CDM investors reject CER prices below €10.00/tCO2e

21 Oct 2010 15:29:37
Investors in the primary market for certified emission reductions (CERs) peg Year 2013 deliveries at €9.00-11.00/tonne of CO2 equivalent (tCO2e), according to an ICIS Heren poll.

Post-2012 prices in the CER market remain fragmented, with the value depending on where the project is based and what methodology it uses.

Most investors with presence on the ground say they are unwilling to sell below €10.00/tCO2e for "a quality project".

"I don't think you would get anything sold under €10.00/tCO2e," one source said. One buyer is rumoured to be on the look-out for post-2012 CERs for €9.00/tCO2e and failing to secure any volumes, he added.

Sources agreed that €9.00/tCO2e was a representative bid for Year 2013 CERs at present, around €3.00/tCO2e below current Year 2012 prices in the secondary market.

Lower price for greater risk
Some primary CERs might sell forward at a lower price than that, but only if they carry heavy counterparty, country and delivery risk.

A project without any financing in place in a country with low creditworthiness could sell credits at €7.00/tCO2e, but that would be a too speculative play for most investors, sources said.

Quality projects are those likely to be accepted by the EU even after 2012, so include renewable projects in countries that are either very poor or currently host very few clean development mechanism projects.

"The price depends on the quality of the CER you are holding. A biomass in Africa is worth more than €8.50/tonne - a large industrial gas project maybe isn't", one source said.

But while investors, often with niche carbon experience or acting on behalf of utilities, are reluctant to lower prices below €10.00/tCO2e, many buyers think this price is just too high for the risk of ending up with a CER that might not be valid under the EU Emissions Trading system (ETS).

Financials back out
Banks are backing out of the market, as their risk managers are unhappy about the exposure to political whims.

One banking source said he would not take up a long position in post-2012 CERs "for the foreseeable future" and could not imagine that many others would either. Investors on the ground were scathing of banks assessing the value of the market but "not putting their money where their mouth is."

Two-tier market
The diversifying risk is already starting to create tiers in the CER market, even for credits with delivery before 2012. Buyers are starting to ask for certain CERs and are ready to pay more for them.

This is linked to both delivery risk and the threat of a credit not being EU ETS eligible. Concern is also growing over the future of hydrofluorocarbon (HFC-23) CERs.

Brokers confirm they have been approached by customers looking to buy non-HFC-23 credits and are prepared to pay extra for the guarantee. Anecdotal evidence puts this premium at €0.10-0.20/tCO2e, or around 10% of the current benchmark CER price.

This is likely to keep CER liquidity in the over-the-counter (OTC) market. Various sources estimate that around 90% of CERs trading on exchanges come from HFC-23 projects, with no current filters in place to weed these out.

"There is already a premium on OTC CERs. If you buy a CER on an exchange, you have to factor in the risk that what you get is an HFC-23 CER," one source said. IS

Gazprom to buy first Chinese post-2012 CERs /// Point Carbon

07 Jun 2010 11:23 CET Last updated: 08 Jun 2010 09:35 CET


Gazprom will buy 1.5 million CERs per year from two post-2012 CDM projects approved by China.

The National Development and Reform Commission (NDRC) has confirmed on its website that it has approved two programmatic clean development mechanism (CDM) projects for the period after the Kyoto protocol expires.

This is the first time applications have been made for post-2012 approvals in China and Russian gas company Gazprom is believed to have paid at least €8 per certified emission reduction (CER), as this is the official minimum price accepted by the Chinese government.

The price and conditions are in line with government policy for pre-2012 credits, which sets a floor price for CERs to protect Chinese enterprises.

Uncertainty

Investors have so far shied away from buying post-2012 credits in China due to uncertainty over what will happen to the CDM in the country after 2012.

The lack of an international climate treaty to replace or prolong the Kyoto protocol means there is doubt over whether the scheme will continue to exist.

Meanwhile, developed countries are calling on China to take on some form of carbon emission obligation in a future treaty, casting doubt over its eligibility to host CDM projects.

Rich nations are also trying to reform the CDM, seeking to limit it to the poorest countries.

In addition, the lack of firm targets post-2012 has made most market participants pessimistic in terms of CER demand over the next decade.

“With regard to the Chinese post-2012 market, this is something developers have been waiting for for quite some time and we are delighted to have been the first to receive an approval from the NDRC for post-2012,” said Dan Berry, deputy director global carbon at Gazprom Marketing and Trading.

“What will happen in terms of treatment of certain sectors in a future mechanism is still of course unclear, but we are positive about the continuation of the world’s largest CDM market, and a positive consideration of PoAs such as these that are providing households with a renewable energy source for cooking,” he said.

Programmatic biogas

The credits will be sourced from programmes of activities (PoAs), meaning they will be implemented at a number of facilities instead of only at one location, which is normal for the CDM.

The two programmatic activities, the first-ever of their kind to be okayed by China, will install biogas digesters to supply gas to over 800,000 households in two rural areas in the Henan province, cutting emissions by almost 1.5 million tonnes of CO2 equivalent annually.

“This is very encouraging for both project owners and buyers,” said Kou Weiwei with Accord Global Environmental Technology, a sister company of the project developer OCCDM.

She said a number of companies in the market are interested in applying for post-2012 approvals, but have so far been uncertain whether the government would give any project the thumbs-up.

“There has been a lot of wait-and-see, but no they can go ahead,” she said.

All of the more than 2,500 projects that have been approved by China so far must also reapply if they want to keep the projects running beyond 31 December 2012.

Both projects will start during the current Kyoto commitment period and will run for 10 years.
By Stian Reklev – sr@pointcarbon.com and Kathy Chen – kach@pointcarbon.com
Beijing