EUAs dropped sharply on Monday after the auction-less period saw prices post gains to a high of €88.64 last week. As previously flagged, the European Parliament Plenary session may be playing into some of this. We expect a watering down of the Parliament’s Environment Committee proposals, but a more ambitious package than last year’s original Fit for 55 proposals from the European Commission. If the European Parliament doesn’t take an ambitious package into further legislative discussions between Commission and Council, that could send a bearish price signal, along with the REPower EU proposal to use EUAs from the MSR, which remains live and would be significanltly bearish. The other possible factor is stressed market conditions, partly due to the lack of auctions over the last fortnight may be limiting forward dated energy sales – that could mean utilities aren’t buying EUAs. Otherwise, profitabiltiy for fossil fuelled power generation should be strong, so fundamental EUA demand should be high. Utilities could resume buying as EUA auctions resume today at 11:00 CET – so the auction results of this coming week will be interesting to look for to judge whether lower EUA prices might come, or not.
Auction volumes are 9.2 million EUAs, 4.1 million more than last week.
Stressed market conditions limit utility hedging? Some utilities have indicated that high margining requirements have prompted them to cut their hedging levels, and therefore not buy EUAs. This demand should return to the market – the lack of liquidity caused by minimal EUA auctions over the last two weeks could have contributed to the lack of power generation hedging, with lower than typical liquidity – average daily volume since April has been 20 million EUAs a day vs. 29 million last year.
Most European buyers are complying with the Russian gas payment terms. This should provide support to EUAs in the mid-term.
European Parliament plenary session 6-9 June: the Environment Committee ENVI’s proposals are currently up for discussion. These ambitious reforms to the Fit for 55 package may struggle to survive the scrutiny of the full European Parliament. Some details:
- There is significant difference of opinion between progressive and conservative parties on reform.
- The stationary ETS target may come out at 63% lower emissions than 2005 levels, vs. the ENVI proposal of 69% and the original Fit for 55 target of 61% vs. 2005.
- Rebasing (one off removal of EUAs) could be spread over 2024 and 2026 instead of happening all at once.
- CBAM phase in might happen over 2026-2032 – that means phase out of free EUAs for covered sectors.
- Speculator involvement & price controls will be a topic of discussion, with talk accelerating on limiting speculator involvement. Some compliance buyers take positions within the market rather than just buying for compliance, so exactly how the EU would regulate this is unclear.
- Aviation / maritime sector inclusion. Including the difficult to abate maritime sector in full by 2024 (as opposed to a phase in over 2023-26) would send a bullish price signal.
- REPower EU’s MSR proposal is very controversial within the Parliament but not the subject of current discussions. Opposition to this seems to be growing.
Failure to agree an ambitious position could send a bearish signal to the market. For a summary of the ENVI proposals and European Parliament plenary positions when they come out, email us.
Generation spreads strong: meanwhile utilities should be making good profits on fossil fuelled power generation – even on gas fired generation. The above point on stressed markets may provide some clue as to why this is apparently not translating into higher EUA prices.
Wider markets: risk of recession in mid-term remains. Central and Eastern Europe are showing resilience to the nearby war. Poland is showing strong year on year GDP growth from Q1 2022 of 8.5%, and the Czech Republic 4.8% up. Meanwhile Western Europe is suffering with inflation. Italy narrowly avoided moving into recession in Q1 2022 and France seems to be heading into recession (-0.2%).
Outlook: bearish / neutral
- Indicative EUA Price: €82.10
- YTD Average EUA Price: €83.37
- May average EUA Price: €85.62
|1 – Dec22 EUA price chart||2 – Clean Dark/ Clean Spark Spreads (electricity generation profitability)|