China CO2 prices to remain low on moderate power demand forecast

Published 11:55 on July 30, 2015  /  Last updated at 11:55 on July 30, 2015  /  China, China's National ETS, China's Pilot Markets  /  No Comments

China’s power demand is set to pick up slightly in the second half of the year, the electricity industry body said Thursday, but thermal power generation will continue to struggle, meaning a rebound for CO2 prices looks unlikely.

China’s power demand is set to pick up slightly in the second half of the year, the electricity industry body said Thursday, but thermal power generation will continue to struggle, meaning a rebound for CO2 prices looks unlikely.

Sluggish market conditions meant power demand in China in the first half of the year rose only 1.3%, the lowest growth rate in 30 years, while thermal generation even fell year-on-year as more renewable capacity came online.

The China Electricity Council on Thursday said it expected overall power demand to pick up in the second half of the year, with annual growth for 2015 expected to be 2-4%.

But non-fossil fuel generation is expected to account for most of the growth, with utilisation rates for coal plants set to fall to record lows in H2, the Council said.

Despite a 50% drop in hydro power investments over the past three years, non-fossil fuel output will account for 53% of new installed capacity in 2015, and will reach 35% of total capacity by the end of the year, the industry body estimated.

CARBON PRICE DROP?

The forecast means China’s seven pilot carbon markets are unlikely to see fresh demand to absorb some of the CO2 permit surplus and bolster prices when the current post-compliance lull ends.

Hubei is the only one of the seven markets that hasn’t seen record low prices during the past two months, and on Wednesday Shanghai prices found a new bottom at 10.50 yuan ($1.69), the lowest price recorded across all seven pilots.

With local governments showing little interest in reining in over-allocation, some traders warn that Chinese market prices could repeat those in European scheme’s early days and drop towards zero.

“(We) warned (our) Chinese partners and most of these 7 local exchanges about the possible collapse of prices already in the beginning of 2014,” Prague-based trading house Virtuse Energy, which participates in the Guangdong and Shenzhen markets, said in a recent note to clients.

The risk of a collapse increases as the pilots approach the end of their lifetimes and likely get replaced with a national market.  Official information has yet to emerge on whether allowances from the pilot markets will be eligible.

The NDRC can stop a price collapse by announcing, and as soon as possible, that the permits will have a future value, Virtuse said.

The NDRC is reportedly in discussions with industry and provinces over finding a mechanism for converting pilot scheme permits into allowances eligible in the national market.

By Stian Reklev – stian@carbon-pulse.com

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