Prices were less volatile in June than they had been in May, with EUA prices trading in a tight range around 5 €/t, though this was a month of two halves in terms of primary supply. The first half, when auction volumes averaged a fairly low 15 Mt per week, and the second half, with weekly volumes averaging 22 Mt.
Still, some fundamental support came from higher levels of scheduled maintenance on French nuclear plants, low (but improving) hydro reservoir levels around Europe, periods of hot weather and reasonably strong industrial production from the energy-intensive sectors. Also, there was a big drop in open interest on ICE, which could well be positions getting closed as we get closer to the summer holiday period.
In politics, the last two months have seen some important European elections, not least in France, where Emmanuel Macron was voted in as president in May. This event brings the future of nuclear power in Europe more into focus, as Macron has pledged to maintain the 2015 Energy Transition Law goal to reduce nuclear to 50% of French power generation by 2025, down from around 75% now. With the first term of the Macron Presidency extending to 2022, the energy transition in France now appears to be much more of a reality.
Under the Energy Transition Law, as a minimum, a net 17-22 GW of nuclear capacity must close by 2025. This could effectively mean the shuttering of older reactors that turn 40 years old first. A net closure of 21 GW would reduce French nuclear generation by some 165 TWh/y and would be highly supportive of power, gas and coal prices in the EU.
While those reductions are large, a look through the rest of the EU suggests that nuclear capacity reductions across the bloc will be around 23 GW by 2025, driven by particularly big losses in Germany (10.7 GW), Spain (7.1 GW), and Belgium (5.9 GW). The losses in the latter two, where extending the lifespans of nuclear reactors seems to be politically difficult, are in line with the expiry of current operating licences.
Overall, nuclear closures are likely to lead to the loss of 43 GW of low-carbon generation capacity, or 321 TWh of generation in the EU by 2025. To replace that with a mix of wind and solar would require 170-200 GW of new capacity—depending on type and location of the facility. While this sounds a lot, the lower end of that range it is only around 19 GW a year, which is what was added in 2016, and this was the lowest annual level of capacity addition in the bloc since 2009.
If this loss is filled by gas, then the impact would be to increase emissions under the EU ETS by around 124 Mt/y by 2025. Over the period 2017-2020, emissions would be higher by 82 Mt, while the 2021-2025 period would see some 529 Mt of emissions added. If hard coal also helps to make up for the shortfall, the emissions impacts would be higher y/y.
The picture we see emerging is one where renewables will, on an annual basis, largely replace generation from nuclear power plants. The need for gas in the power markets will still increase, as gas will be needed to fill the gaps caused by the loss of coal-fired generation from the new BREF rules and fossils will also need to play a reserve role.
The outlook for prices post-2020 is a bit more bullish than last month, with our Phase 4 prices now averaging 25 €/t, up from 22 €/t.