European carbon prices have experienced a significant increase this year, but until recently, emitters based in the UK may not have fully benefited from it.
Front-year EU Allowances futures prices on ICE Futures Europe have risen by over 12% in euro terms since the beginning of the year, reaching around €8.30 on Tuesday.
However, for utilities and industrial companies with operations based in the UK, the increase has been more than halved due to the strength of the pound.
Only in the past month has the Dec-15 EUA in GBP terms started to show positive growth compared to end-2014 prices.
Two weeks ago, the benchmark EUA contract was up by 10.4% in euro terms year-to-date, but only 0.8% higher in pound sterling.
This trend has mixed implications for UK emitters. It is expected to benefit utilities that need to purchase euro-denominated carbon units for their forward power sales. On the other hand, it may be frustrating for industrial companies looking to generate revenue by selling their surplus permits.
“UK utilities are generally very disciplined when it comes to hedging; they typically lock in power, fuel, and carbon all at the same time, so this development is unlikely to materially change their buying patterns,” explained Louis Redshaw, head of Redshaw Advisors in London. “However, UK industrials come to the market less frequently and will have been under less pressure to think about carbon price rises in recent months.”
The pound has appreciated by 6.5% against the euro so far in 2015, partially due to concerns over the debt-ridden Greek economy, low eurozone interest rates, the European Central Bank’s quantitative easing program, and the relatively strong British economy.
However, in the past few days, the euro has gained against major currencies as speculators, amidst a sharp decline in global equity markets, repurchase the currency after having used it for carry trades.
As a result, the gap between the year-to-date gains of the Dec-15 EUA in euro and GBP terms has decreased from 10.4 percentage points to 6.9 percentage points in the past week.
“The ever-strengthening EUA price coupled with the peaking strength of the GBP has caused the GBP carbon price to rise and break out of its sideways price trend,” Redshaw warned, highlighting that some UK-based industrial manufacturers with short allowances might be caught off guard.
“This will draw the attention of those industrials to their own buying requirements, which should lead to increased demand for EUAs in September,” he added.
