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ECEM: Caution reigns over ROCs market, but upside may linger

24 Sep 2013 12:00:16 | ecem

A cautious mood underscored trade in ROCs during September, with participants unwilling to place much premium on top of the inflation-linked buy-out price, in light of increasing wind power capacity coming online in the UK, which ups the size of the market’s major swing factor.

As a result any bulls in the market were sharply restrained, to the point of backing out altogether, with recent weak ROC value outturns compared with historical levels contributing to the restrained sentiment.

“People are typically cautious with buying fixed-price ROCs [at this time of year], so would only go for a maximum of the buyout plus 10% minus the cost of borrowing. Given there is just under a year before they can submit ROCs to Ofgem, then the cost of borrowing will be relatively high,” one market participant said.

However, the source said the additional borrowing cost will decrease as ROCs are bought closer to the date of submission to Ofgem, which would potentially pave the way for a steady increase in buying interest further down the line, possibly pushing ROCs to a price in line with the 10% headroom calculation, or £46.22/ROC.

ICIS fundamentals-based valuations put ROCs for the ongoing compliance period at a total recycle value of 12% above the buy-out price at £46.92/ROC.

The market’s conservative approach was reflected in the e-ROC monthly auction for August average price of £42.74/ROC, a marginal £0.72/ROC premium over the confirmed £42.02/ROC buy-out price.

Almost 58,700 ROCs changed hands, operator NFPA’s data showed – a large decline on volumes seen in recent months, and a drop attributed to the time of year. NFPA said: “Traditionally the August auction is a quiet one,” although the figure was comfortably above the 8,200 ROCs that dealt in August last year, pointing to some lingering buying interest.

The spread between the lowest priced deal and the average, at £0.74/ROC, was relatively large, so with ROCs available at a shade below the buy-out price, the market clearly saw some value in snapping up the ROCs and betting that the redistributed buy-out fund premium winds up greater than the cost of borrowing to hold the certificates.

With weak sentiment underpinning the market’s mood, relatively poor wind power generation in recent months was not enough to dilute the air of caution. “Although the summer has given us a bit of breathing space – given the relatively low [wind power] output – this could easily be eroded if the level of wind output increases,” one participant said.

Latest data supplied by EuroWind put the collective load factor of the UK’s wind turbine fleet at 13% from June to September, down a touch from the same period last year.

On the wholesale electricity market, forward-curve contracts were initially strong on the back of technical buying, after the front winter had dropped to a three-month low late in the summer, with the influence of bullish oil also contributing to the recovery.

The market generally flattened thereafter, as electricity traders adopt that familiar air of caution in the build up to winter. Jamie Stewart


A cautious mood underscored trade in ROCs during September, with ­participants unwilling to place much premium on top of the inflation-linked buy-out price, in light of increasing wind power capacity coming online in the UK, which ups the size of the market’s major swing factor.

As a result any bulls in the market were sharply restrained, to the point of backing out altogether, with recent weak ROC value outturns compared with historical levels contributing to the restrained sentiment.

“People are typically cautious with buying fixed-price ROCs [at this time of year], so would only go for a maximum of the buyout plus 10% minus the cost of borrowing. Given there is just under a year before they can submit ROCs to Ofgem, then the cost of borrowing will be relatively high,” one market ­participant said.

However, the source said the additional borrowing cost will decrease as ROCs are bought closer to the date of submission to Ofgem, which would potentially pave the way for a steady increase in buying interest further down the line, possibly pushing ROCs to a price in line with the 10% headroom calculation, or £46.22/ROC.

ICIS fundamentals-based valuations put ROCs for the ongoing compliance period at a total recycle value of 12% above the buy-out price at £46.92/ROC.

The market’s conservative approach was reflected in the e-ROC monthly auction for August average price of £42.74/ROC, a marginal £0.72/ROC premium over the confirmed £42.02/ROC buy-out price.

Almost 58,700 ROCs changed hands, operator NFPA’s data showed – a large decline on volumes seen in recent months, and a drop attributed to the time of year. NFPA said: “Traditionally the August auction is a quiet one,” although the figure was comfortably above the 8,200 ROCs that dealt in August last year, pointing to some lingering buying interest.

The spread between the lowest priced deal and the average, at £0.74/ROC, was relatively large, so with ROCs available below the buy-out price, the market clearly saw some value in snapping up the ROCs and betting that the redistributed buy-out fund premium winds up greater than the cost of borrowing to hold the certificates.

With weak sentiment underpinning the market’s mood, relatively poor wind power generation in recent months was not enough to dilute the air of caution. “Although the summer has given us a bit of breathing space – given the relatively low [wind power] output – this could ­easily be eroded if the level of wind output increases,” one participant said.

Data supplied by EuroWind put the collective load factor of the UK’s wind turbine fleet at 13% from June to September, down from the same period last year. On the wholesale electricity market, forward-curve contracts were initially strong on technical buying, after the front winter had dropped late in the summer, with the influence of bullish oil also contributing to the recovery.

The market generally flattened thereafter, as electricity traders adopt that familiar air of caution in the build up to winter. Jamie Stewart


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