Calmer waters

Published at 14:48 28 Apr 2017 by . Last edited 16:01 28 Apr 2017.

In April, EUA prices traded with reduced volatility but tended to slide, averaging 4.8 €/t and closing at around 4.6 €/t. Average prices over the month fell by around 6% m/m. As with the price declines in March, the story was the downward pressure coming from the higher volumes of EUA sales y/y outweighing the upward pressure provided by some supportive fundamentals.

This support came from continuing outages at several French nuclear power stations. The outages stayed around 13 GW (higher than Q1 17 levels) as more plants went offline and some outages were extended. The low level of French nuclear generation, which has shrunk the country’s power exports, has also reduced hydro stocks around Europe. The EUA demand side has also benefited from a colder second half of April that has supported higher power demand, which has largely been met by thermal plants filling in the gaps.

Despite this support, gas continues to meet more of the requirement for thermal power, as it has been more competitive in the European power sector in y/y terms. Also, verified emissions for 2016 showed, as expected, a healthy reduction y/y in carbon emissions of around 2.7% y/y.

Meanwhile, auction volumes continuing to swell, which we believe will overpower any upward pressure on prices. May auctions are scheduled to be a significant 83 Mt, up by 31 Mt y/y and 4 Mt higher than the April volumes that were affected by Easter holidays. In June, there will be another 83 Mt followed by a heavy 91.5 Mt in July. Given all that supply, we expect that prices will continue to drop toward 4 €/t over the current quarter. For May, we expect prices to increasingly trade around 4.5 €/t and then to move to a lower 4.25 €/t average in June. For the second half of 2017, we expect the market to fall to around a 4 €/t level on average.    

While not an ETS issue, shipping remains a tough sector in which to achieve carbon emissions reductions. This is primarily due to the different approaches of the UNFCCC and the International Maritime Organization (IMO), which develops policies that aim to treat each ship the same. However, the IMO has made some recent progress in dealing with other forms of air pollution that will start to change how vessels fuel themselves, offering some hope that similar progress will be made on carbon emissions. This month we look at the latest IMO developments and the potential impact these could have on climate policy and carbon markets.

The IMO has agreed tougher environmental standards which, together with a swelling LNG supply side, are creating conditions for growth in LNG bunkering demand. However, when those more stringent IMO rules first come into effect in 2020, the winner in the transition away from HFO is likely to be marine diesel (MGO), given the relative ease of switching compared to LNG.

Beyond 2020, LNG could take a growing share of the shipping-fuel pie, as gas supplies boom, prices fall and LNG bunkering infrastructure is built-out. Given the significant carbon emissions benefits derived from using LNG, as opposed to petroleum-based fuels, we expect that LNG will play an increasing role in shipping in the longer term. A key component of making this happen could be new carbon regulations issued by the IMO. A robust carbon pricing measure could well be the decisive factor moving shipping away from more heavily CO2 intensive fuels (MGO) to LNG. If the full fleet of existing ships was moved from burning HFO/MGO to burning LNG, then shipping CO2 emissions would be reduced by at least a third for the same volume and pattern of trade.

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