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
