Carbon Markets Update. Kedin Kilgore TFS Energy LLC

Transcription

1 Carbon Markets Update Kedin Kilgore TFS Energy LLC

2 Global Carbon Market Roundup Globally, and in North America, the Carbon Market(s) Are a mess Any questions?

3 Carbon Market Update Introduction to TFS Energy Carbon Markets new rules and price supports EU Emissions Trading System RGGI Canada California AB 32 Markets Carbon, LCFS, RPS Proposed rule changes Current market Structures and products Conclusion

4 TFS Energy Introduction Who We Are and What We Do Subsidiary of Tradition ( Over 2,500 global employees Operations in 18 countries 200 energy experts - 10 energy offices worldwide Environmental products focused in New York and London 12 years in environmental markets / 10 years in greenhouse gas Environmental team is diverse group of experience financial market professionals, lawyers and accountants with a combined 50 years of experience Specialize in introductory services in all energy and environmental commodities

5 TFS Energy Introduction Industry leading Carbon and Emissions Offsets team Unrivaled knowledge of opportunities and risk based on our experience in the world s largest GHG market since its inception Strong understanding of pricing relationships between allowances, primary and secondary market offsets Long term relationships with project developers, financial institutions and multi-national industrial concerns investing in the domestic and international carbon markets. Strong cross asset customer base in the energy and emissions markets including domestic utilities, merchant energy producers, refiners and industrials from other US environmental markets that will be affected by AB32

6 TFS Energy Introduction Recognized by industry-leading publications as best in class Environmental Finance Best Broker North American Carbon Markets Best Broker Northeastern Carbon Markets Point Carbon Best Broker Environmental Finance 2010 Deal of the Year Mexico City CFL swap with CERs going to Dutch Utility Energy Risk 2009 Best Broker; US Carbon Numerous other awards from both Environmental Finance and Energy Risk for other US based environmental markets including RECs, NOx, SO2, RTCs and ERCs

7 Global & Regional Carbon Markets The common theme in carbon markets this year is Change Support carbon price to achieve control targets and establish defense against climate change Europe regulators tightening the cap (compliance supply) In RGGI, likewise, member states are working to lower the cap and expand covered sources In Canada, Alberta is responding to pressure to address oil sands emissions emissions And, In California, this week, the California Air Resources Board proposed changes to the cap and trade program Comment Period Opens on July 18, 2013 at 5pm and closes August 2, 2013 at 10pm

8 EU ETS EU ETS Operates in the 28 EU countries and the three EEA-EFTA states (Iceland, Liechtenstein and Norway) Covers 45% of the EU s Greenhouse gas emissions Limits emissions from 11,000 energy intensive and power generation companies Caps airline emissions on all flights to, from and within the EU System expanding shipping emissions to be regulated ETS Rescue Plan Significant compliance overhang heading into Phase II EU Approved a 900 million ton back loading plan Plan is response to sustained pressure on prices Europe wants a strong carbon price to incent investment

9 European Price Collapse Source: PointCarbon

10 Regional Greenhouse Gas Initiative RGGI Program Review First compliance period ended in 2011 Covers 25 MW or greater power plants in CT, DE, MD, ME, NJ, NY RI, and VT Initial 165 million short ton cap declining by 2.5%/yr through 2018 Mandatory Comprehensive Program Review Cap is lower in cp2, but with banking provisions system has too many allowances RGGI excess compliance overhang roughly equal to the cp2 carbon budget Updated Model Rule Cap to declines by 2.5% each year from a 91 million short ton revised compliance budget (cap) Banked allowances will be adjusted by the member states Establish a Cost Containment Reserve Working to address leakage and expand covered sources

11 RGGI Price Support Source: PointCarbon

12 Canada Alberta Alberta is increasing the of the provincial GHG abatement target (12% to 20%?) Likely increase in the compliance price cap perhaps from $15 to + $25 (by 2020) Pressure to offset oil sands emissions Support Keystone approval by the Obama administration And to avoid a federal regulation that targets oil sands Abatement demand driver constrain access to the tech fund which means companies would have to buy offsets and/or abate as opposed to simply writing a modest check to the regulator once a year

13 California California Cap and Trade Rule Proposed Changes Select Rule Changes released July 15, 2012 Resource Shuffling Elimination of REC retirement for direct delivery Legacy Contracts Covered Entities & Corporate Association Auctions and Allocations CHP & Biofuel exceptions & MSW emissions Transaction reporting requirements & contract types Facility closure and opt-out/opt-in provisions

14 Resource Shuffling Codifies November Resource Shuffling Provisions Replaces annual attestation with 13 Safe Harbor Specifies that two kinds of delivery substitutions which are prohibited and defined as Resource Shuffling Removes previous definition of RS Resource Shuffling means any plan, scheme, or artifice to receive credit based on emissions reductions that have not occurred, involving the delivery of electricity to the California grid undertaken by a First Deliverer. Specifies that RS does not include substitution of electricity deliveries from lower emissions sources with higher emissions sources.when substitution occurs pursuant to the [13] conditions listed.. Codifies VRE and RPS provisions Sources after 12/31/2012 for RPS Adjustments Must be used and retired within one-year for VRE

