What can carbon prices tell us about the price of New Zealand energy certificates?
People interested in either buying or selling a New Zealand energy certificate (NZ-EC) for the first time often ask the same question, “What is a fair price for an NZ-EC?” The challenge in answering this question is that NZ-ECs are traded bilaterally between an energy producer and an energy user, or a participant acting on behalf of an energy user. The price resulting from this trade does not normally become public information; it is typically kept confidential between the trading parties. With other markets there often is publicly available price information, such as for physical electricity in New Zealand with the publication of spot prices, the ASX electricity derivative prices and the Electricity Authority’s hedge disclosure website.
The other challenge is that unlike physical electricity, which is the same no matter who produces it, NZ-ECs sold by one energy producer differ from those sold by another energy producer. This is because NZ-ECs by their very nature are specific to the attributes of the production device that produced them. Similarities could be drawn between NZ-ECs sold from production devices with the same fuel source, such as for solar or wind electricity generation. But differences would still remain that may influence the price of the NZ-ECs, such as the age of the production device, its location, its emissions factor, and the use the owner of the production device might apply to NZ-EC revenue.
One thing we can refer to is the price of carbon in New Zealand. The good thing about the price of carbon is that it is well known, and information on it is publicly available and regularly updated. The other good thing is that there is a relationship between the price of carbon and the price of an NZ-EC.
So, let's start by establishing the current price for carbon in NZ. The carbon price is reflected by the price of New Zealand Units (NZUs) sold as part of the New Zealand Emissions Trading Scheme (ETS), often referred to as a carbon credit. The most recent quarterly auction for NZUs was held on 1 September 2021 with a clearing price of $53.85. However, there is also a spot market for NZUs operated by a number of different trading platforms. Since the last auction, the spot price for NZUs on the secondary trading market has increased substantially to $65 (as of 20 October 2021).
Much has been written about the increasing NZU prices in the media, with the view that speculative trading has contributed to pushing NZU prices higher. While some may consider this has artificially increased the price for NZUs, it is often speculators that move prices in markets to their ‘true’ level, and a speculator buying now is likely to be doing so with the view it will be able to sell the NZU for more in the future. Irrespective of the reasons for the change in NZU prices, the most reliable indicator of the cost of carbon is the current NZU spot price.
We can now develop an indicator for the price of an electricity NZ-EC derived from the NZU spot price. We refer to this indicator as the carbon removal cost. Let’s assume an energy user is seeking to report that its scope 2 electricity emissions are zero. It can select amongst a number of recognised approaches to achieve that beyond reducing its own electricity consumption. The first, is that it could purchase a carbon offset. The second, is that it could purchase an NZ-EC from a generator with a zero-carbon production attribute. So, these two options may be substituted for each other, hence the price of one is related to the price of the other.
So how much might it cost to offset one MWh of electricity consumption in NZ? Firstly, you would need to work out the amount of carbon typically emitted per MWh of electricity generated, we refer to this as the carbon intensity of the grid, or more technically as the National Supply Factor (or Residual Supply Factor for market based reporting). Certified Energy provides information on this on our website. A rough guide is that in a typical NZ year (in terms of hydrology, consumption, etc) for each MWh of electricity generated, approximately 100 kgs of carbon dioxide is emitted into the atmosphere. In practice, this will be a mix of renewable generation with zero carbon emissions, low carbon emissions plants such as geothermal, and high emitting plants such as thermal generation fuelled using either natural gas or coal.
Next, if we assume that the price of a carbon offset is approximated by the cost of carbon, then we can create an indicative price for an electricity NZ-EC as follows:
NZ-EC price indicator = CO2e emissions per MWh * carbon credit (NZU) price for one tonne of carbon
NZ-EC price indicator = 100 kg/1000 * $65 = $6.50/MWh
This price should be considered a guide only. As mentioned above, the price of an actual NZ-EC is influenced by the attributes of the production device, the carbon intensity of the grid, and the nature of the NZ-EC transaction itself, such as the volume and duration of the deal. What is very relevant, is that the price of NZ-ECs overtime should trend either up or down in a similar fashion to the movement of NZU prices.
Looking forward, Certified Energy is undertaking work to improve trading arrangements for NZ-ECs. As part of this work, we plan to engage with participants in the NZ-EC market and investigate ways in which we might improve the availability of NZ-EC price information. If you have any thoughts on this, please get in contact with us.