RGGI program review looms large in 2016

OREANDA-NEWS. December 30, 2015. Regional Greenhouse Gas Initiative (RGGI) CO2 allowances moved beyond \\$7/short ton to close out 2015 and the market shows no signs of retreating as the program's nine states prepare to meet federal regulations.

Whether the market climbs at the same pace in 2016 could depend on whether the RGGI states decide to make big changes to the program and how generators meet their first interim compliance requirements.

RGGI allowance prices jumped an impressive \\$2.16, or 41pc, from the end of 2014 to reach \\$7.44/st this week. The bulk of the increase, about \\$1.40, came in the final four months of this year.

The market could climb further next year, with the program's cost-containment reserve, which sets a soft price cap, acting as a guide. The reserve's trigger price will rise to \\$8/st in 2016 from \\$6/st this year. Auctions in each of the past two years have hit the previous trigger prices, adding a total of 15mn st to the market and pushing allowances to new highs.

Recent trading of vintage 2016 allowances shows some market participants expect next year's auctions to clear near the \\$8/st reserve price, with deals this week as high as \\$7.64/st.

This bullish sentiment has been led in part by a wave of speculative demand, with market participants looking to profit by selling banked allowances obtained at much lower prices. At the most recent auction, nearly three-quarters of the allowances went to firms with holdings large enough that suggest their purchase was intended for resale, or speculative purposes, rather than compliance, according to the RGGI market monitor.

The bullish view has been bolstered by an assumption that RGGI allowances will be portable for compliance with the US Environmental Protection Agency's (EPA) Clean Power Plan. Some market participants view the RGGI allowances as akin to "forever stamps" that can be used in perpetuity. But the fungibility of RGGI allowances with the EPA program is not yet a sure thing.

The RGGI program review in 2016 will provide a key signal for the market as state regulators decide the fate of banked allowances and the cost-containment reserve, which both could be dissolved before Clean Power Plan compliance begins in 2022. EPA requires states to show they will meet their CO2 targets without the use of flexibility mechanisms.

The region as whole faces a fairly easy path to compliance with the Clean Power Plan, which would set a cumulative CO2 cap of about 81mn st for the nine states in 2030, compared with an 88mn st budget this year for RGGI.

The bank of allowances could be used up by 2022 because of RGGI changes enacted at the start of 2014. But the flexibility mechanisms risk putting the region as much as 10mn st above the EPA limits in 2030, according to RGGI estimates.

March will provide two early milestones for the market in 2016. By 1 March, generators must hold enough allowances to cover 50pc of their 2015 compliance requirement. That deadline comes just before the first quarterly auction of the year on 9 March, which could put the year's 10mn st reserve allowances into play.

These pressures could challenge the bullish sentiment, particularly if larger merchant generators tap into their CO2 allowance reserves to comply, rather than look to the market, in order to keep costs low in a low-margin generation environment.

Next year could also kick off a shift in the regional generation mix that could affect overall compliance in the long term. Entergy plans to retire the 838MW FitzPatrick nuclear station in New York as soon as late 2016, one of a number of expected nuclear retirements in the region over the next few years. New York hopes to extend a lifeline to its nuclear plants next year by establishing a new clean energy standard, but the exact details have yet to be worked out. Less nuclear may lead to more use of natural gas-fired generation for baseload, leading to higher CO2 emissions in the RGGI region and pushing the allowance market even higher in 2016 or beyond.