CA-QC Linked Carbon Market: Overview of instruments, trading and strategies for compliance

Transcription

1 CA-QC Linked Carbon Market: Overview of instruments, trading and strategies for compliance Prepared by: John Battaglia Director, Carbon Americas Group Prepared for: International Emission Trading Association Business Cap and Trade Dialogue Toronto July

2 Business Overview Company Overview NFA-registered Introducing Broker (IB) providing professional voice brokerage for wholesale energy and environmental markets Founded in 2000 by current management team Leader in the global energy and environmental commodities sector Privately held ~80 employees in New York, San Francisco, Houston, London, and Singapore Award-winning, client-focused services Extensive Counterparty Network Fortune Global 500 Firms Banks Hedge Funds Utilities & Power Generators Industrials Project Developers Private Investors Market Pioneer Largest dedicated environment and energy markets brokerage Advised market design of carbon programs in EU, California, and Northeast US Facilitated first trades in EU-ETS, California, RGGI, and RECs in NEPOOL, Texas, & PJM Evolution principals launched weather derivatives market Forefront of US coal and nuclear fuels markets Services Trade execution for energy and environmental commodity markets Structured environmental products GHG compliance strategy services Environmental asset origination, including carbon, emission credits, renewable energy & fuels Advisory on renewable power purchase agreements Market analytics and data 2

3 Our Markets Clean Power Global renewable power markets; US renewable energy certificates (RECs) Green power purchase agreement structuring and negotiation Green energy policy analysis Environmental Attributes Global/regional carbon allowance and offset markets Fuel-derived markets, i.e. Low Carbon Fuel Standard (LCFS) and RINs US Federal and State emissions markets ENVIRONMENT EMISSIONS WEATHER CARBON ENERGY EFFICIENCY RENEWABLE ENERGY WATER ENERGY Clean Fuels Global biomass and biofuel markets Nuclear fuel supply, risk management and hedging Physical natural gas Power/Natural Gas Integrated brokerage service for US power markets (PJM, MidCon, NEPOOL, Texas) and US natural gas markets Energy Derivatives Global energy swaps and options coverage, including crude, natural gas, coal, and power COAL NUCLEAR FUELS POWER BIOFUELS NATURAL GAS OIL BIOMASS FINANCE STRUCTURED TRANSACTIONS CARBON FINANCE 3

4 Traded Carbon Products California Carbon Allowances (CCAs) Primary: auctions/direct allocations. Secondary: exchange-cleared (ICE) futures/options & OTC* bilateral spot and forwards. Vintages: Quebec Compliance Instruments Quebec Carbon Allowances (QCAs) or offsets. Primary: auctions/direct allocations. Secondary: QCAs via ICE CCA* & OTC bilateral spot and forwards. Vintages California* Carbon Offsets (CCOs) Primary: project-specific, i.e. ODS CCO(3). Secondary: non-project specific. Dec 15 or forward, spot/issued. CCOs trade with or without invalidation risk Carbon Compliance Instruments (CCIs) Bundled allowance and offsets product. Trades OTC via bilateral contracts. Indexed or Fixed pricing Over-the-Counter (OTC) QCAs are deliverable under the ICE futures contract Quebec offset opportunities are limited, currently 4

5 Price Spreads Note: prices are USD and indicative based on current market conditions. Date: 7/2/2015 July 15 V15 Carbon Allowance $12.65 $11.65 Spot Golden CCO Spot CCO (3) $10.35 $9.95 Spot CCO(8) Evolution Markets Inc. Proprietary & Confidential 5

