Market developments
- Carbon trades sideways to end the week 1c up at €4.58
- New low at €4.30 set intra-week
- Oil, power, coal and gas prices fall but stronger EUR helps push Clean Dark Spreads higher again.
EU Allowance Auction Overview
- Auction volume goes up to ~22.1Mt from ~17.9Mt last week
- May brings 82.8Mt to market, up from 78.5Mt in April
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EUA Price Action
Carbon once again ended the week flat as the uptick in the clean dark spreads was enough to offset the auction supply, itself lower due to the shortened week. Prices actually spent much of the week trading in negative territory, setting new year-to-date lows on each of the first three days of the week. Carbon was not helped by falling energy prices last week as oil, power, gas and coal all fell. However, the EURO saved the market from further falls as it strengthened against the USD which, despite the power price falls, led to further improvements in the clean dark spreads, already at relatively high levels. The recovery in carbon prices started on Thursday and extended further on Friday as prices rallied to the dizzy heights of €4.70. A Friday afternoon sell-off reversed much of the gains leaving EUA prices back where they began the week. Price Impact: carbon trading volumes normalised last week and the power utilities’ hedging demand continued to support the market. EUAs are reluctant to move convincingly lower and while carbon is in fundamental and technical no-mans land speculators will be largely observing from the sidelines, waiting for sniff of price direction.
Week ahead
Five auctions will ensure the market is well supplied this week but this may be offset by positive sentiment from the Macron victory in the French elections and utilities hedging the improved clean dark spreads. It is impossible to know with any certainty how much hedging the utilities are doing but the improved returns on offer will be keeping the utilities interested in carbon. The improved bid/cover ratios at the back end of last week back-up the idea that there is increased utility carbon trading. Aside from the clean dark spreads there appears to be little else on the immediate horizon to get excited about. Should carbon start troubling the technical indicators, that may induce some more speculative carbon trading, but at present the week ahead looks to be unexciting with expectations skewed towards the downside.
Window of opportunity? The compliance deadline is out of the way for everyone for another year but carbon risk doesn’t go away so conveniently. The medium-term outlook is bleak for carbon prices but longer term the forecasts tell us that they are set to move substantially higher. To discuss your exposure and how we can help you get on top of it before the market reacts to the MSR, please give us a call on +44 203 637 1055
Other News
Brexit update: UK MPs call for the UK to remain in the EU ETS
According to a committee of MPs the UK should remain in the EU ETS to at least the end of Phase III, if not beyond, as long as prices rise. The report, emerging from the House of Commons Business Energy and Industrial Strategy Committee, cites the lack of alternative options by which to achieve the UKs climate goals at least-cost. However, the report also states the need for EU ETS prices, currently languishing around €5 per tonne of EUAs, to be aligned with the UK carbon floor price for power generators of £18 per tonnes/CO2.
A UK exit at the end of Phase III would currently appear to be the most likely outcome, however, the government is yet to set out a clear plan for climate policies post-Brexit.
EU Power generators make bulk of EU ETS emissions reductions as industrials lag
European power generators have reduced emissions far faster than Europe’s industrial sectors over the last three years, with some industrial sectors seeing emissions rise in the 2013-2016 period, leading to further calls from NGOs for free allocations to be scrapped. Power generators no longer receive free allocations and instead must buy all the allowances they require. The 11.7% reduction in power generation emissions has come as renewable technology costs have fallen and deployment increased.
Carbon Forward is back and Redshaw Advisors announced as official partner
Redshaw Advisors are pleased to announce that we will once again be the official conference partner and training day provider for the annual Carbon Forward conference to be held in London on 26th-28th September 2017. The conference will give carbon market participants from all over the world a greater understanding of the risks and opportunities they face in ever-changing carbon trading, regulation and taxation.
Brexit, the ‘Trump factor’, an ambitious Phase IV reform package, the Chinese ETS launch in 2017 and the development of a global offsetting system for the aviation industry mean carbon risk is higher than ever. To successfully manage this risk companies need a thorough understanding of how carbon markets and regulation across the globe affect them and their competitors, Carbon Forward is designed to provide that understanding.
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