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Factbox: EU CO2 price hits 11-year high

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Factbox: EU CO2 price hits 11-year high

  • Author
  • Frank Watson
  • Editor
  • Alisdair Bowles
  • Commodity
  • Electric Power
  • Topic
  • Environment and Sustainability

EU carbon dioxide allowance prices hit an 11-year high Wednesday, on a variety of underlying energy market and news-driven factors.

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In the background, the Market Stability Reserve has taken 400 million mt of CO2 out of 2019 supply. The following are key facts about EU carbon prices and the drivers shaping price evolution.


**Carbon auction volume in August will fall to 29.2 million mt, down from 67.1 million mt in July, as governments cut sales during the summer period.

**From 2019-2023, the Market Stability Reserve will cut the available carbon auction supply each year by 24% of the supply in circulation.

**The supply in circulation was 1.655 billion mt CO2e at the end of 2018. This translates into a cut to auction supply of 397 million mt between September 2019 and August 2020.

**Total 2018 demand stood at 1.682 billion mt CO2e, based on stationary installations, down 4.1% from 2017 levels. This is likely to fall again in 2019 as increased clean energy generation displaces fossil generation and higher carbon prices prompt coal-to-gas fuel switching in the power sector.

**German power-related emissions fell 15% on year in H1, with first estimates by utility group BDEW pointing to a 20 million mt drop in those six months. That trend is set to accelerate in the second half of 2019, putting Germany's power sector on track for one of its biggest annual CO2 cuts, potentially well over 40 million mt.

**Despite falling demand, the supply cuts are expected to leave the market short of allowances within calendar 2019, forcing regulated companies to use up surplus allowances, or reduce CO2 emissions.

**A total of 12 EU Member States plan to phase out coal from power generation, reducing demand for EUAs, including Germany, which plans to phase out 3 GW of lignite and 4 GW of hard coal-fired power by 2022. Replacing this with gas would lead to an estimated net impact of minus 30 million mt CO2e, according to analysts.

**The EU ETS Directive allows Member States to voluntarily cancel EUAs linked to planned electricity plant closures, to avoid adding to a surplus of EUAs.

**Germany's government-appointed coal commission has recommended that Germany should cancel EUAs linked to coal plant closures, and the country's environment ministry has said it supports that recommendation.

**No EU member states have yet confirmed any decisions to cancel EUAs linked to power plant closures. Ultimate decisions on EUA cancellations in Germany would be taken by other ministries, including the energy and finance ministries.


**EU Allowance futures prices for December 2019 delivery on the ICE Futures Europe exchange hit an 11-year high July 10, closing at Eur28.19/mt ($31.30/mt) -- the highest price for a nearest-December contract since July 2008.

**The ICE futures forward curve showed EUA prices for December 2023 delivery topping the Eur30/mt mark for the first time ever, closing at Eur30.19/mt July 10.

**S&P Global Platts Analytics commented: "The upward price movement for EUAs is linked to gains across the wider energy complex. European natural gas prices have risen, but remain at relatively low levels. That gas storage levels remain very high means that gas prices could come down this winter."


**Higher carbon prices improve profit margins for clean energy generation in Europe, including wind, solar and nuclear power plants, as wholesale power prices are set by marginal lower efficiency coal and gas-fired plants.

**Higher carbon prices also improve gas-fired profits relative to coal-fired margins.

**However, indicative profit margins on coal-fired power plants (clean dark spreads) are mostly ahead of equivalent gas-fired margins (clean spark spreads) at most plant efficiencies in Continental Europe on a year-ahead basis, under current power, gas, coal and carbon prices, suggesting potential for further carbon price gains.

**Industrial plants mostly qualify for free allocation of EUAs, partly shielding them from negative impacts from higher EUA prices. However, industrial free allocation rules are set to tighten over time, raising carbon costs for industrial companies and providing an incentive to invest in cleaner technology and industrial processes.

**A key market uncertainty is Brexit. Around 1,000 UK installations will drop out of the EU ETS this year if a no-deal Brexit scenario materializes. This is considered a bearish short-term driver for EUA prices due to expected offloading of volume by UK companies, although the loss of the UK could have a longer-term supply tightening impact overall across the EU ETS.

**With the UK set to leave the EU on October 31, 2019, this already means the UK government cannot auction or allocate EUAs for this year. Auction volumes are already down by 60 million mt in 2019 due to Brexit-related delays to UK auctions.

**A further downside risk for carbon prices is European gas prices. Should winter 2019 gas prices fall, this would lower the implied fuel switching price of carbon, meaning a lower carbon price would be needed to prompt coal-to-gas fuel switching in the power sector.

-- Frank Watson,

-- Edited by Alisdair Bowles,