London — EU carbon dioxide allowance prices under the EU Emissions Trading System rallied to a fresh 10-year high of Eur21.79/mt on Monday, in a continuation of last week's rally on strong power sector demand and low primary supply from auctions.
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Carbon prices have continued to push higher because of short and long-term supply constraints as well as bullish signals in the forward power markets which encourage utilities to lock in carbon prices to hedge power sales.
EU Allowance futures for December 2018 delivery on the ICE Futures Europe exchange rallied as high as Eur21.79/mt ($25.51/mt) Monday, before easing back to trade in a range of Eur21.12-21.54/mt on Tuesday.
On the supply side, the tight primary supply from government auctions has continued to prop up carbon prices, with total volume in August down 42.7 million mt, or 48%, month on month to 46.6 million mt.
The market also continued to react to an expected long-term supply squeeze driven by the Market Stability Reserve, expected to cut auction supply by at least 400 million mt, or more than 40%, in 2019.
On the demand side, the combination of coal, natural gas and power prices has maintained profit margins on coal-fired electricity generation in the forward markets, encouraging utilities to buy carbon to hedge forward power sales.
In Germany, Europe's largest power generator, the clean dark spread on month-ahead and quarter-ahead power increased its premium over equivalent gas-fired profits in August, in a bullish signal for carbon. That has been aided by a tight natural gas market in Europe which has caused prices to soar, helping to maintain the profitability of the more emissions-intensive coal.
Indicative German clean dark spreads on lower 35% efficiency coal-fired units for month-ahead power rose to Eur2.09/MWh on Friday, compared with minus Eur1.21/MWh on August 10. Meanwhile, the quarter-ahead CDS stood at Eur2.64/MWh last Friday, compared with Eur0.38/MWh on August 10.
For higher 45% efficiency coal units, the indicative CDS on month-ahead power was Eur9.70/MWh on Friday, compared with Eur6.49/MWh on August 10, while the quarter-ahead margin was Eur10.20/MWh, compared with Eur7.88/MWh.
--Frank Watson, firstname.lastname@example.org
--Edited by Daniel Lalor, email@example.com