Over February, EUA prices traded in an increasingly tight range between 4.90 €/t and 5.41 €/t and averaged 5.14 €/t, which was lower than seen in either December 2016 or January.
The month still had some supportive features for prices, but these were less pronounced than in January. The very cold weather across Europe eased, while the outages at a number of nuclear power stations in France dropped back before increasing in the second half of the month. The nuclear plant outage levels were lower than in December 2016 but ended the month at a higher level of around 10.4 GW. Nevertheless, these were still unscheduled, with most outages extended and new plants suddenly going offline, and that was supportive.
The range-bound pricing also came against the background of rather bullish Phase 4 legislative proposals being passed by the European Parliament plenary and sent into trialogue stage. The bullish proposals include a plan to double the injection rate into the MSR for the first four years of its operation. This proposal, which prior to the plenary looked far too disruptive to the market to progress, has been strangely resilient. We still think it will struggle to gain traction in the Council, which is looking to find a common bargaining position by the end of February. If it does not achieve that common position, then the start of trialogue could get pushed back to June or July.
This month, we look at the coal-to-gas switch in the continental power markets in more detail, with the focus largely shifting to Germany, where most of the continental fuel switch capacity sits. The potential scale of gas demand gains in Belgium, France and the Netherlands is limited by shrinking coal capacity and the high efficiency of some of the coal plants that remain. As such, much of the fuel switch in the region will be pushing German coal and lignite out of the system.
The outlook is for less fuel switching in 2017 than previously expected, as the gas market looks tighter over the summer due to a colder winter (with the exception of February/March) having led to a considerable draw on gas in storage. As such, less of the incremental LNG that we expect to land in Europe this year will be available to go into the power sector over the summer, although we still remain bearish for EUA prices.
On 2016 numbers, continental power markets will do well to provide another 20-25 bcm of gas demand from the coal-to-gas switch in 2017 and 2018. This would reduce ETS emissions by around 45-55 Mt annually, on top of the approximately 37 Mt reduction that was realised in 2016 by the switch. With the EU gas market looking a bit tighter after a very supportive start to the year, it is unlikely that all of the fuel switch will be seen in 2017. However, there will be more LNG and more switching, and we still think this fuel switch will largely be exhausted by 2018 or 2019.
The market remains beset by policy uncertainty, with Phase 4 rule changes still likely and the likelihood of UK installations staying in the EU ETS looking increasingly remote. With the UK government intending to invoke Article 50 in March, the Brexit debate will intensify, but it still remains unlikely that the fate of UK installations will be known before 2019. This pushes plenty of uncertainty to the end of the phase, and a Brexit with the UK leaving the ETS would be a bearish blow to the market just as it will start to benefit from the operation of the MSR.