CARB Approved Offsets - Climate Action Reserve
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Transcript CARB Approved Offsets - Climate Action Reserve
California Carbon Market
Dave Mann
TFS Energy LLC
AGENDA
Introduction to TFS Energy
California Carbon Market
Regulatory Update
Market Instruments
Pricing Update
Hedging Structures
Going Forward
Conclusion
TFS Energy – Introduction
Who We Are and What We Do
Subsidiary of Tradition (www.Tradition.com)
Over 2,500 global employees
Operations in 18 countries
200 energy experts - 10 energy offices worldwide
Environmental products focused in New York and London
12 years in environmental markets / 10 years in greenhouse gas
Environmental team is diverse group of experience financial
market professionals, lawyers and accountants
Specialize in introductory services in all energy and environmental
commodities
TFS Energy – Introduction
Industry leading EU-ETS and CER desk in London and New
York
Unrivaled knowledge of opportunities and risk based on our
experience in the world’s largest GHG market since its inception
Strong understanding of pricing relationships between allowances,
primary and secondary market offsets
Long term relationships with project developers, financial
institutions and multi-national industrial concerns who will be active
in the California market. As well as existing relationships with
domestic utilities, merchant energy producers, refiners and
industrials from other US environmental markets that will be
affected by AB32
TFS Energy – Introduction
Recognized by industry-leading publications as “best in class”
Point Carbon 2010 – “Best Broker”
Environmental Finance 2010 – “Deal of the Year”
Mexico City CFL swap with CERs going to Dutch Utility
Environmental Finance 2009 – Best Primary Originator for GHG
Emissions Kyoto Projects Credits
Energy Risk 2009 – “Best Broker; US VERs”
Numerous other awards from both Environmental Finance and Energy
Risk for other US based environmental markets including – RECs, NOx,
SO2, RTCs and ERCs
Regulatory Update
CARB has appealed to the March 18 Superior Court ruling in
favor of AIR, thus putting a stay on… the stay of regulatory
movement.
Likely either win appeal, or
Be able to abide by Judge Goldsmith’s order
The Court found violations of the California Environmental
Quality Act (CEQA) and mandated that – prior to
implementation of the program and any further rulemaking
and implementation – CARB must amend its FED in
accordance
CARB released a FED supplement yesterday evening!
In not as few words: “We disagree with the ruling, but to remove
any doubt, encourage public participation, and remove any doubt
in the matter, we hereby supplement our original FED.”
45 day public comment period (ending July 28)
Post responses prior to a…
Board meeting on August 24 where board will vote whether to
approve 1) the FED and 2) the Scoping Plan
Market Instruments - Allowances
California Carbon Allowances (CCAs) or California
Allowance Forward Trade Agreements (CAFTA).
Dec 12, Dec 13 and Dec 14 forwards
The program must be in force on the future delivery date.
In force is generally defined as any issuance of allowances
via direct allocation or auction prior to delivery by the
governing regulatory authority.
In some cases there are provisions for a potential one year
delay in delivery, while others let both parties walk away
with no further obligations.
A few parties looking at allowances deals, to move
forward regardless of a program in place. Certainly
favors seller, thus lower price.
Market Instruments – CARB Approved Offsets
Climate Action Reserve (CAR) Offsets from one of the
approved CARB Methodologies.
Currently approved methodologies include: Ozone
Depleting Substances (ODS), Agricultural Methane and
Forestry related methodologies.
Generally for issued offsets, but can also be for forward
streams. Issued offsets are preferred due to ease in
contracting. Equivalent to a spot deal that carries little
credit and contracting risk, essentially a secondary market
offering.
What to watch for: Credit, of course, and developer
reputation. They may need to be your friend down the
road.
Market Instruments – CARB Compliant Offsets
Also referred to as GARBOS (Guaranteed Air Resource
Board Offsets) and CCOs (California Carbon Offsets).
An offset that falls under the 8% allowable of total
emissions permits used (allowances for the other 92%)
from one of the CARB-named sectors at time of
delivery.
Seller is responsible for registration and upload to the
CARB registry (which is not online yet).
Transactions are generally for Dec12, Dec13 or Dec14
forward.
As with the allowance transactions, this transaction is
subject to in-force provisions that can cause the deal to
be vacated.
