This week, risk related to the prospect of conflict in Eastern Europe gives us a bullish view. Strong renewable generation at the start of the week and relatively mild weather could have a bearish impact, but strength to TTF Gas prices along the forward curve suggests no great optimism on the energy crisis, even if front-end contracts are showing volatility on possibly avoiding war through further talks. 

  • An invasion in Ukraine is likely to drive EUAs higher by threatening long term natural gas supplies and therefore long term emissions reductions from energy sector fuel switching. Gas prices in mid-late 2023 are sitting at our estimated fuel switching level and have not moved much in spite of varying levels of optimism about avoiding war (see Chart 3). Fuel switching is the main way to reduce emissions in Europe.
  • Strong wind levels are displacing fossil fuel power. See chart 2. Wind looks like it might have been more relevant last week. Wind levels are anticipated to drop by Tuesday. Relatively mild weather across Europe this week could soothe the market.
  • Last week’s price drop was partly prompted by the German government’s announcement that most free EUAs have been distributed to German companies who have surrendering obligations – but we are seeing little evidence of major selling of free EUAs – so a similar price drop may be less likely this week. Continued distribution of free allowances could help EUA prices drop, but this requires companies to actually sell.
  • Emissions are rising when they should be dropping: French nuclear generation is at recent lows while emissions are high as coal has displaced gas generation. With the EU ETS running a deficit due to the Fit for 55 proposals and the functioning of the MSR, the market may keep rising.
  • Article 29a on market intervention to calm the market looks likely to be beefed up, but analysts are sceptical it would be triggered, even under current circumstances. We are sceptical it had a big impact on the market in recent price dips.
  • Compliance season: typically EUA prices don’t take a large jump higher in the lead up to April’s compliance deadline, but those putting off buying in hopes of lower prices may be forced to come to market in the next weeks.

Outlook: bullish

  • Indicative EUA Price: €90.12
  • YTD Average EUA Price: €87.66
  • Month to date Average EUA Price: €92.27


1 – Dec22 EUA price chart 2 – EU power generation 3 – Forward curve gas prices

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