CORRECTED - UPDATE 2-US carbon prices slip 8 pct in RGGI auction

Fri Jun 19, 2009 3:19pm EDT

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(Corrects percent change)

(Updates with expert comments, background)

NEW YORK, June 19 (Reuters) - Prices for carbon allowances in 10 eastern U.S. states have tumbled 8 percent due to the recession and mild weather taking a bite out of the power usage, cheaper clean natural gas supplies and the potential risks from a new energy bill.

The 10 states participating in the Regional Greenhouse Gas Initiative cap-and-trade system said on Friday that they raised $104.2 million in the fourth quarterly auction of carbon allowances held on June 17.

Prices in this auction cleared below previous auctions for the first time, as the 2009 allowances cleared at $3.23 a ton in the fourth auction versus $3.51 in the third auction. The 2012 allowances cleared at $2.06 a ton in this auction versus $3.05 in the third auction.

"Allowance prices are down for three reasons - emissions are down, fuel prices are down and the possible federal preemption of RGGI," said Emilie Mazzacurati at Point Carbon.

She explained that coal plants were running less in part because natural gas is cheap. Natural gas is trading at a little over $4 per million British thermal units, down from over $13 last summer.

A coal plant produces about twice as much CO2 as a similar sized natural gas plant. A 1,000 megawatt coal plant produces about 6 million tons of CO2.

WAXMAN-MARKEY PREEMPTION

In a report earlier this week, Mazzacurati said the Waxman-Markey federal energy bill, which is working its way through the U.S. House, contains a provision that would preempt RGGI from 2012 to 2017.

The proposed federal bill would allow holders of RGGI allowances to convert their allowances into federal allowances at an average of the auction clearing prices.

The Waxman-Markey allowance conversion rules are limiting potential upside for RGGI prices, Paul Tesoriero, director of environmental markets at Evolution Markets LLC, told Reuters.

Both Tesoriero and Mazzacurati noted fewer financial firms participated in this auction than in the past due in part to the potential limited upside caused by the allowance conversion provisions of the Waxman-Markey bill.

RGGI said compliance entities - those that need to buy allowances to offset emissions - bought 85 percent of the fourth auction allowances versus 78 percent in the third.

The ten states hold quarterly auctions and invest the proceeds in energy efficiency, renewable energy and other programs to benefit energy consumers and create green jobs.

All of the 30,887,620 allowances for the 2009 vintage offered in Wednesday's auction sold at a price of $3.23.

Potomac Economics, the RGGI independent market monitor, said 54 separate entities submitting bids to purchase 2.6 times the available supply of 2009 allowances.

In addition, all of the 2,172,540 allowances for the 2012 vintage sold at a price of $2.06 with 13 entities bidding to purchase 1.5 times the available supply of 2012 allowances.

The states have now auctioned more than 110 million allowances and raised a total of $366.5 million since the first RGGI auction in September 2008.

The 10 RGGI states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Hampshire, New York, Rhode Island and Vermont. (Reporting by Scott DiSavino; Editing by Marguerita Choy)

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