This Wednesday brings the first UKA auction of the year. Largely bearish fundamentals – milder weather, a possible increase to the US interest rate and this return to auctioning – albeit with low renewable generation – could send UKAs lower, especially as a lower EUA price, affected by these same influences, will determine the premium (or discount) UKAs trade at and therefore enthusiasm for utilities swapping EUAs to UKAs at the auction. With that said, the UK, like the EU, is vulnerable to further disruption to gas supplies that might stem from a failure to find common ground on Ukraine in Russian – US negotiations in Geneva. The UK, however, with relatively little coal to turn on, should see price gains, if they materialise, relatively limited compared to the EU as the long term outlook for emissions is less susceptible to increases than the EU. A final note, however – we are heading towards the compliance period and there is relatively little liquidity in the market, so there is still potential for UKAs to jump higher.
UK ETS Outlook: neutral-bearish
- Gas price losses unlikely to have a substantial bearish effect on the UK ETS: 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. Relatively less renewable generation should keep UKAs supported.
- Cost containment triggered again: the UK government will decide whether to intervene and add more UKA supply on 18 January, after trading closes. For February, the threshold increases substantially.
- Bearish headwinds from wider markets: mild weather and potential interest rate rises could make UKAs look relatively more bearish than recently.
- 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 last 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 7.80 euros more per UKA compared to EUAs.
- Indicative price: £75.55
See also our EU ETS market update here