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Environmental Newsletter | May 2022 |  |
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| | | Greetings from Leipzig,
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The past weeks on the Environmental Markets were shaped by high volatility with EUA prices moving from above €95 in February to below €60 in March and levelling off above €80 in April. As you may expect, this was driven by the war in Ukraine, but also reflects the compliance deadline at the end of April. Let’s take a deeper look into the recent market developments.
After the record highs in Q4 last year, Emissions trading on EEX had a notoriously calm start into the New Year. During Q1 volumes constantly increased and the number of active clients in futures on the orderbook has developed positively. However, compared to the previous year, the political conditions resulted in cautious trading behaviour, which led to a liquidity reduction in general.
In this uncertain market environment, EEX was able to strengthen its market shares in March and April (up to ~10% on several days) showing a more robust base of liquidity. This is in line with the net Open Interest (OI) improvements - representing the trust clients have in EEX. EEX’s net OI market shares in futures now amount to over 20%, which is the highest ever value for this time of the year.
Looking at the primary auctions, the total auction volume decreased significantly due to the strong cut of the Market stability reserve. As of 31 March 2022, 92 companies were admitted to participate in the EU ETS primary auctions. While EEX continued the frequent auctions for its existing auction mandates (25 EU Member States, 3 EEA EFTA States, Innovation Fund, Modernisation Fund and separately on behalf of the Federal Republic of Germany and Poland), the first auction on behalf of UK in respect of generation of electricity in Northern Ireland was held on 23 February 2022.
EEX Group is highly committed to further developing its offering in order to provide secure, successful and sustainable commodity markets worldwide. In line with that, EEX has successfully revised the ‘EUA as collateral’ offering recently, which is predominantly welcomed by market participants that wish to utilise their EUA spot positions to reduce their Initial Margin obligations. One important next step is the launch of Voluntary Carbon Markets for Europe and the US. This newsletter will provide you with in-depth insights into our ongoing initiatives. Enjoy reading.
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| Until next time,
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| Steffen Köhler
| COO | EEX
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| EEX Group outlines roadmap for Voluntary Carbon Market | | EEX Group accelerates its commitment to contributing to a sustainable future by entering the voluntary carbon market (VCM) with a product suite addressing the increasing demand from corporates which seek to offset or neutralize their carbon footprint. Leveraging on its considerable experience in carbon markets worldwide, EEX Group intends to bring enhanced levels of standardization, transparency and security to the VCM sector.
EEX Group’s planned VCM contract suite covers four different products, aimed at striking a balance between standardization, on the one hand, and catering different customer preferences, on the other. Each of the contracts allows to focus on specific aspects.
The launch of the VCM product suite is scheduled for 17 June 2022, with the products listed initially in North America at Nodal Exchange followed by EEX in Europe in the second half of 2022. Through this global listing approach, the VCM products shall be made accessible across multiple time zones, reflecting the global nature of the products.
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| How to optimize margin requirements cross commodity | | Have you ever heard that the perception of some market participants is that margining in the cleared markets is a burden? Alternatively, others think margining is the appropriate coverage of involved risks when we look at the current market conditions. We explored the role of margining in the cleared markets in an interview with Christian Fleischer, Head of Sales Environmentals.
What does EEX suggest to their clients to manage their margin requirements?
Christian: Well, first of all, and against the extraordinary volatility in the markets, our clients are handling their margin requirements very well. Many clients have of course taken internal measures to mitigate undesired impacts or to reduce their margin requirements. But there are further measures that could be taken in this respect. Many of our power clients are naturally active in other asset classes, often in Emissions, some also in Gas markets. Those clients may significantly benefit from our cross-margining, when [...]
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| | ECC Margin Optimization Tools Webinar | | European Commodity Clearing (ECC) has accepted EU Allowances (EUAs) as margin credit since February 2022. Through changes to the model, ECC waives the current minimum holding period of 105 days before deposited EUAs become eligible margin credits.
Interested in how "margins" work in general and which tools you have at your disposal to take control of it? ECC hosted a webinar on “Margin Optimization Tools”, which gave an insight to the different margin optimization tools available. Press play and listen to our experts Nicola Chalkley, Dr Manfred Schalke and Jörg Schenderlein.
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FOR ALL VIDEO CONTENT - MAKE SURE TO CHECK OUT EEX TV
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| North American Markets' Spring Growth | | North American environmental markets on Nodal Exchange continued to show solid growth in the first quarter and through the spring.
For Q1 2022, volume for the environmental market suite of products was 64,230 contracts, up 10% from 58,065 in Q1 2021. Carbon futures, which include California Carbon Allowance and RGGI futures, totaled 9,979 contracts in Q1, up 194% from 3,389 contracts a year earlier.
Open interest for environmental products also hit a new high of 193,183 contracts in March and ended Q1 at 190,548, up 105% from 123,200 contracts for the same period a year earlier.
Environmental markets on Nodal posted record volumes and open interest for the month of March with a total of 25,547 contracts traded, up 105% from 12,440 a year earlier. The Renewable Energy Certificate (REC) product group posted a record March volume as well with 21,417 contracts traded, up 83% from 11,674 contracts a year earlier. Among the REC product highlights was a new open interest record for Texas CRS wind and solar REC futures, which topped the 30,000 contract level in March and continued to post records throughout April.
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| | A bigger market in North America? | |
In US carbon markets, there may be a major addition to the Regional Greenhouse Gas Initiative (RGGI). In April, Pennsylvania posted its "final-form" rulemaking, which essentially sets the final regulations for power plants in the state under RGGI. Pending further legal challenges, Pennsylvania is expected to become the 12th state to join the group in Q3. The state will set a 2022 cap of 40.7 million short tons for the second half of the year, still making it the largest participant among any RGGI states. The 2023 allowance budget calls for 75.5 million short tons, declining 3% per year through 2030.
While some applauded the news, legal opposition to the state's membership is likely to continue which may further delay Pennsylvania's entrance into RGGI.
Meanwhile, Texas continues to attract market attention on Nodal Exchange. The Texas CRS wind and solar futures and options contracts continued to hit new open interest highs last week. Open interest in the Texas products in equivalent megawatt hours totalled 32 million MWh for wind and solar energy.
Canada is prepping the so-called Emissions Reduction Program and Mexico is finally ready to move its carbon market from the pilot phase to official launch next year. Given the massive changes across the globe in voluntary and compliance markets, it's difficult to accurately predict the size of carbon markets but the trajectory is certainly headed upward. One estimate from S&P Market Intelligence and Katusa Research estimated the global carbon market to grow to about $3.97 trillion by 2040.
North American markets continue to show resilience in volatile times but are functioning as designed. State and regional market operators continue to examine and analyze moves that will further strengthen and enhance these cap-and-trade markets while other new markets are preparing to launch in 2023. Debate over existing and new programs will no doubt continue and a federal carbon market for the US seems unlikely at the moment.
Ultimately, this means North American environmental markets are evolving into a larger broader marketplace for carbon, renewable fuel credits and renewable energy certificates as governments, state and federal, continue to push for market-based solutions to address climate change.
These are indeed exciting and active times for North American environmental markets.
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