This week we have a neutral outlook. Announcements from several European states that coal fired power generation reserves are to be brought online to reduce natural gas consumption could imply more emissions and therefore EUA demand. On the other hand, reductions to industrial production could send a bearish signal to the market. It remains to be seen whether higher power sector emissions will outweigh cuts from heavy industry, so the market looks set to remain in holding mode. It seems government mandated cuts to industrial production to conserve gas supplies may only happen if physical gas supplies are exceptionally tight, while more coal generation will have an incremental bullish impact, changing market fundamentals mostly from 2023 when those plants were meant to have gone offline – more detail below. The European Council is set to vote on the Fit for 55 package this Tuesday and expected to take a stance closer to the European Commission’s original proposal. This vote or any leaks ahead of it could prompt volatility in the market – given signs are pointing to no greater ambition for the EU ETS, this should send a neutral, possibly slightly bearish signal. 


  • Auction volumes this week are at 8.83 million tonnes co2, 2.66 million less than last week.
  • Analysts from ICIS estimate European power sector emissions will increase by a net 5% over 2023-24 due to the change in coal fired power generation policy in Germany, Austria, the Netherlands and Czech Republic. That means about 40 million tonnes more co2. For context, 2021 power sector emissions amounted to approximately 720 million tonnes of co2.
  • Additional coal burn to come from 2023? Coal fired power plants in Germany some of which were scheduled to go offline from 2023 are the ones set to continue operating. These are set to come online ‘as soon as possible’. That means a smaller impact this year but bigger impact versus being shut down over 2023-24. The EU ETS impact will logically come if/when utilities start hedging for increased coal and lignite power generation for 2023 and beyond, so we need to see these coal plants online for more than six months. Coal fired power profitability is looking strong as EUAs continue to trade neutrally and gas prices increase – see chart two below.
  • Industry shutdowns due to gas price and recession possible – bearish market impact: BASF accounts for 1% of German power demand and faces cuts to production. Germany is in the second phase of its emergency response. Moving to the highest ‘emergency’ footing would imply direct intervention in the gas market to maintain supplies for consumers. Auctions for bringing industrial production down are being considered though proposals are vague – ICIS suggest this gas demand management would only be implemented if real tightness in physical gas flows appears.
  • EU ETS market remains tight: hot weather in Southern Europe and low hydro levels continue to maintain EUA demand as fossil fuels take the place of renewable power.
  • August reduced EUA auction volumes: EUA prices typically increase in August as auction volumes are halved for summer holidays. We’ve seen them drop previously, but it seems it was speculators driving EUAs to new highs in July and then selling off into August that prompted that. Speculator net long holdings at present are to 15.8 million EUAs according to the latest commitment of traders report for the week ending 17 June – sharply down year on year but up by 1.8 million EUAs week on week.
  • European Council to vote on Fit for 55 – Tuesday 28 June: most analysts and a draft text of the Commission’s proposal anticipate a weakening compared to the Parliament’s position on EU ETS reform. The Parliament position looks to cut 65 million EUAs from the market over 2021-30 vs the Commission proposal – not that many considering the yearly numbers described above. Given the complexity of the Parliament’s ideas vs the fairly small market impact (see report from 13 June), the Commission may reject the increased ambition. Given analysts largely view the Council as likely to take a stance closer to the Commission’s thinking, the market impact should be neutral. After that, market participants may look to areas where compromise may appear in trilogue discussions, for hints as to what the final package will look like.
  • Added EUA supply still possible: another mitigating factor to the bullish outlook is the beefed up article 29 of the EU ETS treaty, making it easier to inject more EUAs back into the market – especially given expensive and stressed energy markets at present. Crucially, however, the use of the stronger Article 29 provisions is limited to a situation in which a price increase can be declared to not be fundamentally driven. REPower EU, potentially injecting 250 million EUAs from the MSR into the market over 2023-2026 remains as a possibility as well.

Outlook: neutral to bullish

  • Indicative EUA Price: €84.50
  • YTD Average EUA Price: €83.31
  • MTD average EUA Price: €83.40

Charts

1 – Dec22 EUA price chart 2 – Fuel switching – impact of higher gas price, stable EUA price makes switch from coal to gas harder, locks coal burn in.

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