EU carbon prices ease in week 2 on mild temperatures

London — EU carbon dioxide allowance prices eased slightly in the week ending January 10, as daily auctions resumed January 7 after a three-week break over the holidays, as well as strong wind availability and ongoing milder than normal temperatures across much of Europe which curbed demand.

EU Allowance futures contracts for December 2020 delivery on the ICE Futures Europe exchange traded in a range of Eur24.02/mt to Eur25.05/mt Friday, compared with Eur24.98/mt at the close a week ago, January 3.

Strong wind availability in early January pushed marginal fossil units out of the merit order, while warmer than normal temperatures in Europe kept a lid on heating demand, curbing the pull on electricity, generating fuels and carbon.

Moreover, market participants were also wary of an increase in supply of EUAs this year from the UK, which have been kept out of the market in 2019 due to Brexit uncertainty.

With Brexit now expected to go ahead by January 31, all of the UK's 2019 supply is expected to come to market in 2020. Including auctions and free allocation volumes, this could mean around 220 million mt will come to market from the UK in total this year.

If the UK provides two years' worth of free allocation -- possibly up to 120 million mt -- in a short space of time, this could further compound the bearish price impact of twice the normal auction volume entering the market from the UK in 2020.

Uncertainty persists over the timing of this volume, with the UK expected to reach agreement with the European Commission in early February. Depending on the timing, this could put carbon prices under further downward pressure in the short-to-medium term.

TEMPERATURES TO STAY ABOVE NORMAL

Looking ahead to week 3, on the demand side, temperatures were set to stay well above normal for the time of year across much of Europe, in a continuing bearish factor for demand for power, fuels and carbon.

Temperatures were set to be as much as 6 degrees Celsius above normal in Berlin and Paris towards the end of the week, and a few degrees above normal in many other European cities, according to Custom Weather forecasts Friday.

A delay to cold winter weather in Europe so far this year has removed a usually supportive element for the energy complex in general.

Wind output was also expected to ramp up further in the week ending January 17, with a combined 50-60 GW expected in Germany, UK, France, Spain and Italy by Tuesday to Thursday, according to spotrenewables.com forecasts Friday, adding further downward pressure on fossil generation.

On the supply side, total primary supply of EUAs from government auctions is set to jump to 15.8 million mt in the week ending January 17 -- the first full week of auctions of the year -- compared with only 7.8 million mt in the week ending January 10. This will include the start of Poland's 2020 auctions Wednesday with 5.33 million mt on offer.

-- Frank Watson, frank.watson@spglobal.com

-- Edited by Alisdair Bowles, alisdair.bowles@spglobal.com