This week’s outlook is neutral. The UK government last week again decided against intervening in the market to bring UKA prices down after the cost containment mechanism was triggered. The UKA auction on Wednesday could present a buying opportunity if UKAs get sucked towards the EUA price – UKAs currently trade at a premium of €8.20 to EUAs, which could narrow. The UK ETS is calibrated fairly loosely with much dependent on EUA to UKA swapping, so the auction may be the overriding factor in setting short term price direction. On the other hand cold weather and little wind should prompt heating demand. Relatively less speculator involvement compared to the EU ETS and less coal capacity that might be turned on in favour of natural gas fired power means that heating demand and EUA price movements may be the key price drivers this week.
Indicative UKA price: £79
UK ETS Outlook: neutral
Cost containment: the threshold for intervention moves up to £75.76 on average for February, then £80.90 and then £87.99 for March and April respectively.
UKA auction: 3.221 million UKAs are to be sold. We still anticipate this auction will be well subscribed to, with plenty of EUA to UKA swapping interest. If that €8.20 premium fails to narrow, that could affect buyer interest – so provided EUAs don’t go on a bull run to new all time highs this week, we may see a buying opportunity.
Cold weather forecast and not much wind: temperatures as low as -7 degrees celsius are forecast to hit parts of the UK in the coming days. With low wind levels at present, gas fired electricity is the dominant power source.