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RGGI CO2 allowance prices at secondary market unwind after auction

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RGGI CO2 allowance prices at secondary market unwind after auction

In the wake of weak results from the Regional Greenhouse Gas Initiative's final quarterly auction of the year, over-the-counter CO2 allowance prices under the program dropped below $4.00/ton during the week ended Dec. 14. Broker data as of Dec. 14 showed the RGGI spot allowance contract in a bid-and-ask spread of $3.25/ton to $3.50/ton, unwinding 50 cents from the week prior.

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The December 2016 vintage 2016 contract was also eyed in a bid-and-offer range of $3.25/ton to $3.50/ton as of Dec. 14, losing 50 cents as well week over week.

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In the Regional Greenhouse Gas Initiative's fourth and final quarterly CO2 allowance auction of the year, held Dec. 7, 100% of the more than 14.7 million allocation year 2016 allowances on offer sold at a clearing price of $3.55/ton. Results of the December RGGI auction were released Dec. 9 and showed that the clearing price was down a sharp 99 cents, or almost 22%, from the program's prior auction, which came in at $4.54/ton in September.

In the December auction, there were 33 total bidders, with the ratio of bids coming in at 2.4 times the total amount of allowances on offer. RGGI said 71% of the CO2 allowances sold in the December auction were bought by compliance entities or their affiliates.

"We also saw a continued uptick in purchases for non-compliance reasons in this most recent auction, as market participants bought allowances on the cheap, and also as they anticipate potentially higher prices under a tighter supply-demand balance after the release of the updated Model Rule next year. A future price recovery in both secondary markets and the auction will hinge on how much the new Model Rule does to restrain the large stock of banked allowances in the market," Rachel Jiang, environmental and power markets analyst at Bloomberg New Energy Finance, told S&P Global Market Intelligence.

The RGGI states are in the process of concluding a year-long review with a focus on the possible tightening of the program's emissions cap, as well as the coordination with the implementation of the U.S. EPA's Clean Power Plan. The Clean Power Plan, which is on hold and awaiting a ruling by the D.C. Circuit, would require states to meet individual carbon emissions rate reductions at existing power plants beginning in 2022. However, after the U.S. presidential election was held in early November, secondary market RGGI CO2 futures prices slipped about $20 in value amid the belief that the Clean Power Plan will not survive under President-elect Donald Trump.

Looking ahead, over-the-counter RGGI prices could see some upside traction in the medium to longer term.

"We could see a bit of a spike in demand as natural gas rallies thru the winter, making coal generation and fuel oil peakers more viable in the generation stack," a partner in the Energy and Environmental Markets Group at Karbone Inc. told S&P Global Market Intelligence.

RGGI is comprised of nine states: Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire, New York, Rhode Island and Vermont. The participating states use a market-based cap-and-trade program to reduce greenhouse gas emissions from regional power plants, selling nearly all emissions allowances through auctions and investing proceeds in energy efficiency projects in the residential, commercial and municipal sectors.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities Pages.