RGGI prices to maintain bullish momentum in 2024 on supply shortages, stricter regulations

US RGGI prices are likely to maintain their upward trajectory in 2024, as seen for the majority of 2023 driven by favorable policies and tighter caps on allowances, sources told S&P Global Commodity Insights.

The Regional Greenhouse Gas Initiative (RGGI) allowances experienced a bullish trend throughout 2023.The Platts RGGI current month strip, the next month strip, and the Next December hovered at all-time high levels with the price for the Next December strip being assessed at $15.25/Allowance on Dec. 21, only slightly away from its all-time high level.

Under the RGGI, power plants that generate at least 25 kWh of electricity must purchase allowances, or credits, equal to the greenhouse gas emissions they emit.

The upward movement in prices can be ascribed to a combination of factors, including regulatory changes, an in-depth program review, design adjustments and a shortage of allowances among compliance entities.

2024 price momentum bullish

Although there remains some uncertainty with states like Virginia leaving and Pennsylvania potentially joining RGGI, recent events, like the Cost Containment Reserve (CCR) activation, indicate shifts in the market, sources said. So, despite the release of allowances, there still will be a shortage, causing prices to rise.

Legal challenges in Virginia may prolong the resolution until 2024, while Pennsylvania's involvement is currently paused pending an appeal. Virginia's potential departure holds the capacity to reshape the program's dynamics given its high emissions and the largest coal fleet among active states (excluding Pennsylvania), sources said.

North Carolina also plans to join RGGI in 2024 after initiating a rulemaking in 2021 to participate in the cap-and-trade program, but legislation in the state House of Representatives and Senate would prohibit participation in cap-and-trade programs.

According to the S&P Global RGGI Scorecard's published on Nov. 8, 2023, Virginia's participation is anticipated to persist through the time series. This expectation is grounded in the belief that Governor Glenn Youngkin's efforts to exit RGGI will continue facing legal impediments.

As of now, Pennsylvania is excluded from the outlook due to the Commonwealth Court ruling on Nov. 1 against its participation. If Pennsylvania were to enter and sustain membership in the program, a short-term bullish impact on prices is predicted as entities accumulate allowances.

In the fourth quarter auction results, the clearing price hit the Cost Containment Reserve (CCR), marking the first activation since Dec. 21, 2021, at $14.88/allowance.

This prompted a noteworthy development for the upcoming year, as the trigger price is set to increase by 7% in 2024, reaching $15.92/allowance.

S&P Global estimates that the current outstanding obligation is 185.7 million allowances, higher than the approximate 173 million allowances held by compliance entities.

"This shortfall highlights that, despite the release of allowances from the Cost Containment Reserve (CCR), compliance entities still face a deficit, resulting in an upward surge in prices," said Matthew Williams, senior analyst at S&P Global.

A key concern in 2024 also revolves around the RGGI program review, potentially marking the most significant issue of the year.

"The results of the review could fundamentally alter the program, particularly by way of stricter caps," said Williams. He also noted that although a draft rule for the update was anticipated in the fall according to the suggested timeline, no release has occurred thus far.

With a tighter cap, the overall supply of allowances gets constrained and the total number of allowances available in the market will decrease, with fewer allowances available in the market.

There has also been a push to adopt stricter emission targets.

"We are urging RGGI to adopt a stronger emissions target this decade -- including at least an 80% reduction in emissions by 2030 -- to ensure that RGGI states take near-term action in line with what's necessary to build out a clean power sector and reach our national climate goals," said Mandy Warner, director of U.S Climate and Air Policy at Environmental Defense Fund.

"Getting on a declining emissions path to this necessary and achievable goal will require a tighter cap on power sector pollution. Recent investments from the Inflation Reduction Act and Bipartisan Infrastructure Law, which are lowering the costs of clean energy, make meeting this ambitious cap much easier".

2023 price trajectory

2023 was an interesting year for RGGI as several events, mostly in the second half of the year, played a role in pushing up prices. Events like Virginia trying to leave RGGI being blocked by Fairfax County on Nov. 3, the Commonwealth court ruling against Pennsylvania's participation on Nov. 1, the lack of a program review update in the fall and the clearing prices triggering the Cost Containment Reserve during the Q4 auction on Dec. 6.

The Platts current month, next month and next December strips hit high record prices in 2023. The strips witnessed gains of 16.6%, 17.1%, and 10.5%, respectively for the year. On Dec. 21, the current month strip was assessed by Platts at $15.25/allowance, 1 cent shy of the all-time high, while the next month strip was assessed at $15.36/allowance, an all-time high.