15 RS 13 Permitted Provisions Codifies language for substitutions that do NOT constitute Resource Shuffling 1. RPS driven qualified Renewables procurement 2. Compliance with State and Local Emission Performance Standards (CEC & PUC) 3. Compliance with NERC Grid Reliability Standards including between balancing authorities or LSE grid response 4. Deliveries made in response to judicial settlements (except to meet GHG requirements) 5. Substitutions for power previously supplied by a Specified Source now retired 6. Substitutions for closings, divestiture for reasons other than GHG compliance 7. Substitutions resulting from early termination of contract, subject to EPS rules 8. Deliveries necessitated by contract expirations 9. Short term contracts of no more that 12 months Spec/Unspecified sources 10. CAISO day-ahead/real time market settlements resulting from Economic Bid or CAISO cleared self scheduling 11. Operational emergencies or to obtain transmission rights 12. Deliveries necessitated under must-take or must-run provisions 13. Deliveries to make up transmission losses

16 RS 2 Prohibited Actions Substitutions that DO constitute Resource Shuffling Prohibited substitutions of electricity deliveries from a higher emission resource with electricity deliveries from a lower emission resource include: 1.Substituting relatively lower emission electricity to replace electricity generated at a high emission power plant procured by a First Deliverer under a long-term contract or ownership arrangement, when the power plant does not meet California s EPS, and the substitution is made to reduce a First Deliverer s compliance obligation. 2.Assigning a long-term contract for high emission electricity specified in section 95852(b)(2)(B)(1) directly above to a third party, for the purpose of reducing a compliance obligation.

17 Legacy Contracts Attempts to provide relief for 19 generators currently claiming that contract conditions do not provide reasonable means to recover GHG costs CARB officially encouraging contract counterparties find commercial solutions, however At the request of the CPUC where buyer is an industrial, allocation will be reassigned under a true up calculation District Energy exemptions if total of each facility. 25kt/CO2e

18 Disclosures & Reporting Expanded reporting and disclosure requirements Corporation Associations no longer limited to just covered affiliates, but all corporate ties Entity may change account consolidation only once each cp Extensive new requirements for contract type, counterparty, settlements for OTC transactions 3 OTC transaction types disclosed as part of transfer request T+3/4 or cleared OTC trades of any contract type Must provide transaction type, date of trade and settlement, price and other financial terms, price + margin if any Zero price transfers under specific conditions between affiliated entities Disallows beneficial holdings transfer of title required Expanded advisor and consultant reporting Covered facility change of ownership/control

19 Auction & Allocation Changes Changes to sector allocation methodologies and rules Allocations now occur on October 15 Nat. Gas suppliers allocation for protection of rate payers Phased auction consignment 25% to 2015 and 50% by 2020 Legacy contract generators transition assistance allocation Universities to receive free allocations Shutdowns and exemptions allowance (if allocated) returned Auction provisions Language that could increase prompt vintage auction frequency Unsold forward vintages to be returned to prompt auction in their respective vintage year 30 day advance notice of auction participation + 75 day consignment

20 Offset Provisions Offset program revisions Two new offset methodologies written in Coal Mine Methane (CMM) Rice cultivation fugitive emissions reduction ODS statute of limitation provisions & forestry buffer replacement procedures United States, United States Territories, Canada or Mexico Auction provisions Language that could increase prompt vintage auction frequency Unsold forward vintages to be returned to prompt auction in their respective vintage year

21 California Carbon Allowances Market range bound Market remains thin and relatively illiquid Range on daily volume 350,000 to 500,00 tons May saw 13 mm t traded across 600 trades (ICE OTC + Screen) Open interest including options ca. 23 million t as of May Spread and option trade flow increasing, but still small Rule changes may help Source: PointCarbon and ICE

22 Allowance/Offset Price Relationships Current pricing relationship between CCAs/CCOs/CARB approved offsets: $14.40/$11.50/$7.50 Puts CCOs at about 75% of allowance price and CARB approved offsets at 65% of allowance price From a relative value perspective CARB approved offsets are cheap, but they are the only product trading spot In the EU-ETS fully guaranteed SCERs ultimately delivered as highs as 90-95% of the allowance price PCERs generally traded 80% of the allowance price depending on project type, credit worthiness of seller and delivery guarantees (%Firm vs %UC)

23 Allowance/Offset Swaps All sources should use their maximum allowable offsets Easiest way to accomplish this is either through $ based or volume based allowance/offset swaps Give 100k allowances and receive ca.125k offsets Utilities sometimes prefer the volume model because it doesn't t generate a cash flow and may not be viewed as revenue. Compliance hedge for C&I, unrestricted allocation entities Good offset price optimization for merchants and qualified project companies

24 Primary Offset Market Transactions Frustrated by invalidation risk and regulatory insistence that regulated entities buy only market guaranteed products Project Developers often look for structures that let them lock in cost + slight profit and lets them participate in upside if the market rallies Producer hedges difficult to execute. Some indexed products being structured e.g. $4 to $5 guaranteed floor or % of index (but based on what?) on delivery CCO/CCA blended sales for rated entities Generally a structure used for multi-year forward streams Shaped pricing for each year of a forward strip floor or % of index is generally applied to each delivery

25 Thank You Environmental Markets Office: