Weekly carbon trading update – 2nd October 2017

Market developments:

  • Carbon heads above €7 again to end the week at €7.06.
  • 6% gain from surprise French nuclear outage and…
  • Clean Dark Spreads make huge gains as coal prices plummet
  • Q3 carbon ends 40% higher as bullish factors coincide
  • Trilogue fails to find agreement on Phase IV aviation reforms

EU Allowance Auction Overview:

  • Volume falls to ~17.3Mt vs ~22.1Mt last week due to German holiday
  • Auction supply will remain high in October as ~91.5Mt comes to market, slightly down on September’s ~91.8Mt
  • See auction table below for details

EUA PRICE ACTION

Carbon climbed 6% last week to close the week ov once again in another week of volatile trading. The gains came on the back of year to date highs in the clean dark spreads and further turmoil in the French nuclear power generation fleet. The week began with large gains in the energy complex as the price of power, gas and coal all moved materially higher. Carbon prices moved higher in sync, adding €0.63 in a day to close at €7.28. Both the high and low of the week were set the same day at €7.36 and €6.67 respectively. From there, carbon softened in unison with the energy complex and largely reverted to the €6.70-€7.20 range we have experienced over the last few weeks. An announcement by ASN, the French nuclear safety authority, on a forced shutdown of four nuclear reactors at EdF’s Tricastin plant on Thursday sent the market soaring again as prices raced back up to hit €7.33. The shutdown, due to flooding risk rather than the on-going component issues, highlighted the nervousness of the market to developments in French nuclear power generation availability. Once the market digested the story behind the headline prices softened towards €7 where they largely stayed on Friday. Carbon’s strength was not mirrored in power and coal as following Monday’s stellar gains both fell through the week with prices turning sharply lower on Friday. Carbon’s immunity to Friday’s falls appears to largely hinge on the gains in the clean dark spreads thanks to coal price woes outstripping those of the power markets through the week. Price Impact: carbon continues to show signs of support as it continues to revisit the north side of €7. With a heady mix of bullish factors coming together further gains cannot be ruled out into year end.

 

WEEK AHEAD

Auction volume falls more significantly this week as the German reunification holiday on Tuesday creates a day’s lull in proceedings. Carbon has shown scant regard for September and October’s higher year-onyear auction volumes so one less auction in the coming week will not help those hoping for lower prices. Additionally, the nuclear power generation issues in France show no sign of coming to a resolution and will continue to limit downside and create potential for further sharp upward movements. The scheduled return of French nuclear generators from maintenance for Q4 2017 look less reliable as each week passes and it now looks likely French nuclear generation will experience a high outage rate through Q4 2017 as it did in Q4 2016. That, combined with other factors discussed in ‘Other News’ below, has led to Energy Aspects raising their price expectations for Q4 2017 and 2018 ahead of the MSR commencing in 2019. The continued unexpected demand for carbon makes material price falls unlikely, however, should the energy complex continue Friday’s tumbles carbon is unlikely to be completely immune. Outlook: neutral.


OTHER NEWS

A’s climb more than 40% in Q3 2017, Energy Aspects revise their price forecasts

EUA prices climbed more than 40% through Q3 2017 as prices moved from €5.03 at the end of Q2 2017 to €7.06 at the end of Q3 2017. Shifting underlying demand and a mixture of other bullish influences coincided, culminating in price rises and forcing analysts to revise their Q4 2017 and 2018 price forecasts upwards. Energy Aspects cite increased power emissions, higher industrial production, French nuclear issues, a bullish Brexit proposal and the finalisation of Phase IV negotiations as contributing factors to the recent strength in EUAs. With the MSR looming the price rises witnessed of late, caused by the market being made slightly short by French nuclear outages, are likely to be a small taste of what is to come when the market experiences its first sustained period of shortage from 2019. This was a key message from the analyst panel at last week’s Carbon Forward conference. If correct, compliance costs could shift materially higher and EU ETS risk grows exponentially for anyone that is short carbon.

To discuss the recent market movements, Energy Aspects price forecasts or your EU ETS risk, please get in touch with the Redshaw Advisors team.
Trialogue fails to find agreement on Phase IV aviation rules
The latest trilogue meeting held in September has failed to yield agreement between the Council, Parliament and the Commission on some key issues regarding the rules that will govern the aviation sector’s involvement with Phase IV of the EU ETS. The main areas of disagreement were the free allocation/auction volume ratio and the day the stop-theclock derogation will expire or be subject to revision. Parliament wants the aviation sector to move to 50pc auctioning from the beginning of Phase IV, up from 15pc in Phase III while the Council deemed the amount too high. The Council also argued the stop-the-clock derogation should be extended past the parliament cutoff in 2021. Parliament wish to review the derogation measure in 2021 to put pressure on ICAO to establish an effective and ambitious global offsetting scheme (otherwise known as CORSIA).

 

 

 

 

 

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