RGGI Carbon Prices Uncertain in Run-Up to Auction

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By Gerald B. Silverman

March 3 — The upcoming auction of carbon allowances by the Regional Greenhouse Gas Initiative on March 9 will be one of the most closely watched and hardest to predict in years, as allowance prices in the secondary market have been unusually volatile.

The allowance price closed at a record high of $7.50 each in RGGI's last auction in December, but a decision by the U.S. Supreme Court, the release of 10 million additional allowances in September from a cost containment reserve (CCR) and other factors caused high volatility and the price of allowances in the secondary market to drop significantly.

Some 14.8 million allowances will be offered in the next auction, with an additional 10 million available if the auction price hits $8 and the cost containment reserve is triggered.

Among the firms that may be eligible to bid in the auction are Consolidated Edison Co., Koch Supply and Trading, Morgan Stanley Capital Group, National Grid, Vitol Inc., DTE Energy Trading Inc., EDF Trading North America LLC, Calpine Energy Services LP, CE2 Carbon Capital LLC, DRW Commodities LLC, GDF SUEZ Energy Marketing NA Inc. and NRG Power Marketing LLC. The identities of actual bidders are masked by RGGI.

Volatility in Secondary Market

The secondary market for RGGI allowances in the fourth quarter of 2015 was the most volatile in two years, according to one measure followed by Potomac Economics.

Potomac, which is the official market monitor for RGGI, issued a report Feb. 26 that said “option-implied volatility” in the quarter increased for the first time since 2013. It went from an average of 15.7 percent in the third quarter to 19.7 percent in the fourth, according to the report.

Option-implied volatility, according to the report, measures the volatility implied by the trading of option contracts for RGGI carbon allowances.

“If a firm perceives that CO2 allowance prices are volatile, the firm may be willing to pay a high price for an option contract that protects it from unforeseen allowance price fluctuations,” it said. “Likewise, if a firm perceives that CO2 allowance prices are relatively stable, the firm will be willing to pay relatively little for the same option contract.”

Supreme Court

Jennifer S. Smokelin, an attorney in the Pittsburgh office of Reed Smith LLP, said the Supreme Court's decision to stay the Environmental Protection Agency's Clean Power Plan Feb. 9 had an impact on RGGI prices, although the death of Justice Antonin Scalia changed expectations for the court.

“In the week following the stay, the market declined by 21 percent,” she told Bloomberg BNA in an e-mail. “That may have rebounded slightly the next week in the aftermath of Scalia passing, but prices will remain soft because there is uncertainty.”

Brian C. Murray, interim director of the Duke University Energy Initiative, said the Clean Power Plan stay probably didn't have a direct impact on RGGI prices but could have had an indirect one.

“It is possible that the Clean Power Plan was priced into recent ‘pre-stay' allowance bids under the thought that other states' compliance options might spill into the RGGI market, either by adding to the states who would participate or by ensuring that RGGI would stay the course in the future,” Murray told Bloomberg BNA in an e-mail.

“The stay might have shaken those assumptions some, but probably not enough to cause a price plummet by itself,” he said.

Impact Questioned

Heather Leibowitz, director of Environment New York, said the Supreme Court decision shouldn't have much of an impact on RGGI because the cap-and-trade program is going forward independent of the plan.

“It might impact some market players' perceptions about future opportunities in the broader carbon market, but I can only speculate about that,” she said.

Leibowitz predicted that noncompliance entities will continue to have an interest in buying RGGI allowances, despite the recent price declines.

“We are aware that prices on the futures market have recently declined below $5 a ton, but we do not believe that anything fundamental about the market has changed,” she said, referring to price declines in February.

Demand

Smokelin predicted that “demand will be softer” for RGGI allowances, whose price has hit record highs in the past five auctions. She said “compliance entities” and “bullish speculators” may buy allowances from sellers exiting the market or limiting their exposure, “but those bids will likely be made significantly below market.”

“Bullish noncompliance entities will continue to buy, others not so much,” she said.

Derek Furstenwerth, senior director of environmental services at Calpine Corp., said he doesn't see “an underlying fundamental reason” for recent price declines “in terms of the overall supply/demand balance of allowances.”

“As far as upcoming price dynamics, we don’t have a better crystal ball than anyone else,” he told Bloomberg BNA in an e-mail.

“Prices in recent years have generally increased and roughly tracked CCR trigger prices,” he said. “Current prices are significantly less than the upcoming CCR trigger price, so the current condition is fairly unprecedented and hence unpredictable.”

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

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