Suite 2750 San Francisco, CA tel mob jbattaglia@evomarkets.com website