Market Developments
- Week closes close to flat at €5.97, 2c up week on week.
- 48c trading range, weekly high of €6.38
- Large gains in power prices creates surge for carbon
- Energy complex and GBP weakens amid heightened Brexit fears at end of week.
- Increased volatility of EUAs in 2016
- Segolene Royal gives carbon price floor idea another push.
Auction Overview
- 17.260Mt comes to market in 5 auctions, higher than last week (13.770Mt) due to ICE auction on Wednesday.
- June auctions bring ~72.5Mt EUAs to market, a marked increase on ~56Mt in May.
- See auction table below for more details.
EUA Price Action
As feared EUA prices were passengers to wider energy price volatility, in particular power. Carbon spiked to €6.38, aided by a squeeze of those positioned for losses, however order was restored and the market finished close to flat at €5.97. The Clean Dark Spreads (CDS) strengthened early in the week but the rises weren’t sustained and energy prices started falling mid-week. Oil fell nearly 2% on Friday adding more bearish news to the energy complex as markets across the board weakened in apparent reaction to heightening Brexit fears in the build up to the UK referendum on June 23rd. The weekly trading range was a fairly volatile 48c, the drops at the beginning of the year seem to have precipitated higher daily price moves in every month so far this year when compared to the same month in 2014 or 2015. Price impact: carbon prices tracked the wider energy complex and caused the carbon shorts to squeal, the speculative market was probably neutrally positioned by mid-week so a fall became more or less inevitable as we approach 3 weeks of high auction volume. EUA prices will be under some pressure. We expect moderate falls.
Could there be a carbon price floor?
Segolene Royal, France’s energy and environment minister urged EU members at a conference in Paris last Friday to consider adopting a floor in the market. Carbon permits have dropped 28 percent this year and Segolene Royal views a price floor (with accompanying cap to make a price ‘corridor’) as a way to incentivize investments needed to replace coal and to increase energy efficiency. Such a floor price is nothing if not controversial and EU Climate and Energy Commissioner Miguel Arias Cañete reiterated his doubts that regulated price levels would work and emphasized that such a decision would need unanimous support from member states. The EU ETS is designed to allow the EUA price to fluctuate with prices set according to the cost of reducing carbon and demand variations caused by economic fluctuations. As such it has no set minimum or maximum levels but a massive oversupply (in part caused by other overlapping policies such as renewable electricity supply and energy efficiency targets) means prices are currently very low relative to where most believe they need to be to effect a change in the way we use energy. The Market Stability Reserve, starting in 2019, is designed to curb the oversupply of allowances and boost prices but this is too far away for some so the price corridor proposal has been proposed as a stop-gap.
We don’t see much chance of a price corridor happening, more likely are unilateral EUA retirements by member states to compensate for reduced carbon emissions caused by overlapping policies. France and the UK, amongst others, both have high carbon taxes on electricity production that are driving emissions reductions and Germany has arbitrarily mandated the closure of lignite plant as well as displacing fossil fuel with heavily subsidized renewable electricity. All of these policies and more are some of the main reasons we have oversupply (and thus low prices) in the first place.
The week ahead
Although we didn’t see the price decline expected last week at least some of the shorts were squeezed out, so there is more room for the larger auction supply these next few weeks to have a real impact. EUA prices have been trending upwards since the end of March (albeit very gradually since the big squeeze at the end of April) so there is generally more demand than supply. The next few weeks will test how well balanced the market is when 17Mt comes to market via auctions and next week we see more than 18Mt because the monthly Polish auction takes place including some EUAs from their auction cancelled 2 weeks ago. A close below €5.65-5.70 will be needed to confirm that the market is materially oversupplied and this may cause some more substantial losses.
