RGGI Carbon Prices Expected to Stabilize at June 1 Auction

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By Gerald B. Silverman

May 25 — The price of Regional Greenhouse Gas Initiative carbon allowances, which took a big hit in March, is expected to remain steady in RGGI's next auction on June 1, according to several experts from academia, environmental groups and the industry interviewed by Bloomberg BNA.

Among the key factors expected to influence the auction are an oversupply of allowances, a program review currently under way by the nine RGGI states, the potential retirement of nuclear power plants in the region and the continued low cost of natural gas.

RGGI allowances sold for $5.25 each in the cap-and-trade program's March auction, a 30 percent decline from the previous auction and the lowest price since December 2014 (48 ECR, 3/11/16).

Some 15 million allowances will be offered for sale June 1 and, at $5 per allowance, would raise about $75 million for the nine RGGI states, if all allowances are sold.

“We continue to project an oversupply of allowances relative to potential demand between now and 2020,” Timothy T. Cheung, vice president of ClearView Energy Partners LLC, told Bloomberg BNA in an e-mail. “We would not be surprised if the next auction clears below March prices.”

Significant Oversupply

The oversupply is significant, according to a recent annual report released by RGGI (99 ECR, 5/23/16).

The report said there were 130 million surplus allowances at the end of 2015, meaning there were 130 million more allowances than needed for electricity generators to comply with the emissions requirements of the program. Generators are required to hold one allowance for each short ton of carbon dioxide emissions.

One of the wild cards in predicting auction prices is the current program review being undertaken by RGGI to determine what changes are needed to comply with the Clean Power Plan and improve the design of the program.

Jordan Stutt, a policy analyst at the Boston-based Acadia Center, said RGGI's current program review may affect the June auction, which is RGGI's 32nd, but is more likely to affect the following auction on Sept. 7.

“The RGGI states are currently considering the program’s future stringency, methods for cost containment and provisions for wider trading, all of which will directly impact the RGGI allowance market,” he told Bloomberg BNA in an e-mail. “It remains unclear when final decisions will be reached, but it is likely that additional information on RGGI’s future will be released between Auctions 32 and 33.”

Stutt said allowance prices jumped 45 percent in 2013 as a result of RGGI's last program review (51 ECR, 3/15/13).

“Rather than waiting for policy changes to be announced, opportunistic bidders may see this auction as a last chance to secure allowances before prices change dramatically,” he said. “Such strategic bidding behavior could push this auction clearing price slightly higher than recent secondary market transactions might suggest.”

Meaningful Carbon Prices

Cheung predicted that “meaningful” RGGI carbon prices were only likely if RGGI extends its program beyond 2020 and tightens its emissions cap. He said a phaseout of nuclear capacity in the region could also lead to a run-up in prices.

“Without clarity regarding a post-2020 program, or the fate of the Clean Power Plan, we think carbon prices are likely to stay well below January highs,” Cheung said.

Mark Kresowik, eastern region deputy director of the Sierra Club's Beyond Coal Campaign, said he expects prices to remain stable, based on market fundamentals. He told Bloomberg BNA that the run-up in prices last year was partly due to “speculation” about the impact of the Environmental Protection Agency's Clean Power Plan, which set the first carbon dioxide emissions limits for the power sector, on RGGI prices.

In addition, he said there was a “manipulation of the market” in 2015 to trigger release of additional allowances from the cost containment reserve.

He said the market is now more in line with fundamentals like the low cost of wind, solar, energy efficiency and natural gas. “I wouldn’t expect to see an increase in price given the lower cost of cleaner alternatives,” Kresowik said.

The cost containment reserve is a cost-control mechanism that releases additional allowances for sale when prices hit a certain point. It was triggered in September, when prices hit $6 each (176 ECR, 9/11/15).

Rise of 5 Percent to 10 Percent

William M. Shobe, director of the Center for Economic & Policy Studies at the University of Virginia, said allowance prices will probably increase on the order of 5 percent to 10 percent per year, unless there are unexpected changes in gas prices, additional nuclear plant closings or changes in the RGGI emissions cap.

“Given the modest anticipated growth in prices, it will be at least two to four years before the market approaches a level that would result in another release from the allowance reserve,” Shobe told Bloomberg BNA in an e-mail, referring to the cost containment reserve.

“When the courts rule on the legality of the Clean Power Plan, look for some jump in prices, one way or the other, but not a huge move,” he said. “RGGI has charted its own course, and Clean Power Plan compliance would only require a modest downward adjustment to the cap.”

Heather Leibowitz, director of Environment New York, said she expects RGGI allowance prices to rise over the long run, as the supply—and surplus—of allowances decline. “But the decrease in supply will be steady and predictable, giving utility companies a lot of time to plan, which reduces the risk of price spikes,” she told Bloomberg BNA in an e-mail.

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y., at gsilverman@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com