UKAs are looking bullish on similar fundamentals to the EU ETS – the North of the British Isles has been heavy hit by wintery weather. This has meant some power outages in the North however, so while risk is to the upside, with limited coal to turn on in place of gas anyway, prospects for higher UKA prices are somewhat limited, though they are trading near all time highs now. If imports of electricity increase, that could have a bearish impact by displacing some gas fired generation that would otherwise have been turned on. The UK government are rumoured to be adding more auction supply for 2022 in response to the triggering of the cost containment reserve – that could keep price gains limited and presents an interesting scenario for the UKA auction this Wednesday – it remains to be seen whether UKAs trading at a 8.30 premium to EUAs will attract demand from swappers from EUA to UKA given the prospect of more supply next year, though fundamental demand generated by current conditions should mean the auction is well bid. 

Indicative Price offered: £70.00

UK ETS Outlook: neutral – bullish

 

 

  • UKAs trade at a premium over 8 euros to EUAs – interest in the Wednesday UKA auction could be subdued as those swapping EUAs to UKAs might find that too expensive – compared to the 3.91 average price difference through 2021 to date, especially with the cost containment mechanism on course to be triggered, adding auction supply in 2022. 
  • Fundamental demand likely to be strong: utilities will need to try to get power back on for those who have lost it and heating demand will be high. On Monday approximately 55% of power is fossil fuel generated, though 4% is imported – up week on week. If power imports meet demand, UKA prices might not necessarily increase much further as they’ll shift the emissions into continental Europe and the EU ETS rather than UK ETS. 
  • Cost containment reserve to be triggered – more auction supply in 2022? Not enough time remains for the UK to add more UKA supply before New Years’ Eve. The UK government looks likely to bring some supply from future dated auctions forward in 2022. This will help to clear the backlog of demand from utilities swapping EUAs to UKAs. 
  • Are UKAs trading at a ‘fair’ price based on market fundamentals? Some argue that UKA prices are high because of the fundamental switch back to coal from gas. In the EU ETS, prices were able to stop increasing for fundamental reasons because there was enough historical surplus in the market to allow for fuel switching next year to be taken into account. The UK ETS has no such surplus having only started this year and so arguably prices have been able to rise to keep gas ahead of coal in the merit order. With that said, the UK has shut down most coal generation, so added demand from coal fired power shouldn’t be that significant, although relatively small changes across the entire EU in a larger market do influence market direction, so the same can apply in the smaller UK ETS. 

 

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See also our EU ETS update here