Price increase mirrors market balance expectations

Background

Germany closed the 2023 disclosure window on 1 November 2024 as the last of the AIB countries, contributing to a drop of 2023 GO closing prices by 21 % on 4 November 2024. Although interest in this vintage is expected to come to an end as it is approaching its expiry date, the 2023 GO supply has left its mark on the market.

The option to use the 2023 vintage for future year disclosure periods in jurisdictions without temporal matching requirements, requires market participants to keep close attention to the cumulative market balance. Such an option exists as long as the GOs fall within the 12-18 months GO expiry date. The cumulative balance refers to the balance the GO market has accumulated since the inception of the system in 2001.

The absence of temporal matching requirements for disclosure in many AIB countries has since the beginning of the GO system allowed market participants to bank and roll over GOs for future use. Until the adoption of the first Renewable Energy Directive (RED I) (which replaced the Renewable Electricity Directive), banking was not subject to any limitation. However, with the transposition of RED I, banking became restricted by the GO expiry date.

With these changes, the cumulative balance on the GO market contracted with 117 TWh between 2009-2011, as seen in the graph below. But the possibility to roll over supply, by using the previous year’s vintages for disclosure in the following one to two years (depending on national rules), allows a rolling effect of the market balance.

According to our calculation, which builds on and is subject to abnormalities and possible errors in the AIB statistical data, the cumulative balance of EECS GOs corresponding to the production of electricity from renewable sources (RES-E) stood at 164 TWh following the main 2023 disclosure deadline on 31 March 2024.

Veyt’s medium-term forecast indicates that this oversupply will increase this year, as we have seen high RES-E production in the AIB region so far in 2024, while it is uncertain to what extent recent EU regulations and the sharp year-to-date price declines will result in higher demand.

Impact of market balance expectations

The growing cumulative balance of RES-E GOs has a bearish impact on spot and future prices. However, while the possibility of banking GOs has an impact on future contracts, the expectations of supply and demand balance in the future can also affect spot prices, at least if participants expect a tightening in the market balance as this gets discounted and priced in.

This is because market participants may purchase spot vintages to use for disclosure up to two years after the corresponding power production within the expiry deadlines to hedge against expected future price increases.

Veyt’s long-term model takes into account the cumulative balance until 2040. Our latest modelling update indicates that demand will eat up the oversupply in the next few years. This development is driven by a growing demand from corporate and industrial end-consumers, including for renewable hydrogen production.

For companies looking to align with European regulations such as the Corporate Sustainability Reporting Directive and other relevant legislation, current price levels provide an incentive to enter the market with a buy-and-hold strategy and thereby provide a bullish price impact.

Expectations of increasing future demand and a tightening of the market balance are reflected in the price development of future contracts and it can affect spot prices as seen for 2024 contracts on 21 November 2024.

This is also reflected in the price forecast of Veyt’s Base Case, with an annual volume weighted average price of more than double that of current levels for 2027 vintage, also under favourable weather conditions for renewable generation.