NZU emitter demand may spike amid Q2 2024 electricity emissions hitting 3-year high

The demand for New Zealand Units from emitters may rise as second-quarter 2024 greenhouse emissions from electricity generation climbed over a three-year high since June 2021 and more than doubled on the year to 1.431 MMtCO2e, market sources said.

The emissions were last higher at 1.866 MMtCO2e in June 2021.

The Q2 emissions equate to around 1.4 million New Zealand emission units (NZUs) and could lead to increased demand for the units from the emitters, market sources said.

“Lake levels remain very low, and coal generated power [rather than hydro generated power] is requiring much coal to be imported from Indonesia, that in turn will increase demand for the units [NZUs]. But we will have to wait until the March auction with its NZ$68/tCO2e floor price to discover any truth,” a New Zealand-based forester said.

Emitters covered by the NZ Emissions Trading Scheme are required to purchase and surrender one NZU for every ton of CO2 equivalent emissions they produce. The government sells a portion of NZUs directly to the market through quarterly auctions, while additional NZUs are available in the secondary market.

NZUs prices had reached a more than five-month high at NZ$62.25/tCO2e after the third quarterly auction of carbon allowances on Sept. 4 failed to clear due to a lack of high-enough bids. Under the NZU auctions, the bids have to be equal to or above the auction floor price (NZ$64/tCO2e for 2024) as well as the confidential reserve price. The CRP is set by the government to prevent the sale of units significantly below spot market prices.

Platts, part of S&P Global Commodity Insights, assessed the NZU prices at NZ$61.45/tCO2e on Sept. 12.

A New Zealand’s Ministry of Business Innovation & Employment (MBIE) report shows that over April and June, extra coal and gas were needed to generate enough power amid low hydro Lake levels. Coal-based generation contributed 7.9% of total generation for the quarter, making up for the reduction in generation from hydro.

“Increased electricity generation from non-renewable sources saw emissions from electricity generation reach the highest level on a quarterly basis since June 2021 with 1,431 ktCO2e (1.431 MMtCO2e) representing a 169% increase from the previous June quarter,” MBIE Domains Manager Amapola Generosa said.

The emissions from coal-based electricity generators in Q2 saw an increase of 264% on the quarter, with a jump in emissions from 212,470 tCO2e to 773,600 tCO2e, respectively, MBIE data showed.

“Yes, sounds about right [the report], although haven’t seen the dirty coal burners out in the market buying carbon,” said a New Zealand-based trader dealing with NZUs, NZ electricity and natural gas.

About 40% of New Zealand's total greenhouse gas emissions come from our energy use, as the country relies on fossil fuels for 99% of transport energy and around 60% of industrial energy, according to New Zealand's Energy Efficiency and Conservation Authority.

“I think they [coal-based electricity generators] are sitting on a huge stockpile for the moment, which they are using to cover the higher emissions. They will have to buy more to cover those I assume at some stage but no idea when,” the trader added on whether the increased emissions mean that emitters will be needing more NZU units.

The government announced Aug. 20 its decision to slash ETS auction volumes by more than half over 2025-29.

"It’s a significant volume [the emissions by electricity generation], but honestly, I think the market is very well supplied and can easily fill in the demand. If they [emitters] want to buy a million units, they can easily get it below NZ$64/tCO2e. Worst case scenario, if they can’t fill all below NZ$64, they will buy at the December auction. So, I feel this can’t move the price more than NZ$2," a trader dealing in NZUs said.

Meanwhile, the latest government data shows the NZU stockpile dropped to 144 million in June, bringing the total NZU holdings below 150 million for the first time since June 2021. Collectively, these developments signal a more balanced market, and removal of surplus from the market, estimated at approximately 68 million units, as suggested by Climate Change Commission.