“No bottom in sight” for EUAs, but floor nears for German power -PIRA

Published 11:28 on February 17, 2016  /  Last updated at 14:12 on February 17, 2016  /  EMEA, EU ETS  /  No Comments

EU carbon prices face more downside risks but signs are emerging that German power prices could be bottoming, US-headquartered energy consulting group PIRA said on Tuesday.

EU carbon prices face more downside risks but signs are emerging that German power prices could be bottoming, US-headquartered energy consulting group PIRA said on Tuesday.

Despite EUAs holding above their 22-month low of €4.62 touched last week, PIRA said a number of factors continue to weigh on prices, including “greater supply, a lack of policy action in 2017-2018, reduced demand from forward hedging [by utilities], and lower gas prices that encourage fuel switching away from coal”.

According to analyst estimates, the EU ETS remained oversupplied by at least 1.8 billion units last year, a glut that since 2011 has kept EUA prices under €10.

And with the EU’s Backloading programme wrapping up this year, government auction volumes return to normal in 2017 and 2018, before the bloc’s MSR starts in 2019 and more allowances are removed from the market before the end of the decade.

EUA prices are down by more than 40% since the start of the year, a sharp fall that many say has been exacerbated by a lack of buying by European utilities, which typically buy carbon allowances several years in advance to hedge their forward power sales.

In addition, falling gas prices and, in some cases, higher carbon costs are prompting some of those utilities to decrease their coal-fired power output in favour of the cleaner fuel.

“EUAs are nearing parity with implied carbon values and will more closely track natural gas price movements. We do not currently expect near-term policy support for [EUA] prices. A downward price trigger, like a cancelled auction, could have a sustained negative market impact,” PIRA said.

“There is no doubt that lower carbon compliance costs are a relief for high-emitting units, but in January and February thus far, German lignite units have been ramping down heavily in response of lower [power] prices, suggesting some supply discipline has been emerging.”

Calendar 2017 baseload power prices plumbed a new record low of €20.65/MWh on Wednesday, having fallen by around €6 or 22% since December.

By Mike Szabo – mike@carbon-pulse.com

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