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EU CO₂ price hits 11-year high in Week 29

Highlights

Prices hit Eur29.50/mt July 15

New European Commission president touts deeper EU 2030 target

Forecasts point to return of heatwave conditions

London — EU carbon dioxide allowance prices rallied to an 11-year high in the week ending July 19, and were holding well above Eur28.50/mt by the end of the week.

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EU Allowance futures contracts for December 2019 delivery on the ICE Futures Europe exchange rallied to an 11-year high of Eur29.50/mt ($32.61/mt) intraday July 15 - the highest price for a nearby-December contract since July 2008.

Prices came off the earlier highs through the week to dip below Eur28.00/mt Thursday, but rebounded Friday to as high as Eur28.95/mt by mid-afternoon, up by over Eur1 day on day. That compares with Eur28.79/mt at the close on July 12.

Related factbox: EU CO₂ price hits 11-year high

The move up in Week 29 came as the market digested over a raft of bullish factors, including rising natural gas prices in July, which implied a higher coal-to-gas fuel switching price for carbon.

Politics also came to the fore this week, with the EU Parliament narrowly backing Germany's Ursula von der Leyen as new European Commission president. Von der Leyen has voiced support for raising the EU's 2030 emissions reduction goal to 50% from 1990 levels from the current 40% and adding new sectors including shipping and road transport into the EU ETS by 2030.

Related story: EU Commission president candidate proposes 50% EU CO₂ cut by 2030

She also resurrected the idea of a carbon border tax for goods imported into Europe from areas not subject to equivalent carbon constraints. While controversial because of wider trade issues, such a border tax could pave the way for a withdrawal of free allocation to the non-energy industrial sectors, which are currently deemed to be trade exposed.

These political developments raise the potential for both tougher supply and demand under the EU ETS in future, through tighter caps and increased sectoral coverage.

Heatwave forecast for early Week 30

Looking ahead to Week 30, temperatures of up to 10 degrees Celsius above normal are forecast in France, according to a Custom Weather forecast Thursday for July 23, which may be significant for the country's river-cooled nuclear reactors.

This was confirmed by a BBC forecast Friday which pointed to temperatures building up again to as high as 40 C in some western European countries over the next few days, in a likely repeat of heatwave conditions seen in late June and early July.

The forecasts contrast with unsettled weather which brought cloud and rain to areas of Northwest Europe including the UK and Benelux on Friday.

An extended heatwave is more likely to have an impact on nuclear generation toward the end of summer when river levels are generally lower following a dry summer. Of France's 58 reactors, with a total capacity of 63 GW, 40 units are river-cooled. In summer 2018, four plants were affected by cooling water restrictions.

Any reduction in nuclear output implies greater pull on fossil generation in France and neighboring countries to meet grid demand, raising CO₂ emissions.

French nuclear generation has broadly been healthy this year, with output in the first half of 2019 up 1 TWh year on year, with June averaging 39.5 GW, little changed from June 2018. The very high temperatures are expected to be short-lived, with cooler conditions resuming toward the end of Week 30.

Separately, wind generation is expected to stay below 20 GW on average over the next five days for Germany, UK, France, Spain and Italy combined, according to spotrenewables.com forecasts Friday. That's a moderate increase from earlier in the week, but still low by historical standards, helping to support demand for fossil generation.

On the supply side, the total volume of primary EUAs from auctions is set to fall to 11.5 million mt from four auctions in the week ending July 26, compared with 16 million mt from five auctions in the week ending July 19.

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

-- Edited by Jonathan Dart, newsdesk@spglobal.com