The carbon markets out West continue down the path of linkage as Washington State’s Department of Ecology is putting for the effort to make sure the everything is in place when it comes to being a part of the California/Quebec infrastructure. The movement was solidified this past November when the initiative to dismantle the Washington Carbon Policy (WCP) was not successful thus giving the green light to forge ahead. The inception of the WCP led to the auction results escalating up in price to where each conversation entered the phase of getting to the cap sooner rather than later as the market fundamentals pointed to a short position in the marketplace. After pushing through the APCR Level 1 price and stretching into the Level 2 threshold within the first 6 months, the rules changed as the allocation of carbon credits were placed in the Level 1 APCR bucket, which held the price just north of $50. After a period of front page news outlet headlines hit the wire, the conversation quickly turned to linking up with California. The unorganized market construct had its oppositional group who pushed for the program to dissolved to which Initiative 2114 was placed on the most recent Washington State ballot, which was letting the voters decide (it needed over 50% yes to dissolve the policy to win, the percentage was far less).
Table 1 | WA Carbon 8th Auction Results – 2024 & 2027 Vintage – December 2024
The latest auction result is from December 2024, which is post-election ballot results and prior to any linkage absolutes with California. The result of $40.26 settled closer to the California daily carbon settle of $35 rather than the more archaic APCR Tier 1 threshold that was once the floor.
Since that time, the California cash carbon price settles have continued to shift lower with the most recent print of $31.06. You must go all the way back to 2022 to see such a decline in the month of January, which ultimately led to the month clearing as low as $28.77.
Figure 2 | CAISO Carbon Settles - Daily
The image in Figure 2 displays the California cash carbon price settle posted by CAISO for the past five years. What is interesting to point out is that once WCP’s ballot result was known, the carbon prices across the West, including CAISO’s daily numbers dropped from just under $40 to that of $35. In the middle of December 2024, there was another steep decline as the level went from $36.38 to that of $33.95. Fast forward to the New Year and a little resolution uptick, the last two weeks have ratcheted down $35.21 to the current level of $31.06.
It is weird to think that a market that was going to be gaining demand would see its value drop by 18% in a matter of two months ($38 down to $31). Looking at the market dynamics over the past couple of months, the one thing that sticks out when it comes to market fundamentals is the lack of natural gas demand within the Golden State.
Figure 3 | CAISO Load and Natural Gas 12x24 Profiles
The image above displays the 12x24 profiles for both CAISO power demand (load) and that of the natural gas supply (NG) within the balancing authority’s footprint for the past three years. The interesting points are two-fold with the first staying with the load profiles where you can see the January 2024 profile is matching that of the previous two years during the light load and ramping periods while the midday is driven lower due to the continued increase in behind the meter solar capacity. We are expecting this to continue to be in display over the course of the coming year and beyond. The second point is on display with the natural gas profile as the trend is staggering to say the least, even on the summer months where 2024’s load came in substantially higher than 202, only to find the natural gas profile being displaced by the added industrial scaled solar capacity, batteries and imported volume from adjacent balancing regions such as the Pacific Northwest and Desert Southwest.
Figure 4 | CAISO 12x24 Profiles for Other Components
The same chart as the previous one is displayed in Figure 4 where the components are the ones mentioned in the list above. Starting with imported volume, since October of 2024, the Pacific Northwest’s Water Year has been better than the two previous ones therefore the region is able to move more power around the West region. It also helps that the lower carbon price is folded into the energy markets, and it does not make sense to export volume out of California and sync it elsewhere. It also helps when entities with the flexible hydro resources can work through the midday to evening ramp/light load arbitrage opportunity that presents itself every day (see import turquois blue line – upper left). Moving down the list, we have batteries next, and the technology continues to have an impact on market pricing. We discuss in detail how the batteries within California are impacting the hourly price buckets in the EnergyGPS Battery Package. For more information on what is included in such a package, email us using the link provided. The flexible resource is what the market needs and the operators of such facilities are optimizing their portfolio to the best of their ability. It should be noted that the fire at the Moss Landing battery facility in the middle of January 2025 is something to keep an eye on as many regulators will want to have a better understanding to the why did it happen question? In-state hydro generation is basically holding steady with slightly less showing up in the evening ramp in January compared to previous years. The solar output is the one that sticks out the most and continues to impact the middle of the day natural gas numbers as weather driven events that once moved the marginal megawatt back into the gas stack now keeps the number of days outside of such a box.
Figure 5 | California Aggregated HDD for November and December
The colder temperatures as of late delivered blue skies across the desert while the coastal portion of Southern California dealt with the fires touching down in the LA Basin and now the San Diego area. We can see from the bar chart in Figure 5, November 2024 was colder than 2023 but warmer than the frigid start to winter in 2022. The same is true for the month of December but January has been at a similar level when it comes to the aggregated HDD numbers for California. This is why the natural gas supply 12x24 profile sticks out so much in January 2024 as the power demand/weather is similar to last year and the consumption of natural gas within the Golden State is substantially lower (less of a carbon footprint in essence).
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