6 Auction Highlights Auction Current Vintage Volume Future Vintage Volume Reserve Price (USD) Current Vintage Price Current Vintage Ratio Qualified Bidders :Supply Future Vintage Price CA Nov ,126,110 (100% sold) 39,450,000 (14% sold) $10.00 $ * $10.00 CA Feb ,924,822 (100% sold) 9,560,000 (46% sold) $10.71 $ $10.71 CA May ,522,048 (100% sold) 9,560,000 (79% sold) $10.71 $ $10.71 CA Aug ,522,048 (100% sold) 9,560,000 (100% sold) $10.71 $ $11.10 CA Nov ,614,526 (100% sold) 9,560,000 (100% sold) $10.71 $ $11.10 QC Dec ,971,676 (34% sold) 6,319,000 (27% sold) $10.75 CAD $10.75 CAD 0.34 $10.75 CAD CA Feb ,538,695 (100% sold) 9,260,000 (100% sold) $11.34 $ $11.38 QC Mar ,049,111 (99% sold) 1,527,000 (84% sold) $11.39 CAD $11.39 CAD 0.98 $11.39 CAD CA May ,947,080 (100% sold) 9,260,000 (44% sold) $11.34 $ $11.34 QC May ,049,111 (100% sold) 1,527,000 (85% sold) $11.39 CAD $11.39 CAD 1.02 $11.39 CAD CA Aug ,473,043 (100% sold) 9,260,000 (70% sold) $11.34 $ $11.34 QC Aug ,049,111 (66% sold) 1,527,000 (95% sold) $11.39 CAD $11.39 CAD 0.66 $11.39 CAD JOINT Nov ,070,987 (100%) 10,787,000 (100%) $11.34 USD $11.39 CAD JOINT Feb ,610,528 (100%) 10,431,500 (100%) $12.10 USD $15.01 CAD JOINT May ,931,627 (100%) 10,431,500 (94%) $12.10 USD $12.08 CAD $12.10 USD 1.73 $11.86 USD $12.21 USD 1.14 $12.10 USD $12.29 USD 1.16 $12.10 USD 6

7 1/3/2012 2/21/2012 4/11/2012 5/30/2012 7/18/2012 9/5/ /24/ /12/2012 1/31/2013 3/21/2013 5/9/2013 6/28/2013 8/19/ /8/ /26/2013 1/24/2014 3/14/2014 5/5/2014 6/23/2014 8/12/2014 9/30/ /18/2014 1/8/2015 2/26/2015 4/17/2015 6/5/2015 ICE V13-15 CCA, Dec Delivery $22.00 $21.00 $20.00 $19.00 $18.00 $17.00 $16.00 $15.00 $14.00 $13.00 $12.00 $11.00 $ ,000,000 1,750,000 1,500,000 1,250,000 1,000, , , ,000 - Source: Intercontinental Exchange Volume Daily Price Settlement 7

8 CCA vs. CCO Settles CCA Golden CCO CCO(3) Source: Evolution Markets, Inc. 8

9 Brokered Trades Assistance: Broker assisted trades enable participants to gain access and insight into the markets, including ideas for effective price risk management, structured finance trades and other strategies for minimizing compliance costs Full Product Coverage: ICE-cleared allowance futures, options, spreads, and bilateral offset and allowance products for California, Quebec, RGGI and other emerging carbon programs such as Ontario s Price Transparency: increased exposure to market pricing and transaction opportunities. Brokers communicate with market participants and therefore provide price discovery and liquidity in the market Competitive Trade Execution: When trading on ICE parties increase their exposure vs. trading direct with 1-2 enable parties OTC which limits price discovery. Anonymity: Brokers are used to handle larger block trades. For example, 25 contracts (25,000 MT) is typically traded electronically on the ICE. A party may enter the market and want to purchase 1,000 contracts (1 million MT). Putting a bid 1,000 contracts on the benchmark Dec 15 V15 CCA contract in a thin market will discourage sellers to sell competitively. The buyer can use an OTC voice broker to find a seller that is willing to sell their size at a competitive price. The trade is put together OTC by the broker and then given up to the parties banks for clearing. Neutral: Introductory Brokers (IBs) are market neutral. We do not take principal positions in the market and therefore, do not trade a book which could impact the price we re providing to the market. 9

10 Contact Information John P. Battaglia, ERP Director Carbon Markets, North America Evolution Markets Inc. 3 Embarcadero Center, Suite 1630 San Francisco, CA tel mob jbattaglia@evomarkets.com website 10

