US: Focus - A closer look to August auction consigment

26 June 2014 20:41 Source:ICIS

The California carbon allowance (CCA) volume consigned for the third auction of the year could offers a glimpse into the sentiment among the state’s utilities that alloted the second highest total in the programme’s history.

The Air Resources Board (ARB), the cap-and-trade regulator, will offer 22.5m Vintage 2014 CCAs on 18 August, a 33% increase from 16.9m sold in May ( see EDCM 23 June 2014 ).

The 5.6m extra supply is likely due to heavier consignment by publicly-owned utilities (POUs) and investor-owned utilities (IOUs), because the number of state-owned allowances remains relatively constant throughout the year at 2.2m per auction. The ARB sells allowances on behalf of the state and allowances consigned by utilities.

The 20.3m Vintage 2014 CCAs consigned is the second highest total since the inaugural November 2012 auction. In the 2014 auctions, the POUs and IOUs have consigned an average of 16m per auction, and the utilities have never consigned more than 17.3m current allowances at auction.

All future allowances sold at auction are owned by the state.

Consignment profiles

IOUs are forced to sell their entire free allocation for a given year and redistribute the proceedings to end users, but they are not required to divide their consigned volume evenly across the four auctions.

The six Californian IOUs received 63m allowances for free in 2014. Those entities consigned 28.5m in the first two auctions of the year, and they must consign the remaining 34.5m allowances in the final two auctions, ARB data shows. That would mean an average of 17.25m CCAs per auction in the August and November sales.

The POUs are not required to consign free allowances like the IOUs. Due to that difference, POUs usually consign allowances when they are long. They have consigned between 0.6-2.1m CCAs in the past seven auctions.

The ARB does not disclose the breakdown of IOUs/POUs consignment before the auctions. As a result, it is not possible at this stage to estimate who specifically is responsible for the higher consignment volume.

Possible meanings

Due to the rules, IOUs and POUs sell at auction for different reasons, but market participants believe most sell when they expect to make the most from their CCAs.

“If I were an IOU or a POU... I would assume a higher clearing price for my tons if I consign them in Q3 before a potential joint auction in Q4,” said a trader at a trading house. California and Quebec, who officially linked their carbon markets this January, are aiming at starting joint auctions in November ( see EDCM 3 June 2014 ). The trader said the extra supply from Quebec could generate expectations that the November auction clears lower than in August.

A second trader said IOUs could expect the final two auctions to garner higher prices due to fuel suppliers entering the marketplace ahead of their inclusion in the programme in 2015 and the market responding to the yearly 5% plus inflation rise to the floor price. Therefore, he thought IOUs would split their consignment evenly.

Jan Frommeyer, director of market analysis at ICIS’ analytics division, had a different interpretation depending on whether it was IOUs or POUs behind higher consignment.

“If IOUs are responsible for the ramp up, this can indicate that they expect higher prices, which is slightly bullish,” said Frommeyer. “If POUs are responsible, this could hint at lower emissions than expected... which would be bearish.” Silvia Molteni

By Silvia Molteni