This week the UK ETS faces a short week of trading with a bank holiday on Monday. Strong wind levels should limit price gains, but pent up UKA demand from over the long weekend could cancel this out, while with no auctions scheduled until 12 January, the lack of supply is likely to limit the impact of any lower emissions through strong wind generation. The price drop for natural gas should mean relatively little as not much coal capacity exists in the UK in the first place. If anything, a drop in UK power prices compared to electricity imports from continental Europe should ensure emissions largely stay in the UK. Meanwhile, continued strength for EUAs should keep UKA prices supported as utilities await the next opportunity to swap UKAs to EUAs, the UKA auction on 12 January. That long wait without any supply coming to market should keep UKAs supported, but it is hard to envision major price losses without an EUA correction. The UK government’s decision not to intervene in the market in spite of the cost containment threshold being met keeps bullish pressure on – as well as smaller auction sizes compared to last year, spread out over a full year’s worth of auctions.
UK ETS Outlook: neutral – bullish
- Gas price losses unlikely to have a substantial bearish effect on the UK ETS, power price drop will keep emissions in UK rather than encouraging imports: the UK ETS is unlikely to respond in strongly bearish fashion to a return to fuel switching given the gas price increase didn’t mean very much additional coal was turned on in the first place – and no coal is currently turned on. Lower gas, and therefore power prices, will keep emissions in the UK, and keep UKAs supported.
- Renewable output up on strong wind levels: higher renewable output, however, does have the effect of displacing fossil fuel generation, so emissions may drop – but there is little supply available in the first place, and auction supply for much of the year are likely to be dominated by EUA to UKA swapping.
- No UKA supply now: the UK ETS struggles to balance supply and demand at the best of times. The first UKA auction of the year is scheduled for 12 January, and likely to be dominated by utilities swapping EUAs to UKAs. Even lower emissions, therefore, are unlikely to cause any major correction.
- Smaller auctions, UKAs could get sucked nearer to EUA price by auction time: 3.2 million UKAs are up for auction every fortnight, down from approximately 5 million in 2021 – though the UK ETS started up partway through the year. Utility activity swapping EUAs to UKAs looks likely to keep the UK ETS correlated to the EU ETS as those utilities will seek a tight premium between the two carbon allowances. That premium stands at 6.97 euros more per UKA compared to EUAs.
- UK government declines to intervene in UK ETS in spite of cost containment triggering: the UK ETS authority stated “[We] agreed that not intervening was the right course of action on this occasion to support the continued effective functioning of the UK ETS market. The Authority has confidence that this decision will uphold the objectives of the UK ETS as a market-based approach to reducing emissions and incentivising participants to find the most cost-effective solutions to decarbonise.”
- Indicative price: £74.75
See also our EU ETS market update here