Market Developments
- EUA carbon price closes the week at €8.63, up 24c (2.8%) week-on-week
- Week closes at the high, sending further bullish signals
- GBP EUAs almost unchanged as EUR falls following ECB comments
- Clean dark spreads under pressure but EUA price rises immune
- Germany agree lignite’s future
- Poland elects Euro sceptic party
- EU parliament sets out timetable for Phase IV reform
- Environmental Finance Annual Market Rankings now open
Deadline for moving CP1 CERs and ERUs into a non-EU account: 18th November
Auction Overview
- 15.075Mt comes to market this week in four EUA auctions
- 59.828Mt EUA will come to market in November
Price Action
Another week, another rise in the carbon price as new 35 month highs continue to be set (35 months ago the price fell suddenly from over €10 so the 35 month statistic won’t change for a while) amid a glut of market-moving news. The week closed at €8.63, the high of the week, posting a 24c week-on-week gain. Strong auctions signalled buying intent that was topped off on Friday by the highest bid volume since May. Having found a new higher range the price consolidated around €8.43 in the first half of the week before continuing its upward moves with the largest gain of 15c coming on Friday. The rise came despite a large drop in the Euro that caused falls in the clean dark spreads (CDS). The CDS ended the week down ~10% so continued EUA price rises will have wrong-footed the shorts using the CDS as an indicator and suggests other factors are behind the recent EUA demand and price surges. The value of the Euro dropped significantly on Thursday following comments from Mario Draghi, President of the European Central Bank, on the quantitative easing programme and inflation within the Eurozone. EUR weakness relative to the GBP and USD continued on Friday ending the week down 162 and 337 points and 2.25% and 2.9% respectively. The rise in carbon despite these headwinds points to other factors being responsible for EUA demand. Over the weekend it was revealed that the German government has negotiated reductions in lignite capacity (see article below) that, while seemingly bearish, will remove uncertainty from lignite operators that allows them to hedge more output (and thus buy more EUAs). Lignite power production is much more profitable than hard coal and thus demand for EUAs has the potential to be decoupled from the CDS. Price Impact: the continuation of the uptrend will keep the long-term long speculators long (the short traders will have been caught out by events and their shorts closed out by now) and buying for lignite hedging will dominate price development until it doesn’t. Calling the end of additional demand caused by lignite hedging is impossible so only a recovery of the CDS is likely to allow the upward price trajectory to continue into year-end. That said, further short-term gains appear the most likely scenario, depending on how much warning the lignite operators had of their settlement with the German government and thus how much hedging they have left to do. Continued strength with a natural target of €9 cannot be ruled out over the next few weeks.
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Germany agree lignite reserve
Germany has come to an agreement with RWE, Vattenfall and Mitteldeutsche Braunkohlegesellschaft mbH over plans to decommission lignite power plants. Starting from 2016 the 8 plants included in the scheme will be gradually removed from the ordinary merit order and included in a capacity reserve. As such the power plants will be paid to be kept open and on standby to ensure there is enough capacity in the German power grid in times of other power station outages before being closed up to 4 years later. The bill for keeping the plants on standby is expected to be around €1.6 billion and may yet fall foul of state-aid rules. The plan comes as Germany aims to reduce emissions to meet its 2020 emissions reduction target and is expected to reduce emissions by 12.5Mt by 2020. By agreeing to keep the plants open the German government hopes it will avoid the negative impact of mass redundancies in the economies of the regions affected. It also allows the companies affected to operate the plants as normal until they enter the reserve and provides more production certainty and potentially more demand for EUAs in the short term as the production is hedged. The plants will stay in the reserve for a maximum of 4 years before being decommissioned.
Poland elects Eurosceptic government
Poland has elected the eurosceptic Law & Justice (PiS) party over the weekend. Senior figures within the party have said they would seek to renegotiate Poland’s participation in carbon trading should they win power. Poland are the third largest emitters in the EU ETS. It is unclear whether renegotiation of Poland’s participation in the EU ETS is feasible as this may lead to Poland having to renegotiate their EU Membership. The party have already stated that this is not a road they wish to go down. Poland has taken a strong stance on the reform of the EU ETS and opposed any moves made to increase the price or ambition of the system. With the country heavily reliant on coal fired power and set to expand the coal fired power sector Poland appears to be at odds with the majority of the other member states in the EU ETS and any potential for exit would potentially allow the other member states to pursue more ambitious reform. Speculation on the eventual outcome will only fuel volatility in the EUA market.
EU Parliament timetable for EU ETS reform set out.
The timetable for Phase IV reform of the EU ETS has been set out by the European Commission. It is likely to see a vote in the European Parliament at the end of Q3 2016 and could mean the law is passed at the end of 2016 or early in 2017. Previously commentators had suggested the reforms would take 2 years to iron out.
The Parliament timetable in full:
1. Public hearing at ENVI meeting – 18th – 19th February, 2016
2. Consideration of draft report in ENVI – 18th – 19th April, 2016
3. Deadline for amendments – 26th April, 2016
4. Consideration of amendments in Committee – 15th – 16th June, 2016
5. Vote in ENVI – 29th September, 2016
6. Vote in plenary - November 2016 (exact date not confirmed)
The week ahead
With unknown quantities of hedging seemingly caused by German lignite power production rule changes it is hard to call price direction however the odds are there will be continued support and possibly higher prices. Euro volatility and other energy complex developments could accelerate a move up but, based on last week, are unlikely to cause downward moves.
