On 3rd April Redshaw Advisors hosted a webinar with Energy Aspect’s Head of Carbon Research, Trevor Sikorski to look at the impact of COVID-19 on Europe’s emissions and the EUA price.
The global spread of the COVID-19 has affected markets and businesses worldwide, and the European emissions market is no exception having dropped from a high of €25.87 to a low of €14.35 in recent weeks. The main question is, what happens next?
Our CEO Louis Redshaw invited Trevor Sikorski to explore the multiple aspects of the pandemic that are relevant to EU ETS and the price of EUAs. The pair discussed the subject for an hour. Despite the subject’s complexity and the uncertainty associated with coronavirus impacts on the global markets, they found that the impact can already be analysed with certain assumptions and a good understanding of the market.
In particular, we were looking for answers to the following questions:
- What happened to the EUA market and why?
- How low can EUA prices go?
- How long is COVID-19 likely to impact EUA prices?
- Will EUA prices recover, and when?
- What help or hindrance can be expected from the European Commission and member states?
- What choices does European industry have for managing EU ETS risk?
Louis summarised that the price of EUAs had crashed from mid-March, triggered by increasingly bearish news about the spread of the virus, lockdowns and stock market volatility. According to both Louis and Trevor the main protagonists were speculators dumping long positions and hedging put options [bets that the price would drop] that were sold to finance bets on the price increasing towards the end of the year. According to Trevor, speculators have by now largely exited the market as he mentioned that there are few put options with strikes below €14 per EUA that might need to be hedged if the price were to drop again.
Louis commented that, despite some commentary to the contrary, industrial market participants were unlikely to have been behind much of the selling activity because they were buying all the way down, taking advantage of the sudden reduction in compliance costs when compared to previous weeks.
However, buying interest has dropped off somewhat in recent sessions as industry’s appetite for cheaper allowances has waned as uncertainty sets in as to how many allowances firms will actually need given the current production downturn. In the very short term, EUA prices could find some support a from the reduced number of auctions over the Easter holiday period.
Trevor concluded that the outlook remains bearish overall, given the likely continuance of low demand as measures to stem the spread of the coronavirus persist. EUA prices will likely hold within the €15-20/t CO2e range in the second quarter of this year.
Looking at long term scenarios, the pair also discussed the possibility that firms struggling in the current economic downturn could turn to selling EUAs for cash, which could further pressure EUA prices this year. Louis mentioned that if companies were struggling for cash that this could happen even if firms expect to be short of allowances by 2020’s compliance deadline (in April 2021). A move made more risky due to the start of Phase IV of the ETS that means that allowances cannot be borrowed from the next reporting period. However, Louis also mentioned that the ability to borrow was misunderstood and was not completely cut off for installations.
Both remain optimistic for the longer-term outlook for the EU ETS and EUA prices. Trevor does not exepct that the EU ETS will be abandoned, as called for by EU member states such as Poland. Louis anticipated that longer-term interest in carbon markets from speculators would “creep back in” as certainty increases on where European and global economies are going.
Trevor forecasts that EUA prices will rise back up towards the end of the year, assuming a return to economic normalisation by then. He added that prices might be expected to pull above €30/EUA in Q1 2021 and highlighted a number of supportive factors for the market next year, including nuclear closures and the scheduled exit of the UK from the ETS. Louis concluded that the bigger game in town was actually low gas prices, that were already under downward pressure before the Coronavirus hit. Nonetheless he considered that, considering the longer-term outlook, it was probably better to buy into EUA price dips and store up EUAs for future use.
To get a feel for where our audience felt the market was headed we took 3 polls during the course of the webinar, details of which we will release this week.
The interest in our special webinar exceeded our expectations due to the huge demand for access from across Europe. If you would like to access the slides or a recording of the event please contact us at info@redshawadvisors.com.
We’re currently evaluating feedback and are considering topics for future webinars, if you have suggestions that you would like to see covered, please let us know.
