Thursday's decisive UK election victory for the Conservative Party has brought some clarity and reduced uncertainty regarding Brexit, positively impacting the British Pound and stock markets. However, despite initial gains, the EUA market has reversed and faces challenges as we approach 2020.
The implications of the UK election for the EUA market can be summarized as follows:
No-deal Brexit risk averted: The Conservative Party intends to honor the most recently negotiated withdrawal agreement, eliminating the significant downside price risk associated with a no-deal Brexit.
UK compliance with EU ETS: UK installations will still be required to comply with the EU Emissions Trading System for their 2019 and 2020 emissions. However, the mechanism for complying with 2020 emissions, considering the UK's expected departure from the EU by December 31, 2020, is yet to be fully agreed upon.
Resumption of UK auctions: UK auctions are anticipated to resume in early Q1 2020, involving the sale of both 2019 and 2020 auction volumes simultaneously.
The EUA market currently faces bearish conditions, primarily influenced by declining gas prices. The additional volume resulting from the resumption of UK auctions adds further uncertainty to the EUA price outlook for 2020. The gas market is expected to remain bearish.
With the need to purchase allowances for compliance and considering the foreign exchange movements, the recent price declines present an opportunity for UK installations to take action.
In summary, while the UK election results provide some clarity regarding Brexit and remove the risk of a no-deal scenario, the EUA market still faces challenges due to bearish conditions and increased auction volume. UK installations will need to navigate these conditions and leverage the opportunity presented by recent price declines.
