European carbon prices eased on Thursday after hitting a fresh two-month high earlier in the day, as uncertainty surrounding some details of yesterday’s EU Council agreement on the MSR lingered and as news emerged that Germany was considering watering down its proposed coal levy plan.
Front-year EUA futures climbed as high as €7.64 in the first three hours of trade before sliding back to settle at €7.43 – down 7 cents and just above its session low of €7.41.
Volume on the contract was modest at around 17.6 million units traded.
“The market is still digesting the elements of the MSR proposal, but I think a lot of this was already priced in … (and) it looks like there was a bit of ‘buy the rumour, sell the fact’,” one trader said.
While EU member states and European Parliament appear to agree on starting the MSR in 2019 and putting backloaded and unallocated allowances in it from the get-go, there may still be some disagreement on measures to compensate industry for higher carbon prices.
The Parliament supports setting aside 300 million unallocated allowances for an industrial innovation fund.
However, this amendment was stricken from Wednesday’s EU Council agreement text and replaced with a yet-to-be-formally-announced and reportedly tentative deal to exempt from the MSR allowances earmarked for poorer nations under the bloc’s ‘solidarity fund’, which was agreed during the EU 2030 energy and climate package talks last October.
German lawmaker Matthias Groote, one of the lead MEPs on the file, on Twitter said an agreement between Parliament and the Council of member states was “not a given”, but Scottish MEP Ian Duncan added, also on Twitter, that no obstacles should be insurmountable.
POLICY-DRIVEN PRICE VOLATILITY
The Dec-15 EUA price is still some 2% above levels seen before it emerged last Friday that Latvia would amend its MSR proposal to push member states towards the parliament’s stance backing a 2019 start.
Energy Aspects, in a research note published Thursday, wrote that any short-term EUA buying driven by an MSR agreement could quickly dissipate and prices could drift lower on the back of relatively weak market fundamentals, which include limp demand from the power sector.
“The conclusion of the main part of the MSR legislative process is in sight and May should be the last month where this policy process is likely to drive price volatility. A 2019 start date could add some value when it looks certain, although that start date is still far enough in advance that any sustained impact on underlying price levels is likely to be modest.”
The analysts added that CO2 demand from utilities hedging forward power sales is likely to improve “a little” and the withdrawal of more allowances from sale under backloading could lead to more sustained price increases in H2-15 and in 2016.
Energy Aspects left its EUA price forecasts unchanged, predicting an average €7.80 in 2015 and increasing to €10.50 in 2016 and €21.00 by 2020.
“We believe the policy uncertainty around these numbers has eased,” the analysts added.
FLOATING GERMAN COAL LEVY?
Another trader said news that Germany was mulling linking its proposed levy on coal-fired plants to wholesale power prices from 2017 rather than fixing it may have also helped to mute carbon’s bullish sentiment on Thursday.
News agency ICIS reported that the German economy ministry said it may force plants older than 20 years to buy extra EUAs, on top of their existing compliance needs, worth a value based on power prices rather than a set range starting at €18-20 as proposed by the government last month.
A spokeswoman for the ministry told ICIS the re-think was because the original plan could cost plant owners too much as it assumed a €42/MWh power price by 2020 – or roughly a third more than current levels.
Economy minister Sigmar Gabriel last week said Germany will review its proposed plan – which has divided the industry and energy sectors, as well as government – and scrap it if it’s deemed detrimental to the country’s competitiveness or employment levels.
By Mike Szabo – firstname.lastname@example.org