Transact recently caught up with Kenneth Ivanic, Vice President of Environmental Markets at World Energy Solutions, to discuss insights from Carbon Expo and analyze today’s carbon market.
The market is desperate to know what is going to happen post-2012. On the commercial side, buyers are struggling with long-term concerns in the absence of any binding rule sets from either the EU or U.S. This lack of clarity makes it extremely difficult for buyers, who are used to hedging years out and whose daily job is to mitigate their company’s exposure. Not knowing if post-2012 will be a cricket match or a hockey game makes it awfully difficult to suit up appropriately. While buyers are doing their best to read the tea leaves, project developers and other suppliers are simply trying to get their projects funded and adjust to the new normal.
That said, I could still sense optimism among show participants in terms of the market and how they are moving forward in it. But overall, the takeaways from Cologne are that everyone is looking to figure out how to make this market work and awaiting that rule set – with a keen eye on the U.S. – that will provide near- and long-term market clarity and direction.
I think the key for buyers and sellers alike is to be realistic and to better understand the drivers of the deal from the other side of the transaction. For sellers, we advise being realistic in terms of post-2012 expectations. Sellers have been used to, and typically looking for, a fixed price or maybe even a higher floor price because they’ve been dealing in pre-2012 commodities. But in the post-2012 world, they have to accept that from a buyer’s point of view a floor price is very unattractive. Buyers want the safety of index-based pricing.
I’m struck by the difference a couple of years makes. I remember doing trades pre-recession, when folks were bullish on the voluntary market, and having sellers turn down US$6.00/tonne. Now sellers have to try to get comfortable with the notion that $3 or $4 per tonne can be quite a generous offer. It’s a lot like today’s housing market, where the power has moved from sellers to buyers, and buyers have plenty of inventory to choose from.
We are adapting to this by helping our customers adapt. Sellers today need to understand that buyers are more discerning, looking for – and demanding – exactly the kind of project they want, particularly given the uncertainties in the market. This puts transparency at a premium. Sellers should be prepared to negotiate on price, but, more importantly, they really need to sharpen their focus on providing project documentation and other items that promote clarity and make their projects stand out. Earlier this year, World Energy shared tips for transacting in this uncertain market called “Getting Buyers to Yes”