Higher CO2 price would help EU utilities, but remains a pipe dream -Moody’s

Published 17:44 on June 30, 2015  /  Last updated at 12:05 on July 13, 2015  /  EMEA, EU ETS  /  No Comments

European utilities would benefit financially from higher EU carbon prices, but they are unlikely to rise much above €7 through 2020, ratings agency Moody’s said on Tuesday.

European utilities would benefit financially from higher EU carbon prices, but they are unlikely to rise much above €7 through 2020, ratings agency Moody’s said on Tuesday.

More expensive EU Allowance prices would translate into higher power prices, which would benefit “almost all” European utilities, Moody’s said in a series of published reports.

Electricity prices across much of Western Europe are near multi-year lows due to anaemic demand and supply overcapacity amid a subdued macroeconomic environment and increasing energy efficiency, it said, adding it expects them remain weak through 2020.

But Moody’s forecast that EU carbon prices, seen as one of the few drivers of European electricity prices that don’t depend on market dynamics but rather on the actions of lawmakers, would also remain muted for the rest of the decade.

“We expect the price of carbon allowances to remain low in the medium term in the absence of additional changes to the current framework,” said Paul Marty, a VP and senior analyst at Moody’s, adding that the current permit oversupply in the EU ETS is expected to last until at least the mid-2020s, despite the 2019 introduction of the MSR.

“Our estimate is for the CO2 price to remain low through 2020 at around €7 per tonne, broadly in line with current levels.”

Moody’s said a UN climate treaty agreed later this year that leads to tighter emissions controls could support carbon prices.

“However, affordability concerns and opposition from certain EU governments are likely to prevent a sharp step change in the ETS mechanism and hence in the CO2 price,” it added.

“In a hypothetical scenario of higher CO2 prices, the effect on power prices would vary by market: the impact would be greater on coal-driven markets (e.g. Germany) that have greater carbon intensity than on gas-driven markets (e.g. Italy).”

Moody’s said the lowest CO2 emitting utilities with hydro or nuclear generation in their fleets, for example EDF, Verbund, Fortum and Statkraft, are best positioned to accommodate government policies supporting GHG reductions and higher CO2 prices, while bigger emitters with lignite or coal plants like RWE and Polish utilities are the worst positioned.

In terms of country-specific wholesale power prices, Moody’s forecast:

  • German power prices will remain around €30-35/MWh through 2020 (compared to €31-32 currently) because new capacity will shift price-setting from marginal hard coal plants to more efficient ones, coal prices will recover only modestly over the period, and EUA prices will remain broadly flat.
  • British power prices will remain low through 2020 at between £42-46/MWh due to ongoing demand reductions and growth in electricity interconnectors and renewable energy sources, provided gas prices remain stable.
  • Italian power prices will slip into a €42-47/MWh range from €48-51/MWh currently due to lower gas prices, weaker demand, and oversupply.
  • French power prices will stay in a range of €36-41/MWh through 2020 because the country’s mainly-nuclear fuel mix will not change significantly by the end of the decade, and as wider energy prices will remain broadly stable.
  • Polish power prices will remain at low levels within a range of PLN160-180/MWh (€38-43/MWh) through 2020 (compared to PLN163/MWh currently) because the scale of the country’s installed capacity will not change substantially, and as demand grows the reserve margin will gradually tighten until new power plants are commissioned in 2019.
  • Iberian power prices will remain near current levels and trade between €45-50/MWh through 2020 due to limited changes expected in the generation merit order, modest demand growth and flat commodity price estimates.
  • Nordic country (Norway, Sweden, Finland and Denmark) power prices will within a €25-30/MWh range through to 2020 due to flat demand combined with surplus output from growing renewable capacity.
  • Irish power prices will continue to fall over the next three years, but at a more gradual pace than seen in 2013-14, to a range between €53-58/MWh thanks to an increase in the number of onshore wind farms.

By Mike Szabo – mike@carbon-pulse.com

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