Trading in Californias Carbon Market: Trading in California s Carbon - PowerPoint PPT Presentation

Trading in California’s Carbon Market: Trading in California s Carbon Market: A summary of trading activity, products and drivers Prepared by: Lenny Hochschild Prepared for: Northwest Power and Conservation Council September 5, 2013 1

Evolution Markets – Leadership Evolution Markets – Leadership Since Evolution Markets was founded in 2000, we have received more than 130 awards for excellence in brokerage. Below you will find a sample of our most recent awards from 2012. For the full list our awards, please visit www.evomarkets.com visit www evomarkets com Annual Commodity Rankings 2012 Annual Customer Survey Best Broker, U.S. Coal 2012 * Best Broker, Asia ‐ Pacific Coal Best Broker Options (EUAs CERs) Best Broker, Options (EUAs, CERs) Best Broker, Weather Derivatives Best Broker, Spot & Futures (EUAs, CERs) * Best Broker, Emissions Best Broker, Secondary Market Kyoto Project Credits Best Broker, North American Markets (California) Best Broker North American Markets (RGGI) Best Broker, North American Markets (RGGI) House of the Year: U.S. Coal (2010) Best Broker, Renewable Energy Certificates, North America Specialist Broker of the Year (2008) Best Broker, SO 2 House of the Year: European Emissions (2007) Best Broker, NOx (Reclaim) Annual Awards House of the Year: Weather / Emissions (2004) Best Broker, Nox Best Broker ERCs * Best Broker, Weather Risk Management, North America Best Broker, Weather Risk Management, Europe Best Broker, Weather Risk Management, Asia *category runner ‐ up 2

Califo rnia Carbo n Market Ac tivity Califo rnia Carbo n Market Ac tivity 2013 Year to Date Average ICE CCA Daily Volume for Allowances Futures: Futures: 226,000 226,000 Options: 142,000 Total: 368,000 2013 Spot Market Pricing 2013 Vintage $12.80 2015 Vintage $12.10 2016 Vi t 2016 Vintage $12.00 $12 00 2013 Offsets: $9 ‐ $11 range depending on offset type and delivery period Market Psychology Market Psychology • Recent market activity reflective of sentiment that CA Cap & Trade program is here to stay • First retirements to take place in Nov ‘14 which likely means increased liquidity next year 3

Carbon Price Drivers Carbon Price Drivers Hedging Behavior • Many power entities hedge carbon when they sell wholesale power providing price support Many power entities hedge carbon when they sell wholesale power providing price support • Will Transportation fuels begin hedging significant volumes in 2014? Structural • $10 price floor + 5% escalator and CPI provides price support • IPP’s and Refiners Transportation Fuels receive no allocations • Other sectors receiving on average 90% allocations • H ldi Holding limits could adversely impact liquidity li it ld d l i t li idit • Auction/ICE/Bilateral Markets Events Events • Quebec Linkage • November 2013 Auction • First Offset issuances 4

Carbon/Power Relationship Carbon/Power Relationship • 1H 2013: Average CCA Price: $14.57/mtCO2e (CAL ISO DMM – August 2013 p 41) • Cal ISO’s Department of Market Monitoring estimates that the average wholesale electricity price impact is about $6.00/MWh for 1H 2013. This is consistent with the emissions costs for gas units typically setting prices in the ISO market. • Given the importers unspecified emissions default rate as established by CARB of 0.428 tonnes/MWh, the above numbers make sense. 5

Benchmark California Carbon Contract: ICE CCA V13 Dec ’13 ICE CCA V13 Dec 13 $22.00 750,000 700,000 $21.00 650,000 $20.00 600,000 $19.00 550,000 $18.00 500,000 450,000 $17.00 400,000 $16.00 350,000 $15.00 300,000 300,000 $14.00 250,000 200,000 $13.00 150,000 $12.00 100 000 100,000 $11.00 50,000 $10.00 ‐ 3/2012 7/2012 1/2012 5/2012 9/2012 2/2012 6/2012 0/2012 4/2012 8/2013 2/2013 5/2013 9/2013 5/2013 9/2013 2/2013 6/2013 0/2013 4/2013 9/2013 2/2013 6/2013 1/2013 5/2013 8/2013 2/2013 9/3 9/17 10/1 10/15 10/29 11/12 11/26 12/10 12/24 1/8 1/22 2/5 2/19 3/5 3/19 4/2 4/16 4/30 5/14 5/29 6/12 6/26 7/11 7/25 8/8 8/22 Volume Daily Price Settlement So ur c e : Inte r c o ntine ntal E xc hange 6

Open Interest (millions) Open Interest (millions) V13 CCA Open Interest (Futures) 10,000 8,000 6,000 4 000 4,000 2,000 0 7

Open Interest (millions) Open Interest (millions) Total V13 OI (Futures & Options) 25 000 25,000 20,000 15,000 10,000 5,000 0 8

Open Interest V16 CCA Futures Open Interest V16 CCA Futures Open Interest V16 CCA Futures 9,000 8,000 7,000 6,000 s Title 5,000 Axi 4,000 3,000 2,000 1,000 ‐ 29 ‐ Jul ‐ 13 30 ‐ Aug ‐ 13 9

Closing Comments Closing Comments • • All types of compliance entities and liquidity providers are actively transacting All types of compliance entities and liquidity providers are actively transacting in the California Carbon markets today • Volumes and liquidity are relatively healthy w/ more participants trading since Volumes and liquidity are relatively healthy w/ more participants trading since the start of compliance this year • Pricing appears to be reflective of the fundamentals g pp • The offset market is moving forward slowly and will likely increase activity once the first CARB approved offsets are issued 10

Contact Information Contact Information Lenny Hochschild Managing Director, GHG Markets Evolution Markets Inc. 3 Embarcadero Center, Suite 1630 San Francisco, CA 94111 tel. +1.415.963.9138 mob. +1.415.269.3092 email lennyh@evomarkets.com website www.evomarkets.com 11