This week’s outlook is neutral/bullish. The only certainty is volatility as Germany switches more coal power on to conserve gas supplies, the threat of industrial demand destruction looms, and the European Parliament votes on EU ETS reform. Germany’s announcement that it will authorise use of legacy coal plants for two years as gas flows from Russia are cut sent EUAs to a high of €85.33 this morning. This represents a €1.88 gain compared to the open at €83.50 as the market responded to possible higher EUA demand from coal use for an extended period of time. Since, prices have dropped to beneath the open. How much additional coal will be turned on is unclear as it is not a given that mothballed coal plants have the right connectivity to send power to every part of the country. Meanwhile, volatility in gas prices could exert a bearish influence on EUAs, while reduced industrial production would cut EUA demand. The other main piece of news for the week is the European Parliament’s vote on ETS reform, which looks likely to pass on Wednesday this week. Points of agreement and contention are summarised in last week’s update. It is reported that there is agreement now on the most contentious of the topics, the CBAM, which should mean a successful vote will retain those points agreement and have a limited market impact. The vote could nonetheless prompt volatility. 


Auction volumes are 11.49 million EUAs, 2.66 million more than last week.

Germany to lean on coal to reduce gas consumption: as last week saw decreased gas flows from Russia to Germany through the Nord Stream pipeline (apparently for technical reasons), the German Economy Minister Habeck announced that more coal will be burnt in order to conserve gas and fill up storage ahead of winter, while industry will be incentivised to reduce gas consumption. A vote will be held within the German houses of parliament on 8 July. More coal burn means higher emissions, more EUA demand and higher EUA prices, but:

  • Grid inefficiencies to limit additional coal burn? It is unclear how much additional coal burn will be required or possible to send electricity to various parts of Germany – the grid is not perfect in its ability to transmit electricity to all areas.
  • Gas rationing to reduce EUA demand? If the government intervenes to cut gas consumption from industry, this could reduce a significant source of EUA demand – both through power consumption and lack of gas burn at factories.
  • Stressed energy markets: volatility in gas prices and increasing coal prices could make maintaining futures positions difficult and prompt liquidations of EUAs to raise funds. Last week’s trading suggests the inverse correlation between gas and EUAs remains.

In any case, as Markus Krebber, RWE’s CEO says, gas prices could stay high for three to five years, which likely means EUAs stay supported.

European Parliament plenary session 22 June: the EPP, S&D and Renew have reached agreement on the CBAM phase in (over 2027-32). This was the most contentious element of the vote that ultimately resulted in rejection at the last attempt. On non-compliance market access, MSR thresholds and maritime phase-in and scope, there is agreement. The market will have priced this in to a large extent so price developments related to the Parliament vote are likely to be limited.

European Council to agree position on Fit for 55: Environment ministers will meet on 28 June in the European Council to finalise their position on Fit for 55 and EU ETS reform. Leaks from those discussions could prompt a market reaction.

Fuel switch remains impossible; coal power generation profits improve: year +1 clean dark (coal) and clean brown (lignite) spreads moved higher last week, while equivalent profits in natural gas fired power (clean spark spreads) dropped as natural gas prices rose. Fuel switching from gas to coal on Friday only looked possible around 195 euros per EUA according to ICIS, a gain of €28.02 compared to last Monday’s fuel switch price.

Speculators stay away: the most recent ICE Commitment of Traders report shows speculator net long positions had dropped by 22% week on week. Uncertainty regarding the political process in the European Parliament and worsening economic outlook could be behind this

Outlook: neutral to bullish

  • Indicative EUA Price: €83.70
  • YTD Average EUA Price: €83.29
  • MTD average EUA Price: €83.29

Charts

1 – Dec22 EUA price chart 2 – Clean Dark/ Clean Spark Spreads (electricity generation profitability)

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