Allowance surplus in China’s pilot markets to grow as slowdown hits power, manufacturing sectors

Published 10:40 on January 19, 2016  /  Last updated at 11:00 on January 19, 2016  /  China, China's Pilot Markets  /  No Comments

Power generation in China fell in 2015 for the first time in nearly half a century with fossil fuel-fired output hit the hardest, data from the National Bureau of Statistics showed on Tuesday, pointing to a drop in absolute CO2 emissions and a growing surplus of allowances in the country's seven pilot carbon markets.

Power generation in China fell in 2015 for the first time in nearly half a century with fossil fuel-fired output hit the hardest, data from the National Bureau of Statistics showed on Tuesday, pointing to a drop in absolute CO2 emissions and a growing surplus of allowances in the country’s seven pilot carbon markets.

The NBS data said power generation in 2015 fell 0.2% year-on-year, contrasting with numbers from China Electricity Council and the National Energy Administration, which both suggested a small increase of under 1%.

Tuesday’s data showed thermal power generation fell 2.8% last year, with two-thirds of the drop in coal-fired generation despite a nearly 8% growth in capacity.

The data came as China said its GDP grew 6.9% in 2015, down from 7.3% the previous year and the lowest annual growth figure in 25 years.

The falling generation numbers were accompanied by reductions of 4-7% in output of key commodities such as cement, iron and coking coal. These declines were linked to the slowdown and restructuring process of the Chinese economy.

CO2 ALLOWANCE SURPLUS

The numbers, though not unexpected, are likely to extend the surplus of allowances in China’s seven pilot carbon markets, and might be a warning sign for the central government as it ponders whether to allocate allowances in the national ETS based on grandfathering or benchmarks.

“The markets are already over-supplied, and this will probably worsen the situation in all the pilots except Beijing,” said Sophie Lu, an analyst with Bloomberg New Energy Finance.

She said BNEF data showed only marginal changes in power consumption numbers in all the pilot regions except the capital, where the mild winter of 2014 was followed by a cooler 2015, causing a bump in electricity consumption.

“Most of the markets expected a 3-5% growth in power demand, so they are likely to have over-allocated. For Beijing, the generation growth is unlikely to have much impact because less economic activity in some of the other covered sectors will more or less cancel it out,” she told Carbon Pulse.

Analyst Jian Wei Lim with ICIS-Tschach said the manufacturing data meant the allowance surplus held by industrial firms was also likely to swell.

“Cement production decreased almost 5% year-on-year. Combined with the fact that some pilots are using grandfathering to allocate allowances in these sectors, many industrials should continue to have a surplus,” he said.

Most of the pilot market regulators have the opportunity to trim some of the surplus based on verified emissions data, but they normally don’t make that information publicly available.

SLOW IMPACT

The slowdown has dented demand in the seven pilot markets and kept prices low, although the real impact is unlikely to be observed until closer to the compliance deadlines in June and July.

The pilots typically follow a pattern where prices and trading volumes slump after the summer compliance rush, with only a handful of companies active in most of the markets.

Emitters firm up their positions in January or February when they verify their emissions, and the majority of trading takes place between March and the June/July deadlines.

In previous years, prices have spiked in some markets when there have been pockets of allowances shortages.

By Stian Reklev – stian@carbon-pulse.com

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