Political uncertainty should keep EUAs consolidating around the 80 euro mark this week as market participants may stay away until there is more clarity on what the European Parliament will come up with for their position on the EU ETS. REPower EU and it’s MSR proposal remain on the table and though there was agreement on many aspects of Fit for 55, CBAM proved a sticking point, bringing down the whole agreement. Below we discuss what elements of the Fit for 55 package saw agreement, and possible impact on EUA prices. The next round of votes on the ETS revision are being aimed for 22 June. Meanwhile emissions remain high with emissions intensive coal still firmly priced in and high temperatures in southern Europe. Gas storage is starting to fill up, which is shielding TTF Gas to some extent from a cut to American supplies at the Freeport LNG plant – underlying energy sector EUA demand plus relatively more stability in the gas market should keep EUAs supported. Bearish price action from wider markets could drag EUAs lower.
Auction volumes are 8.83 million EUAs, 0.37 million less than last week, though there is also an EUAA auction for 0.6 million EUAs, leaving total supply up week on week.
European Parliament plenary session 6-9 June results in no agreement: much was agreed by the European Parliament, with CBAM apparently the major sticking point that prompted rejection of the entire package. The details of what was agreed and not agreed are shown below in a table. Market impact on 22 June looks likely to be neutral if the Parliament’s position is similar to the Commission proposal on CBAM, plus a 63% cut to emissions vs. 2005 levels, earlier maritime phase-in, stronger benchmark levels and the lower threshold for MSR withdrawals. See table below. If the final proposal deviates from this, it could cause a market movement.
Market access for non-compliance entities: amendments agreed by the Parliament within the overall package seem to aim to limit market access for trading and holding physical allowances. This could have some impact on the secondary market however in making it harder to hold EUAs as a backing for futures, and could also disrupt banks and financial service providers from distributing EUAs to clients. Utilities could fill the gap here. Short term agreement on this would add to bearish sentiment, though emissions do remain high so price losses seem likely to be limited.
Generation spreads down week-on-week, bearish pressure: EDF is delaying planned nuclear outages that were for Q1 2023 to later in the year adding bearish pressure to power prices. The fire at the Freeport LNG plant in the USA and unplanned outage affecting Norwegian deliveries have pulled gas prices moderately higher – strong European gas storage levels are moderating gains to gas prices. Clean Dark and Clean Spark spreads are narrowing across the board, less power generation profitability could exert some bearish influence on EUAs.
Fuel switch remains impossible; Poland to increase domestic coal production: ICIS’ front-month fuel switching model suggests EUAs must hit 127 euros to incentivise fuel switching from coal to gas again. Meanwhile Poland is doubling down on coal by increasing domestic mining production to alleviate high energy and heating prices. Fundamental market tightness remains.
Wider markets: inflation data remains bad and markets are saying that the ECB and Fed are behind the curve on inflation. Hence, markets have now priced in a much more aggressive tightening path than both central banks are willing to contemplate at this juncture.
Table: Fit for 55 key proposals & European Parliament positions
|Parliament Agreed upon|
|Commission proposal||Parliament position||Notes|
|61% lower emissions by 2030 vs. 2005||63% lower emissions by 2030 vs. 2005|
|4.2% LRF (percentage by which cap on emissions drops each year)||4.4% LRF in 2024 & 2025, 4.5% LRF from 2026||Most emissions cuts towards end of 2020s|
|117 million EUAs removed from market when legislation is approved (likely 2024)||70 million EUAs removed from market in 2024, 50 million in 2026||This pushes emissions reductions to later in the 2020s .
Didn’t receive large majority, but doesn’t appear a key sticking point, so likely will form part of the agreement.
|833 million upper threshold, buffer from 833-1096m||MSR upper threshold 700 million TNAC, buffer between 700m and 921m. Upper threshold decreases by LRF||Got a good majority so likely to form part of EP position. Increases use of MSR as market tightens.|
|–||Restrictions on non-compliance market participant access from 2025, subject to Commission assessment||Strong majority suggests this will form part of EP position.|
|–||Market intervention: Trigger = Price for 6 consecutive months is 2x average price in previous 2 years
If triggered, meeting to be convened to determine if intervention is necessary
Injection of 100m allowances from MSR subject to commission decision
|Maritime: 100% compliance in 2026, phased in 2023-26||Maritime: 100% compliance from 2024|
|Aviation: Full derogation to extra-EEA flights||Aviation: flights from EEA to third countries to be covered by EU ETS|
|Aviation: free allocation phaseout by 2025||Aviation: free allocation phaseout by 2027|
|Not yet agreed|
|Commission proposal||Parliament position|
|CBAM Phase in 2026-2035 (affects free allocation for covered sectors)||A compromise phase in end-date of 2032 was floated but not agreed. S&D have said they will not agree to anything weaker than the Commission’s initial proposal, so the Commission proposal may represent the baseline of ambition for negotiations.||Neutral to bullish|
|–||Rebates for exporters out of EU floated, but nothing agreed|
|–||MSR releases EUAs if price is materially higher than recent average EUA price|
Outlook: bearish / neutral
- Indicative EUA Price: €82.10
- YTD Average EUA Price: €83.37
- MTD average EUA Price: €83.15
|1 – Dec22 EUA price chart||2 – Clean Dark/ Clean Spark Spreads (electricity generation profitability)|