Post on 30-Aug-2019
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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 2015
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Business 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
• 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
• 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
• Fortune Global 500 Firms
• Banks
• Hedge Funds
• Utilities & Power Generators
• Industrials
• Project Developers
• Private Investors
Company Overview Market Pioneer
Extensive Counterparty Network
Services
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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
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
Our Markets
ENVIRONMENT
ENERGY
FINANCE
EMISSIONS CARBON RENEWABLE ENERGY
WEATHER ENERGY EFFICIENCY WATER
COAL POWER NATURAL GAS BIOMASS
NUCLEAR FUELS BIOFUELS OIL
STRUCTURED TRANSACTIONS CARBON FINANCE
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Traded Carbon Products
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
California Carbon Allowances (CCAs) Primary: auctions/direct allocations. Secondary: exchange-cleared (ICE)
futures/options & OTC* bilateral spot and forwards. Vintages: ’13-’18
Carbon Compliance Instruments (CCIs) Bundled allowance and offsets product. Trades OTC via bilateral contracts. Indexed or
Fixed pricing
Quebec Compliance Instruments Quebec Carbon Allowances (QCAs) or offsets. Primary: auctions/direct allocations.
Secondary: QCAs via ICE CCA* & OTC bilateral spot and forwards. Vintages ‘13-’18
• Over-the-Counter (OTC)
• QCAs are deliverable under the ICE futures contract
• Quebec offset opportunities are limited, currently
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Price Spreads
$10.35
$11.65
$12.65
July ’15 V15
Carbon
Allowance
Spot CCO (3)
Spot “Golden”
CCO
Note: prices are USD and indicative based on current market conditions.
Date: 7/2/2015
$9.95 Spot CCO(8)
Evolution Markets Inc. – Proprietary & Confidential
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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 2012 23,126,110 (100% sold) 39,450,000 (14% sold) $10.00 $10.09 1.06* $10.00
CA Feb 2013 12,924,822 (100% sold) 9,560,000 (46% sold) $10.71 $13.62 2.47 $10.71
CA May 2013 14,522,048 (100% sold) 9,560,000 (79% sold) $10.71 $14.00 1.78 $10.71
CA Aug 2013 14,522,048 (100% sold) 9,560,000 (100% sold) $10.71 $12.22 1.62 $11.10
CA Nov 2013 16,614,526 (100% sold) 9,560,000 (100% sold) $10.71 $11.48 1.82 $11.10
QC Dec 2013 2,971,676 (34% sold) 6,319,000 (27% sold) $10.75 CAD $10.75 CAD 0.34 $10.75 CAD
CA Feb 2014 19,538,695 (100% sold) 9,260,000 (100% sold) $11.34 $11.48 1.27 $11.38
QC Mar 2014 1,049,111 (99% sold) 1,527,000 (84% sold) $11.39 CAD $11.39 CAD 0.98 $11.39 CAD
CA May 2014 16,947,080 (100% sold) 9,260,000 (44% sold) $11.34 $11.50 1.46 $11.34
QC May 2014 1,049,111 (100% sold) 1,527,000 (85% sold) $11.39 CAD $11.39 CAD 1.02 $11.39 CAD
CA Aug 2014 22,473,043 (100% sold) 9,260,000 (70% sold) $11.34 $11.50 1.14 $11.34
QC Aug 2014 1,049,111 (66% sold) 1,527,000 (95% sold) $11.39 CAD $11.39 CAD 0.66 $11.39 CAD
JOINT Nov 2014 23,070,987 (100%) 10,787,000 (100%) $11.34 USD $11.39 CAD
$12.10 USD 1.73 $11.86 USD
JOINT Feb 2015 73,610,528 (100%) 10,431,500 (100%) $12.10 USD $15.01 CAD
$12.21 USD 1.14 $12.10 USD
JOINT May 2015 76,931,627 (100%) 10,431,500 (94%) $12.10 USD $12.08 CAD
$12.29 USD 1.16 $12.10 USD
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-
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
$10.00
$11.00
$12.00
$13.00
$14.00
$15.00
$16.00
$17.00
$18.00
$19.00
$20.00
$21.00
$22.00
1/3
/20
12
2/2
1/2
01
2
4/1
1/2
01
2
5/3
0/2
01
2
7/1
8/2
01
2
9/5
/20
12
10
/24
/20
12
12
/12
/20
12
1/3
1/2
01
3
3/2
1/2
01
3
5/9
/20
13
6/2
8/2
01
3
8/1
9/2
01
3
10
/8/2
01
3
11
/26
/20
13
1/2
4/2
01
4
3/1
4/2
01
4
5/5
/20
14
6/2
3/2
01
4
8/1
2/2
01
4
9/3
0/2
01
4
11
/18
/20
14
1/8
/20
15
2/2
6/2
01
5
4/1
7/2
01
5
6/5
/20
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Volume Daily Price Settlement
ICE V13-15 CCA, Dec Delivery
Source: Intercontinental Exchange
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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.
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Contact Information
John P. Battaglia, ERP
Director – Carbon Markets, North America Evolution Markets Inc.
3 Embarcadero Center, Suite 1630
San Francisco, CA 94111
tel. +1.415.963.9137
mob. +1.917.287.9688
email jbattaglia@evomarkets.com
website www.evomarkets.com
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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 www.evomarkets.com
Annual Customer Survey
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
(California)
Best Broker, Options – North American Markets (California)
Best Broker, North American Markets (RGGI)
Best Broker, Renewable Energy Certificates, North America
Best Broker, U.S. Coal
2014
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)
2014 Annual Commodity Rankings
Annual Awards
*
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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 2015 -- 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
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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 (2013-2014) of 27.52 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?!!!
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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
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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-15 -12.56 200 2 0.06 0.03 0.36 2.89%
6/18/2015 CCA Futures 15 Aug-15 12.62 200 2
6/16/2015 CCA Futures 15 Jun-15 -12.56 1000 7 0.19 0.027 0.32 2.59%
6/16/2015 CCA Futures 15 Jan-16 12.75 1000 7
6/15/2015 CCA Futures 15 Jun-15 -12.55 150 6 0.15 0.025 0.3 2.40%
6/15/2015 CCA Futures 15 Dec-15 12.7 150 6
6/10/2015 CCA Futures 18 Jun-15 -12.34 800 6 0.13 0.022 0.26 2.11%
6/10/2015 CCA Futures 18 Dec-15 12.47 800 6
6/10/2015 CCA Futures 18 Jun-15 -12.34 100 6 0.13 0.022 0.26 2.11%
6/10/2015 CCA Futures 18 Dec-15 12.47 100 6
6/10/2015 CCA Futures 17 Jun-15 -12.5 100 6 0.13 0.022 0.26 2.09%
6/10/2015 CCA Futures 17 Dec-15 12.63 100 6