The Christmas period and Friday’s EUA correction gives us a neutral to bearish outlook for the UK ETS, though low renewable output and cold weather will ensure some demand for UKAs is retained. The UK government has declined to intervene in the market and next year’s UKA auctions are smaller, though more in number, so we might still see some more bullish pressure, though much depends on what happens to EUAs given that a large chunk of auction demand is from utilities swapping EUA hedges to UKAs.
UK ETS Outlook: neutral – bearish
- 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.”
- UKAs trade at significant premium to cost containment reserve threshold – we finish the year at an approximately 16 euro premium to the threshold at which intervention by the government can be triggered.
- No auction supply keeps market tight, more smaller auctions next year: UKA auctioning is set to resume on 12 January, with 3.2 million UKAs up for auction every fortnight, down from approximately 5 million currently – though the UK ETS started up partway through the year and needed to compensate for no supply prior to the first UKA auction.
- EUA price crash sends UKA premium vs. EUAs to 16.17 Euros approximately, suggesting future auctions will have to deliver lower UKA prices to attract those swapping EUAs to UKAs unless EUAs stage a recovery. The market isn’t as tight as the EU ETS, and without large amounts of coal power capacity, even smaller auction sizes next year will most likely attract a lot of bidding interest from utilities wanting to swap EUA to UKA.
- Fundamental demand likely to be strong: continued cold suggests continued fossil fuel burn, with low wind levels. Risk remains to the upside on utility buying demand to cover their power generation. BMRS data shows fossil fuels are currently generating above normal levels (67% vs. 55%)
- Indicative price: £76.50
See also our EU ETS market update here