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US: NJ entities could be entering RGGI - traders

11 Apr 2014 17:11:05 | edcm

New Jersey compliance entities could be buying Regional Greenhouse Gas Initiative (RGGI) allowances as speculation grows that the state may rejoin the carbon programme, numerous market participants told ICIS.

New Jersey is expected to rejoin the US Northeast carbon scheme after a court ruled in March that Governor Chris Christie violated the state’s Administrative Procedure Act when he unilaterally removed the state from the system in 2011 ( see EDCM 27 March 2014 ).

Upcoming rules from the Environmental Protection Agency (EPA) aimed at cutting emissions from existing power plants, which are due in June, could also prompt New Jersey to rejoin the carbon scheme.

As a result of those factors, traders said that some of the larger New Jersey compliance entities may be purchasing RGGI allowances now to hedge against future prices.

“I think there are New Jersey players coming to market in anticipation of the state coming back in,” said a trader at a trading house. “If you are fundamentally bullish, why not buy?”

New Jersey power producers Rockland Electric and Public Service Electric and Gas Company, which participated in RGGI auctions in 2011, did not respond to calls about re-entering the market. An Atlantic City Energy spokesman said the utility does not have any compliance obligation, because it no longer owns generation capacity.

Market participants said it would be difficult to know whether New Jersey entities are purchasing allowances, because they are likely doing it anonymously on the InterContinental Exchange (ICE). Some of those New Jersey entities also own or operate generation in one of the nine current RGGI states.

Hedging for price

RGGI cut its cap by 45% earlier this year, causing prices to rise from $3.00/tonne of CO2 equivalent (tCO2e) in December to the mid-$4.00/tCO2e range this week. Prices have risen $0.10/tCO2 since late March, according to data from ICE, and some traders believe prices could rise to the $5.00/tCO2e range by the end of the year.

RGGI market participants said those rising prices may cause New Jersey companies to be proactive in the secondary market to protect themselves against prices rising even further.

“It makes a lot of sense for (New Jersey entities) to get active again,” added a broker from an environmental brokerage firm.

Another broker, however, disagreed, as he said compliance entities in New Jersey may take a more conservative approach and wait for more certainty from the state. They could also delay purchasing until there is some certainty about whether a state could rejoin in the middle of a compliance period. RGGI is in the final year of its current three-year compliance period.

Traders said any state joining the RGGI programme could be bullish for prices, because it would add demand to an already tight market.

RGGI officials have said they are speaking with numerous states potentially interested in joining the programme or creating their own system. A RGGI board member said any expansion of the RGGI programme would be unlikely to happen before 2015 ( see EDCM 28 March 2014 ). Dan McGraw

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