2017 was another year of EU ETS policy developments adding to market price volatility. Much of that volatility drove upwards movements as the EU settled on a very bullish ETS reform package and the ‘Brexit clause’ added unnecessary disruption.
The fundamentals are unlikely to be as supportive in 2018 as they were in 2017. In terms of EUA supply, 2018 looks like being a year or watching and waiting. The wait will mostly be on the supply side, as not much at all is going to change with auction volumes, which are expected to be down by 10 Mt (3.7%) y/y. This compares with 2019, when that supply side is going to be hit with the removal of over 400 Mt due to the start-up of the market stability reserve.
Power sector emissions are likely to be less supportive for EUA prices in 2018 than 2017. French nuclear power availability should be higher y/y, while hydro remains under pressure at the start of 2018, with reservoirs still 31% lower y/y in Spain and 4% lower in Italy, but stocks are now 9% higher y/y in France. With heavy snowfalls reported in Alpine regions, we could see a normalisation of hydro levels come spring in the region, only leaving Iberia sharply down in 2018.
In addition, relative fuel prices are still expected to increase the competitiveness of gas-fired power plants. Coal is being resilient, with Cif ARA M+1 up above 90 $/t and the curve having largely caught up and lost some of its backwardation, while we expect downside for European gas over the coming summer.
Policy discussions to directly tweak the ETS will be much less prevalent in 2018, although changes to related policies must be watched. Revisions to the EU directives on renewable energy and energy efficiency will be important, as will domestic member states’ policies, with Germany and France both likely to be make important policy announcements on their electricity sectors.
In this opening Outlook of 2018, we also present an overview of the EU’s ‘clean mobility package’ of legislation, which looks to introduce new emissions standards for vehicles from both 2025 and 2030. A key thrust of the policy is to encourage the increased electrification of vehicles. The new 2030 target for cars would come in around 67 gCO2/km, which is lower than the emissions of a new hybrid vehicle today. An implication of this target is that low and ultra-low emissions vehicles such as pure electric vehicles, fuel cell vehicles and plug-in hybrid electric vehicles (PHEV) will need to be around half of all new car sales by 2030 for the sector to be compliant.
In a scenario where these targets are met by the manufacturers, by 2025 there will be 9 million low-CO2 vehicles in the EU (including the UK) and by 2030 there will be 30 million. While large numbers, that will still be only 12.7% of the total passenger vehicle stock in the region in 2030. If 100% of the power requirement from that sector comes from gas-fired generation, then in 2025 additional gas demand would be 1.2 bcm and CO2 emissions from the power sector would be 4.6 Mt higher. In 2030, gas demand would be higher by 4.7 bcm and CO2 emissions would be higher by 17.2 Mt—not small, but not massive either.
Despite less supportive fundamentals, we still think that the 2019 market short will draw the market upwards throughout 2018—and evidence of more long prop positions being put on was one of the key developments of 2017. Our forecasts are for EUA prices to gradually trend upwards, but stay in a 7.5–8.5 €/t range in Q1 18. For the remainder of 2018, we expect prices to average 8.8 €/t, with an average of 9.5 €/t in Q4 18.