Current Pricing and Recent History
CCAs
Currently trading ~ $15.00 for Dec12 forward
Lifetime price range of $11.50 (first trades November 2010) to ~$15 (June
2011)
Floor?
Liquidity has improved substantially: First markets were 10k on B/A and
$1-$2 wide. Currently, ~250k could be transacted on the $14.50/$16.00
market
Given the walk away clauses, there is an implied option premium in the
$15.00 price
Dec 12 forward with no walk away clauses is offered at $9.00 with no
aggressive bids
Current Pricing and Recent History
CARB Approved Methodologies
Currently $7.75/$8.50 for issued ODS, $6.50/$7.75 for issued forestry
Pre 2010 election they were $4/$5
Peaked at $10.50 in January 2011
Downturn has been caused by liquidation due to AIR lawsuit and fresh
selling of recent issuances
CARB Complaint/Guaranteed Offsets
Currently ~ $11.50 for Dec 12 forward
Generally has the same walk away provisions as Dec 12 allowances
European compliance players generally looked to develop a mixed portfolio
of PCERs and SCERs which let them achieve better average prices and
mitigate delivery risks
Which to buy?
Key Issues: Volume and Scalability
ODS offers large volume, predictable deliveries
Forestry and Ag methane are a concern on both fronts
For these reasons most Kyoto CERs were from large scale N20 and HFC
projects, not LFG or renewable energy projects
Potential new CARB approved meths: N2O and international ODS,
composting. Currently trading in the $3.00-4.00 range
Hedging Structures – Purchase and Sales
Currently only bilateral
Issues, issues…
GX and ICE both working on cleared contracts, but
timeline is difficult to predict given current market
uncertainty. No need to make the same mistakes again,
in developing contracts too early.
The forward prices contain embedded option premiums
for buyers since there are walk away provisions for
delays in program implementation or abandonment of
scheme.
Options
Options on Allowances and Offsets have been fairly
active
Given the underlying uncertainty on program
implementation options are viewed as a bit of a middle
ground safe harbor play.
The $5put, $10call and 5/10 Collar on offsets have been
the main strike interest
$20 calls on allowances are also actively quoted
IV in the 50% range
All options are physically settled and buyers surrender all
premium on contract with no look backs for regulatory
delay or abandonment of scheme
Allowance/Offset Price Relationships
Current pricing relationship between CCAs/CCOs/CARB
approved offsets: $15.00/$11.50/$8.00
Puts CCOs at about 75% of allowance price and CARB
approved offsets at 55% of allowance price
From a relative value perspective CARB approved
offsets are cheap, but they are the only product that are
immediate cash and carry with no potential for
retroactive vacature
In the EU-ETS fully guaranteed SCERs ultimately
delivered as highs as 90-95% of the allowance price
PCERs generally traded 50%-80% of the allowance price
depending on project type, credit worthiness of seller
and delivery guarantees (%Firm vs %UC)
Allowance/Offset Swaps
All sources should use their maximum allowable offsets
Easiest way to accomplish this is either through $ based
or volume based allowance/offset swaps
Give 100k allowances and receive 127k offsets or $300k
cash
Utilities sometimes prefer the volume model because it
doesn’t generate a cash flow and may not be viewed as
revenue. Merchants and De-Reg players can sometimes
be of the opposite opinion
Transactions in the Primary Offset Market
Project Developers often look for structures that let
them lock in cost + slight profit and lets them
participate in upside if the market rallies
Typical structure might be the greater of a $4 to $5
guaranteed floor or % of index (but based on what?) on
delivery
Generally a structure used for multi-year forward streams
Whether the floor or % of index is generally applied to
each delivery
Some keep it simple. “I’m a project developer, not a
trader.” 8.00 / 8.25 / 8.50 over 2011-2013, payment on
delivery. 50k/yr. firm, up to 10k/yr. UC.
Where Next?
Would have thought more deflation
Due to lack of transactions
Stubborn (more than I thought) project developers
The info line is flat (all access to same info)
Serious opportunity in getting ahead
I was wrong… So, trying not to predict much further. Best to…
Look out for additional meths.
Composting, Soil, Imported ODS, N2O, Coal methane
Pick up options
Maybe make $ on buying CRTs, selling CCOs.
Bottom line… diversify the book
It’s coming… just a matter of when.
Thank You
Environmental Markets
Office: +1 212 943 2883
[email protected]
www.tfsgreen.com