11 Market Leadership Since Evolution Markets was founded, we have received more than 140 awards for excellence in brokerage. Below is a sample of our most recent awards from 2014/2015. For a full list, please visit Annual Customer Survey Best Broker, U.S. Coal Annual Commodity Rankings Best Broker, Spot & Futures EU Emissions Trading Scheme Best Broker, Options EU Emissions Trading Scheme Best Broker, Secondary Market Kyoto Project Credits Best Broker, Spot & Futures North American Markets * Annual Awards House of the Year: U.S. Coal (2010) Specialist Broker of the Year (2008) House of the Year: European Emissions (2007) House of the Year: Weather / Emissions (2004) (California) Best Broker, Options North American Markets (California) Best Broker, North American Markets (RGGI) Best Broker, Renewable Energy Certificates, North America 11

12 Carbon Price Drivers: Fundamental NOTE: ARB released 13 emission data from capped sectors. Trends show declining emissions largely due to the recession, but there are other reasons. 13 covered emissions in CA amounted to 145M tons. The 13 cap was 163 million market is oversupplied compliance instruments, before accounting for 8% offsets Macro-economic Electrical load and industrial growth in CA the state s recovery is picking up Power Annual hydro power variability California has declared a drought emergency which means low hydro power/high fossil generation, yielding higher emissions/cca demand Record renewable energy generation in 13; escalating RPS (33% by 2020) Transportation Added to cap in GHG policies such as clean car standards and LCFS have resulted in lower gasoline demand and emissions per unit of gas product Fuels are 100% short; comprise approx. 160 million tons, or 40%, of emissions cap 12

13 Carbon Price Drivers: Fundamental Offset Supply Current offset utilization rate is below 8% allowable limit 5 project types approved by ARB to date (MMC,ODS, Livestock, Urban Forestry, Forestry) Currently approx. 18 million tons available vs. approx. demand from CA-QC for First Compliance Period ( ) of million tons. Linkage with other Programs QC-CA linked January 1, 2014 making compliance instruments between the program fungible QC has a more stringent reduction targets than CA and less abatement opportunity Section 111(d) of The Clean Air Act: EPA proposal may lead to additional U.S. States joining CA & Quebec, RGGI Ontario joining what does it mean for the QC-CA supply-demand balance?!!! 13

14 Carbon Price Drivers: Technical & Legal Hedging Behavior Generators buy carbon when selling wholesale power; mismatched timing of supply and demand, some argue, could lead to short term price spikes albeit they would be limited given the oversupply Utility procurement restrictions adversely impacting liquidity Fuels have a large short to cover; we re starting to see fuel hedging in the V16 Dec 15 ICE CCA contract Structural/Regulatory Price floor + 5% escalator and CPI provide price support Holding limits adversely impacting liquidity High level of free allocations, flexibility to comply, i.e. use V14 against 13 emission obligation Resource shuffling safe-harbor provisions ; 18 month non-enforcement period Legal All environmental markets are ripe for legal challenge 14

15 Financing Trade Cost of Carry Buy carbon, i.e. auction or secondary market, roll forward at low rates entities carrying allowances (selling the spread) have low financing costs, i.e. banks trades are executed via exchange (spreads) or can be OTC bilateral between counterparties Recent trades: TRADE DATE PRODUCT Vintage TERM PRICE VOLUME # MO SPREAD $/MONTH $/YEAR ANNUALIZED 6/18/2015 CCA Futures 15 Jun % 6/18/2015 CCA Futures 15 Aug /16/2015 CCA Futures 15 Jun % 6/16/2015 CCA Futures 15 Jan /15/2015 CCA Futures 15 Jun % 6/15/2015 CCA Futures 15 Dec /10/2015 CCA Futures 18 Jun % 6/10/2015 CCA Futures 18 Dec /10/2015 CCA Futures 18 Jun % 6/10/2015 CCA Futures 18 Dec /10/2015 CCA Futures 17 Jun % 6/10/2015 CCA Futures 17 Dec