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EU carbon price short-term risk skewed to downside: SocGen

Highlights

Power fuel switching costs likely to fall: analyst

Medium-term price outlook points to Eur32/mt by 2025

Carbon prices seen rising to Eur60/mt by 2030

London — EU carbon allowance prices face short-term downside risks moving into the spring, with warmer temperatures in Europe potentially weighing on natural gas prices, Societe Generale senior energy analyst Lueder Schumacher said in a report Feb. 17.

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Even though further carbon price gains are possible due to financial investors' risk appetite, fundamentals appear weighted to the downside, he said, after carbon futures prices hit an all-time record high of Eur40.64/mt ($48.89/mt) Feb. 15.

"The upper end of the current fuel switching range would leave some further upside potential, especially if speculative flows remain strong," Schumacher said in the report.

"However, as European temperatures normalize going into spring, fuel switching costs are more likely to come down rather than rise further. After a rise of almost 70% in just over three months, the risks look more skewed towards the downside though," he said.

The fuel-switching price -- the carbon price needed to prompt a switch from coal to natural gas for electricity generation -- has played a key role in setting carbon prices as the most widespread form of marginal CO2 abatement in Europe.

"For 2021-2025 we expect limited demand for fuel switching. Unless more cold winters or hot summers are in store, fuel switching costs are likely to come down. With the 2025 fuel switch range at Eur25/mt to Eur37/mt, we see CO2 prices at Eur32/mt," said Schumacher.

A 2025 price of Eur32/mt would represent a drop of nearly 18% from the Feb. 16 closing price of Eur38.86/mt.

Carbon prices seen at Eur60/mt by 2030

Looking further ahead however, carbon prices have potential to push into higher territory as the EU works on equipping the EU Emissions Trading System to help deliver on the bloc's goal to reach net-zero emissions by 2050, he said.

"For 2026-2030, we see either industrial abatement taking over from the coal-to-gas fuel switch (if 65% of 2030 output from renewables), or significant fuel switch demand (if renewables only account for 57% of 2030 output)," he said.

"Either way, CO2 prices will go to Eur60/mt, where we currently see the maximum politically acceptable price," said Schumacher.

The near-term views from SocGen are broadly in line with recent updates from S&P Global Platts Analytics, which has flagged up short-term risks for carbon prices.

Returning nuclear generation and the end of the 2020 compliance period on April 30 suggest a price retreat from the recent highs by the spring, Platts Analytics said in its European Emissions Trading System Market Outlook dated Feb. 11.

Platts Analytics sees EU carbon prices averaging Eur33.60/mt in 2021, and rising to Eur37.10/mt on average in 2022, in its latest forecasts.

EU Allowance futures contracts for December 2021 delivery on the ICE Futures Europe exchange traded in a range of Eur38.05/mt to Eur39.42/mt Feb. 17, while a daily auction of spot delivery EUAs by the Polish government cleared at Eur38.42/mt, down from an all-time high auction cleared price of Eur40.19/mt on Feb. 16.