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EU CO2 price falls after German coal panel reaches deal on plant closures

Highlights

Carbon price falls by more than Eur1/mt Monday German coal panel targets

7GW of additional closures by 2022

Germany expected to cancel corresponding EUA volumes

London — EU carbon dioxide allowance prices fell sharply Monday, after Germany's coal commission reached a position over the weekend on coal plant closures that would see an additional 7 GW of capacity closed in the period 2019-2022.

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EU Allowance futures contracts for December 2019 delivery fell sharply to as low as Eur22.55/mt ($25.74/mt) Monday morning, from Eur23.93/mt at the close Friday, before rebounding back above Eur23/mt by midday.

Germany's coal commission -- which groups industry representatives, unions and environmental groups -- reached a final position over the weekend on phasing out lignite and hard coal-fired power plants.

The report, which does not single out specific power plants, sets a summer 2020 deadline for operators to agree on the phase-out timetable. The plan foresees additional closures of 3 GW of lignite and 4 GW of hard coal-fired capacity by 2022 in a first wave of closures, over and above the capacity already earmarked for closure.

"The drop in CO2 [prices] doesn't really make sense," a senior utilities analyst at a continental European bank said Monday.

"The report says that closures will be carbon neutral, i.e. [Germany's carbon volume] will be reduced by the amount those plants would have used," the analyst said.

The German government is widely expected to cancel a corresponding volume of carbon allowances from its auctioning volume, reflecting a goal to avoid causing distortions in the European carbon market, making the net impact of the closures neutral.

The commission's report states that the impact of the plant closures must be ensured within the framework of the EU ETS. It also notes that the current reform of the system from 2021 onwards explicitly allows EU Member States to remove carbon allowances from their national budgets linked to power plant closures resulting from additional national measures.

Nevertheless, the carbon market's negative initial reaction Monday does indicate a level of uncertainty until the coal commission's findings are confirmed by the German government and clear announcements are made on the exact cuts to auction volume that will result from the first wave of coal phase-outs to 2022.

The latest news out of Germany comes against a backdrop of other bearish factors for carbon prices in the short term.

On the supply side, Week 5 will see primary supply of carbon allowances from auctions rise to 15.1 million mt, from 7.5 million mt in Week 4, and February as a whole will see auction volume jump by 33% to 51.6 million mt due to the return of German auctions on February 1 after a pause since November 9.

Also by the end of February, the 27 EU member states are expected to allocate annual free EUAs to most of their industrial sectors -- estimated at 700-800 million mt -- which may impact buy-side demand in the short-term.

Tighter EU carbon market set to prompt more power fuel switching in Europe

2019 is set to be the year that coal-to-gas switching in power generation takes off in continental Europe. Carbon prices supported by the new market stability reserve cutting supplies, coupled with potentially lower gas prices, could prompt unprecedented C2G switching volumes.

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On the demand side, temperatures across most of Europe are set to be a little above seasonal norms in the week starting Monday, according to Custom Weather forecasts, sending a bearish signal for domestic heating demand, with the exception of the UK, Benelux and Scandinavia which are set for colder-than-normal temperatures.

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

--Edited by Jonathan Loades-Carter, newsdesk@spglobal.com