Weak Demand Sends Mixed Price Signals in California Carbon Auction

Results from California’s fourth carbon auction reflected slowing demand for V13 allowances as many participants have bought what they needed for the year. In contrast, demand for V16 allowances surged, signaling a boost in confidence in the programs’ long term prospects.

UDPATE (Aug 22): The number of participants and their classification for Auction 4 has been updated in the text and figure below.

V13 Clearing Price Falls

V13 allowances cleared at $12.22, below expectations and eight percent below secondary market prices – CCAs were trading at $13.35 a tonne on ICE yesterday. This drop will likely lead to a correction on the traded markets, and I expect prices will fall below $13 on the exchange within the next couple of days. The lower than expected clearing price was caused by weak demand from a smaller number of participants: 79 bidders, against 91 in February and 81 in May. Nine participants were new to the auction, with a noted entry of gas companies in the pool of bidders. Figure 1 below provides the breakdown by sector for each auction.

Financials Bored by Flat Market

Of particular interest, the number of financial participants dropped by a third, which translated as a smaller percentage of allowances purchased for speculative purposes: only four percent for each auction (current and future) against 10 and 14 percent respectively in May 2013. Flat prices and low liquidity in the secondary market have likely contributed to this lack of interest from financial players. Participation of industrials and governement entities also fell, which probably means that many of them have purchased what they need for 2013 already. If these trends are confirmed, we should expect weak demand in the last 2013 auction as well.

Figure 1. Who are the auction participants? (click to enlarge)

Auction participants Aug13

(See below for more explanations on the participant classification)

V16 Price On the Rise

The future auction created a bullish surprise – V16 allowances sold out, for the first time since the beginning of the program, and the clearing price was $11.10, 40 cents over the reserve price. This surge in interest in allowances for the second compliance period reflects the growing confidence of market participants in the viability and stability of the program. The increased demand for V16 allowances is also probably an effect of having better visibility on allocation in the second compliance period, one of the key elements ARB has been working on in its ongoing regulatory amendment process.

One Billion Dollars for Clean Energy

The auction raised a total of $138.5 million dollars for the state of California, up 18 percent from the May auction – thanks to the higher volume and price for V16 allowances, while IOUs saw the revenue from consigned allowances drop by 18 percent, from $151 million in May to $124 in August due to the lower V13 clearing price. Overall, since the first auction, the state of California has raised $395 million for the GHG Reduction Fund, while IOUs have received $626 million for the benefit of California electricity ratepayers, just over one billion dollars in total to be spent on emission reduction efforts and lower electricity bills.


Note on participant classification:
when counting and classifying auction participants, we distinguish between Investor-Owned Utilities (IOUs), Publicly-Owned Utilities (POUs or Munis), independent power plants, power merchants (who own more than one power plant), and power marketers. The distinction between power plants, power merchants and power marketers is important to get a better sense of how many bidders may also be buying for speculative purposes.

Indeed, power marketers and power merchants are entities that have a compliance obligation, either because they own one or several plants in California (merchants) or because they import electricity into California (marketers) or both. However, these companies are large financial or energy corporations like EDT Trading, Goldman Sachs, Morgan Stanley, Shell Energy and Citigroup Energy. They have sophisticated trading desks and it is quite possible, if not likely, that they also purchase allowances for speculation rather than purely for compliance. Because there is no way to know how much of the allowances they purchase could be over and beyond what they need for compliance, their purchase are all counted as ‘Compliance’ in ARB’s categorization – but these entities also contribute to market liquidity by acting as financial players.