Market developments
- Carbon closes the week up just 5c at €4.96
- Tight 28c weekly trading range
- Power, coal and gas prices provide little direction
- UK to hold snap General Election on 8th June
- This year’s compliance deadline effectively 26th April, see our ‘Tips for surviving the EU ETS compliance deadline’ and our registry shortcuts
- The daily carbon market update is back for the compliance season. Email us if you wish to receive it.
EU Allowance Auction Overview
- Auction volume falls to ~17.3Mt from 17.6Mt in four auctions
- April brings 78.5Mt to market, down from 92Mt in March.
EUA Price Action
As expected, EUA prices moved sideways last week amid muted emissions trading as the Easter holidays approached. The close on Thursday at €4.96 was just a 5c gain as prices spent time in both negative and positive territory but ultimately failed to establish a direction. The week’s emissions trading started with a dip, falling in sympathy with power prices. However, a mixture of late compliance buying and recovering power prices averted any further falls and EUA prices recovered. Despite piercing the psychologically important €5 level twice over as many days, carbon failed to advance any further and capitalise on the lack of auctions caused by Friday and Monday’s European holidays. Over the course of the week wider energy markets; power, gas and coal, all failed to set a direction from which EUA prices could gain some impetus. This meant that Clean Dark Spreads remain at the upper end of recent levels and maintains the incentive for European utilities to lock in power generation returns. Price Impact: April can be a tricky month to predict as the last of the compliance buying is forced into the market. We understand that up to 100Mt of free allocation is still to be distributed so any of the affected installations that plan to use 2017’s allocation to cover 2016’s emissions and that want to avoid being caught out by a €100 per tonne fine, will have an increasingly itchy trigger finger. As always compliance volume remains impossible to quantify and therefore its impact in last weeks price action is impossible to say. Relatively strong clean dark spreads, one less auction this week and the potential for a last minute compliance rush suggests that price risk is skewed to the upside.
Week ahead
The size of compliance buying interest as we head towards the 30th April deadline will be key to setting price direction between now and the 30th. There is still some around but quite how much is unclear, even for some of the installations themselves (see article below on late power sector and aviation sector allocations). As we move closer to the 30th April deadline buying interest either thins out or becomes more desperate. A full auction week this and next week suggests that it is unlikely we see large moves upwards but a last-minute compliance buying rush cannot be ruled out. We maintain our neutral emissions trading view with a chance of a spike upwards for the week ahead. Any positive price action now is probably reversed after 30th April.
If you still need to buy to cover compliance exposure, EUA prices are still below the 2016 average. Check out our blog on April price development, available in full here.
Other News
Derogation volume approval and aviation free allocations reduce likelihood of April price spike
The European Commission have given approval to all but one Eastern European country to distribute free derogation allowances to their power sector. Europe’s power generators typically receive no free allocation but those from the poorest Member States are allocated some free allowances as part of an effort to help them modernise their power generation infrastructure. Lithuania are the only country still to get the green light to distribute their derogation volumes but according to Argus Media they form a very small part of the total volume (270,000 vs 65.7Mt).
The aviation sector’s status in the EU ETS was due to be reviewed at the end of 2016. As a consequence, there were no firm plans in place for free allocation for 2017 and thus free allocation was delayed beyond the normal February deadline. That free allocation bottleneck only got unplugged last week as the EUTL was updated with free allocation volumes to 2020 and 2017’s allocation was granted to airlines.
In April 2016 delays to derogation allowance distribution forced Eastern European utilities into the market at the last minute to avoid the non-compliance penalties of €100 per tonne. This year’s distribution of free allowances reduces the chance of a repeat of last year’s price spike. Now that aviation has also got their free allocation (that some may have been depending on to borrow from), the capacity for surprise from this aspect of the EU ETS has essentially been negated.
US position on Paris climate change agreement to be clarified at the next G7 meeting on 26-27th May
The US position on the Paris climate change agreement remains unclear. President Trump had pledged to pull out of the agreement in his election campaign however, amidst disagreement in the White House, the US energy secretary Rick Perry has said that the administration is “still reviewing the issue” following a G7 energy ministerial in Rome. All the remaining members of the G7 re-affirmed their commitment to the agreement.
The US has said it will confirm its position on the Paris Agreement by the 26-27th May summit of G7 heads of government.
