In August, the EUA market was very well supported, with Dec-17 prices pushing up to the 6 €/t level and surpassing it by the end of the month. Prices generally trended upwards through the month, averaging 5.6 €/t, which was around 0.3 €/t higher than the July average.
As we said last month, we were expecting August to be a real test for the emissions market given its 32 Mt (233%) y/y increase in auction volumes. That wave of supply has been met with a good upward ramp in prices over August. Part of this was driven by liquidity, as although primary auctions were considerably higher y/y, they were some 50% lower m/m. For September, auction volumes will be up both m/m (+45 Mt) and y/y (+23 Mt). Aviation (EUAA) auctions will restart in September as well, although this will only add 4 Mt by year-end.
Fundamental support came from the same sources as in the last few months, with French nuclear outages still much higher y/y—averaging some 21 GW offline this in August vs the August 2016 average of 8.5 GW offline. The market expects continued high outage levels after the French nuclear regulator (ASN) ordering EDF to check all the parts in all their reactors that have come from a single French forge, which will extend scheduled maintenance periods at the very least.
In addition, hydro was still low in most markets and industrial production continues its sustained run of good performance. Indeed, y/y industrial production growth over H1 17 averaged 3%.
In terms of hedging, while open interest (OI) in the December EUA contracts is still down y/y, the gap is the smallest seen this year. Indeed, adding in OI in the March contracts puts total OI up y/y for the first time this year. This suggests either better utility hedging of future contracts, or the specs were more out in force last month—both would be somewhat odd occurrences for the market. However, to the extent that some of this is led by proprietary position taking, the market could well see a downward pricing episode as auction volumes jump back up in September.
In this month’s Insight, we look at the developments in the outlook for the US Regional Greenhouse Gas Initiative (RGGI) market, which covers states in the Northeast and Mid-Atlantic. RGGI prices have been increasingly volatile, being shifted around by a number of policy developments. The intent of most of the rule changes has been to support higher pricing, including both the amendments introduced from 2014 and now those intended for 2021.
However, some of that impact started to be eroded as prices softened throughout H1 17. This was driven by a reasonably large y/y reduction in emissions, with indicative data showing a fall of 6.2 Mt (17%). Part of this was due to weather, while part of it was likely due to the addition of new gas plants and renewables into the RGGI region’s power markets. We expect these new plants to crowd out what little coal is left, before then crowding out less efficient gas plants.
While RGGI rules should keep the market drawing down the inventory of surplus credits for the period out to 2025, the reductions expected in power sector emissions mean that that inventory is likely to still be above 40 Mt in 2025. The implication for RGGI allowance prices is that, given existing rule proposals, the market will be more likely to trade around certain price triggers associated with the Emissions Containment Reserve (ECR). This will largely keep prices below 10 $/t for the period out to 2030.