The 14th joint auction of the Western Climate Initiative, and the first that Ontario participated in was fully subscribed for 2018 current vintage allowances and was undersubscribed for 2021 future vintage allowances.
The results of the February 21st auction were posted on February 28th at 3pm. Participants in California, Quebec, and Ontario purchased 98,215,920 current vintages allowances with a 1.21 bid to cover ratio and 8,576,000 future vintage allowances with a 0.69 coverage ratio. This auction is expected to raise roughly $471 million for the Province of Ontario.
Joint Auction Results vs Expectations?
Expectations varied among market analysts. Some expected the auction to be fully subscribed due to record high open interest levels, while others predicted an undersubscription. But there was consensus that the 14th auction is an important milestone in setting expectations for the rest of 2018.
Overall, the auction results demonstrate the continued positive uptake of the cap and trade program by participants. A summary table of the results is here:
Subscription and Bid to Cover Ratios
- The past four joint auctions have sold out completely of current vintage emission allowances.
- Ontario’s last auction sold out of future vintage allowances but not current vintages allowances (0.83 bid-to-cover ratio). The latest auction results are opposite, as Ontario fully subscribed to current vintages but not to future vintages.
- The bid to cover ratio is the total qualified bids divided by total allowances available for sale.
- A 1.21 bid to cover ratio for current allowances is a slightly bullish result that indicates healthy demand. A total of 20.6M bids were not filled.
- The 0.69 bid to cover ratio for future allowances is significantly lower than the past two joint auctions, which had bid to cover ratios of 1.84 and 1.27. This may reflect a lower amount of hedging for future compliance because of the uncertainty of Ontario’s future participation in the WCI market.
- The settlement price for current allowances was $18.44 CAD, $0.10 higher than the reserve price and the settlement price for future allowances was the same as the reserve price.
- The resulting price for the current allowances was relatively low considering the bid to cover ratio of 1.21. The last joint auction had a bid to cover ratio of 1.37 and the price was $1.49 above the floor.
Herfindahl-Hirschman Index (HHI)
- HHI measures market concentration by squaring the market share of each firm competing in the auction and them summing the resulting numbers. The lower the HHI, the more competitive the marketplace is.
- The latest Joint Auction had a HHI of 436 for current allowances – the lowest out of all the 14 joint auctions. There were a total of 121 qualified bidders
- This is likely because of Ontario’s participation in the auction which distributes market share to a larger amount of firms.
- The linked market provides these companies with more choice and lower cost options for reducing their greenhouse gas pollution.
Increased Supply of Emission Allowances
Additional allowances are released into auctions if two consecutive auctions are fully subscribed (sold out). Up to 59.5 million allowances will be released if the next quarterly 2018 auction is fully subscribed.
The likelihood that supply will increase is slightly higher now that the first auction was fully subscribed for current vintages. Despite the potential for increased supply in the future, the strong auction results highlight that market participants may expect to absorb that additional supply in the future. Prices may increase in secondary markets as a result.
Conclusion: Strong Results Despite Market Uncertainty
Regulatory uncertainty remains a concern for market participants as Ontario’s provincial election approaches on June 7th. Nevertheless, the auction demonstrates strong results especially considering the fact that this was the first auction for California and Quebec’s new compliance period.
Photo Courtesy of Dick Duckhorn