California carbon allowances (CCAs) rose on Wednesday as power companies began hedging the market in response to fears that hydroelectric generation could be impacted in 2014 due to dry conditions.
The Dec ‘14 Vintage 2014 contract saw more than 490,000 allowances trade on Wednesday for $12.20/tonne (€8.95/tCO2e), a $0.22/tonne rise from Tuesday’s price. The spot Vintage 2014 contract sold for $11.90/tonne, according to traders.
Market participants attributed the rise to power companies hedging the market for CCAs due to fears that hydroelectric power could be stifled in 2014 due to dry conditions in the California region. A broker added the price increase was spurred by a generator trying to cover future emissions.
“Given the outlook for water, California may be moving to more fossil fuel generation,” a second broker said. “That’s making the carbon market a bit more bullish today.”
California to declare drought
California governor Jerry Brown is expected to declare an official drought sometime in the near future. California has undergone one of the driest years on record, and the lack of rain is expected to impact in-state hydroelectric generation.
Market participants said this year could hold similar dismal production from hydroelectric sources. With the closure of the SONGS nuclear station, power companies may be forced to turn to carbon-intensive sources, such as coal-fired or natural gas-fired plants.
Even with the slight rise in prices, traders polled by ICIS said the prices are still in line with their expectations for 2014. Participants believe prices will remain stable through the first half of the year before seeing a slight increase in demand and liquidity ahead of the November partial compliance period. Dan X McGraw