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UK carbon prices swing back to premium as EUA rally halts

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UK carbon prices swing back to premium as EUA rally halts

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  • Autor/a
  • Andreas Franke
  • Editor/a
  • Manish Parashar
  • Materia prima
  • Energía eléctrica Energy Transition Gas natural

UK carbon prices have swung back to a premium over EU as the EU Allowances rally halted, with the Feb. 8 auction for UKAs settling 26% above the previous auction a fortnight ago.

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The UK carbon price fell in January to its biggest monthly average discount to EUAs since launch in 2021, compared with an average premium of Eur11.65/mtCO2e in 2022, S&P Global Commodity Insights data showed.

Platts last assessed EUA contracts for December delivery at Eur90.28/mtCO2e Feb. 8, while UKA prices rose to Eur92.21/mtCO2e, S&P Global data showed.

The spread has swung over Eur40/mt in the past six months.

Analysts at S&P Global forecast price parity between the two carbon markets this year, led by continuation of hedging across markets by power generation participants.

Details on additional allocations under the EU's REPowerEU plan to help raise Eur20 billion from additional EUA sales are to be unveiled in coming months.

The European Parliament's ENVI committee is to vote Feb. 9 on the proposed changes to the market stability reserve after member states agreed Feb. 8 the next steps in the reform of the EU Emissions Trading System.

S&P Global analysts expect that the annual Total Number of Allowances in Circulation in May could be used to calculate revisions to the auction calendar from Sept. 1.

"Our analysis still puts around an additional 40 million mt in auction volumes this year, and we think that is still deliverable over a shorter time frame," S&P Global Carbon Analyst Michael Evans said.

If implemented from September when the annual MSR intake rate takes effect on auction volumes, S&P Global analysts calculate auction supply could increase around 14% each month for September-December.

Structural premium

For UK ETS participants, the government is to auction some 78.74 million UKAs in 2023 with power generators expected to remain the biggest compliance buyers.

In 2021, the sector emitted some 54 million mt and 2022 sector emissions could be higher after record power exports to the Continent.

In addition to UKAs, UK power generators have to pay the Carbon Price Support currently pegged at GBP18/mtCO2e, giving the sector a structural premium over EU generators before any gas or power price spreads.

That in combination with the shrinking NBP gas discount over Continental gas prices, as well as the improved outlook for French nuclear, will see power flows between Britain and the Continent reverse with the former set for record net imports in February and March, according to analysts at S&P Global.