US: Power sector running out of time to acquire carbon offsets

Market participants say compliance entities are running out of time to acquire California carbon offsets (CCOs) because of the time required to close deals and low supply of offsets issued by the Air Resources Board (ARB) this year.

The ARB, the cap-and-trade regulator, allows companies to use carbon offsets to cover up to 8% of their compliance obligations. Those credits can be invalidated for up to eight years, and offset developers typically sell them based on their invalidation period.

Market participants are concerned about the offset supply because the ARB’s issuance rate may leave the market undersupplied ahead of the November compliance deadline. There is also concerns that the heavy demand from fuel and natural gas suppliers may leave power-sector compliance entities searching for available offset credits ahead of their November compliance deadline.

A broker said power-sector compliance entities may have a short window to complete deals because of time required to reach deals and low supply of credits coming into the current market. Investor-owned utilities, such as Pacific Gas & Electric and Southern California Edison, are required to go through a more formal process to buy offsets.

“The window of opportunity for [power sector] offset buyers is closing rapidly,” the broker said. “[They have] got about eight weeks left before it starts to become too late.”

The ARB has issued nearly 20m offsets since September 2013. Quebec, which linked with California’s programme last year, has not issued any credits yet. To reach the maximum demand, the regulators must issue a combined 26m offsets.

Flood of offset may end

However, developers said it appeared increasingly more likely the cap-and-trade programme will not reach that 26m total.

“The market is continuing to internalise the idea that supply will likely never be close to potential demand for offsets,” an offset developer said of the market. “The flood of early-action [credits] is almost over, and the new registration run rate will decrease.”

ARB data shows the average issuance for 2015 is nearly 425,000 credits per issuance period, a decline of 30% from a similar period in 2014. The lower issuances, new participants and increased concerns about invalidation risks have caused nearly all of the offset products to rise this year.

Carbon offsets with protection against invalidation, or so-called Golden carbon offsets, are valued in the $11.40-11.55/tCO2e range on the secondary market. The bid-offer spread narrowed from $0.35/tCO2e in early June to $0.15/tCO2e last week, but a broker said it was the result of market interest not low issuance.

A second broker said offsets could see further rises if California carbon allowances (CCAs) increase in anticipation of the 2016 floor price. He said supply issues could become more common as the compliance deadline approached.

“Things are going to get squeezed,” a second broker said of the offset market.

Others said they did not expect the market to see a supply crunch because they were not expecting entities to use the maximum allowed under the ARB rules. dan.mcgraw@icis.com