Analysts slash EU carbon price forecasts on expected LNG import boom

Published 02:02 on November 2, 2015  /  Last updated at 02:02 on November 2, 2015  /  EMEA, EU ETS  /  No Comments

Analysts Energy Aspects have slashed their estimates for emissions from European utilities and subsequently EU carbon prices due to an expected boom in gas imports.

Analysts Energy Aspects have slashed their estimates for emissions from European utilities and subsequently EU carbon prices due to an expected boom in gas imports.

“Our conviction that … developments in the related fuel markets (gas and coal) could start to drive down emissions on their own, reining in the upward momentum carbon is currently riding … has strengthened,” the London-based analysts said in a research note published late on Friday.

“We think there is a bearish cloud on the horizon … as Europe accommodates the increases in global LNG supply by pushing gas into power at the expense of coal.”

Energy Aspects predicted that liquefied natural gas (LNG) imports into Europe will swell in 2016 and 2017 due to the commissioning of new supply facilities against a backdrop of weak demand from countries outside the EU.

As a result, emissions from the bloc’s power and heat sector, which accounts for the bulk of emissions output in the EU ETS, are seen dropping by 206 million tonnes or 16.3% between 2016 and 2018, the analysts said, leading them to cut their forecasts for EU Allowance prices from 2017 onwards.

They now estimate the front-year EUA futures to average €10 in 2017, down €2 or 17% from their previous view, and €9 in 2018, down €5 or 36%.

Energy Aspects said the current supply glut will have only decreased modestly to 1.8 billion units by the end of the current 2013-2020 trading phase, leading the analysts to slash their EUA price forecasts for 2019 and 2020 to averages of €10 and €14, down from €18 and €21 respectively.

They also cut their view for Phase 4 (2021-2030) to €33 from €41.

However, they left their 2016 mean view unchanged at €9.80 as any decrease in emissions will be offset by the 200 million allowances removed from the market during the Backloading initiative’s final year of curbing supply.

The analysts added that they see EUA prices averaging €8.50 during Q4 2015, before climbing towards €11 by the end of next year.

FUEL-SWITCHING

One of the main effects of cheaper, more abundant gas in Europe will be a rise in fuel-switching, where capable utilities swap burning coal for the cleaner alternative.

Energy Aspects forecast that some 300 million tonnes of emissions reductions could come over the next few years from replacing a significant amount of coal-fired power with gas, and from gas prices falling low enough to force most remaining lignite plants out of the merit order.

While cutting emissions output, this could also cause some utilities to unwind some of their existing forward power hedges, which would leave them with EUAs that would either be sold back to the market or kept, thus curbing future demand.

As a result, the analysts cut their year-on-year forecasts for emissions from the EU power and heat sector by 5.5% in 2016, 7.3% in 2017, and 4.5% in 2018 – an overall reduction of 206 million tonnes or 16.3% over those three years.

They predicted utility emissions would drop by a more modest 6 million tonnes or 0.5% this year due to mild weather and greater shares of the energy mix achieved by renewables and gas.

The dip will be offset by industrial emissions edging up by 3 million tonnes this year, leading to an overall drop in EU ETS emissions from stationary installations of 3 million tonnes to 1.812 billion tonnes.

That is down from their previous view of an EU ETS-wide increase of 11 million tonnes this year.

The analysts predicted that Phase 3’s EUA surplus will now bottom at around 1.6 billion tonnes in 2016, before climbing back above 1.9 billion by the end of 2018 and then levelling off through the final years of the decade as the MSR starts to absorb supply.

As a result, the bloc’s supply regulating mechanism will remove allowances from the market until 2028, Energy Aspects said, adding that the reserve would have reached 3.3 billion tonnes by then and therefore would take 33 years to empty based on current EU rules.

By Mike Szabo – mike@carbon-pulse.com

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