17 January 2009

Depressed carbon prices to have ripple effects

By Michael Szabo, Reuters, Jan 15, 2009 2:29pm GMT


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LONDON (Reuters) - Tumbling prices for emissions permits may have knock-on effects on the world's $120 billion carbon market, including a slowing of U.N. offset supplies and a shake out in green project developers.

Carbon offsets traded under the Kyoto Protocol and used by European industry to meet carbon caps, representing a $32 billion market last year, have not escaped the global economic downturn, more than halving 2-year highs hit last summer.

That came on the back of weak energy prices, increased selling of credits by cash-strapped firms and an anticipated drop in emissions from muted European industrial production.

U.N.-approved offsets called Certified Emissions Reductions for December delivery were trading at 11.95 euros ($15.71) on Thursday.

Low CER prices are deterring new investment in clean energy projects, cutting the number of developers chasing deals in the number one market China.

"I'd say there's half the number of players now than there was a year ago. Banks have cut back considerably and developers aren't been pushing as hard," said a small Chinese project developer, requesting anonymity.

"The number of buyers competing in the primary CER market has fallen quite considerably from a year ago, meaning there's less upward pressure on CER prices."

Under the Kyoto Protocol's Clean Development Mechanism (CDM), companies can invest in a primary market of projects in developing countries, and receive CERs to sell to industry in a secondary market in the North -- cashing in on the price spread.

The lull in CER prices is expected to last up to two years and may significantly alter the developer landscape.

James Graham, commercial strategy director at project developers Camco International, argues that a drop in CER prices will have less effect on established developers because primary market CERs (pCERs) are still priced higher than when they started out.

"In mature markets, pCERs have been contracting at above 10 euros for the last 12 months ... and a shake out of the latecomer (developers) is possible," he told Reuters.

Wipe Out

As only a few developers report average pCER contract prices, it is difficult to predict who might be wiped out.

"The drop in CER prices is hurting us, but we'll definitely survive," said Lars Alm, CFO at smaller, Sweden-based developers Tricorona. "I think there is going to be some consolidation in the market."

CERs are expected to range from 18-21 euros to 2012, so developers are delaying selling at these levels.

"Present market conditions don't reflect the full value of delivered CERs, so while people may be interested in buying at this point, there is less interest from sellers," Graham said.

Although limiting revenues during a global recession may sound like a bad idea, equity analysts say the three largest publicly-traded developers, Camco, EcoSecurities and Trading Emissions, are well positioned to weather a prolonged downturn in CER prices.

"They're in an extremely strong position due to their cash holdings and the fact that none of them has any debt," said Agustin Hochschild of Mirabaud Securities, citing low contracted pCER prices of between 7.50-8.50 euros and hefty cash holdings ranging from 25 million to 85 million euros each.


China raised its imposed pCER price floor to above 8 euros last year, which some say is also hindering investment by keeping margins tight in the world's largest pCER market.

China dominates the CDM, accounting for over half of the nearly 3 billion CERs expected by 2012, U.N. data shows.

Developers are hoping the government will take notice of the depressed market and ease minimum prices.

"If the government shifted it back down to 6 euros, it would help things a lot by providing more breathing space ... projects are suffocating at these levels," said the Chinese developer.

But others are skeptical that the government will be quick to relieve pressure. "It would take a sustained period of depressed prices to see a revision of the pCER floor price in China," said Graham.

(Editing by Gerard Wynn and James Jukwey)
© Thomson Reuters 2009 All rights reserved.

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