Current VEEC creation and required target
On 21 May the State Government announced that the Victorian Energy Efficiency Target (VEET) will end after 2015 compliance has been completed. While this was not the announcement that the industry was hoping for and, putting aside the possibility of a change in government, it has defined the requirements for the remaining life of the scheme. We can now determine the number of certificates that need to be surrendered for the last two years of the VEET and how many more certificates need to be created to meet the target.
Considerations for installers
- Despite last week’s announcement, the VEEC price is holding stable with supply roughly equal to demand.
- In 2015, the weekly VEEC creation target will drop to 38,462. Given the introduction of increased compliance requirements for Activity 21C, we may experience a natural dip in creation levels in line with the 2015 target.
- VEECs can continue to be created after the 2015 target is met and, if this occurs, the VEEC price is likely to drop. Conversely, if the 2015 target is not met, the VEEC price is likely to increase.
Certificate surrender for 2013 was completed on 30 April 2014 leaving us with two years of surrender to complete. The total number of certificates surrendered for both 2012 and 2013 however, was less than the notional annual target of 5.4 million certificates. This situation is permissible due to the way that liable parties’ annual liability is calculated, but any under-surrender must be made up for in the final year of any three-year period; in this case 2012 to 2014. So the residual surrender for the current period equals; 3 x 5.4 million less the total surrenders to date:
So if we assume that exactly 2 million certificates need to be surrendered for 2015, then a little under 7.53 million certificates are yet to be surrendered.
On the supply side, as at 25 May 2014, we had almost 3.4 million certificates which were registered and available for surrender, plus a further 609,000 which were pending registration. Many of those which are pending registration have been pending for a long period, so we have assumed that one-third of these will never be registered. This gives us approximately 3.8 million certificates which have already been created and will be able to be used for surrender.
Which leads us to the question of, how many certificates need to be created each week in order to meet each annual target? When calculating the weekly creation requirements for 2014 we need to consider that any certificate created by 30 January of the year following a compliance year can be used for the previous year. So accounting for the current over-supply, between now and 30 January 2015, we need to create 46,709 certificates per week to meet the 2014 target. Assuming that we meet 2014’s target with no over-supply, 2015’s target will be simply 2 million divided by 52 or 38,462.
Since the announcement of the end of the VEET, the VEEC certificate price has stayed fairly stable. This indicates that the market was expecting a phasing out of the scheme as per earlier newspaper reports. Average VEEC creation however has been higher than the required level for 2014, at 55,850 per week for the 12 weeks to 23 May. The market had clearly factored a future reduction in certificate creation, due to increased compliance requirements for 21C activities. From 20 May, 21C activities needed to be performed by a licenced electrician, which significantly increases the cost of this activity.
It is important to note that, while there was significant certificate creation potential from 21C, this activity was yet to see a significant rate of consistent creation. Activity 21C had contributed to 8.2% of total VEEC creation for the four months to the end of April. Activity 21D, for which there were no compliance changes, created 8.7% of certificates over the same time frame. Prior to January, 21C creation figures were negligible.
As we near the end of the scheme we may see the VEEC price move toward extremes. If there is an over-supply then certificate prices may get very low as they will be worthless after 2015 compliance. If there is an under-supply, the price is likely to approach the tax effective penalty rate. For the time being however, VEEC prices are stable at the mid $18.00 level, with supply roughly equal to the 2014 demand.