Another four weeks of strong EUA price gains suggests that the proprietary longs still have an appetite for the trade. The drop in primary supply in August has helped. Power demand has provided some support for compliance buying, but strong hydro and solar generation in southern Europe has blunted the impact of the European heatwave on the call for thermal power.
EUA prices should continue to gain over the rest of August, but over 17 Mt of Sep-18 call options are already in the money. These options expire on 19 September and the market will likely start to position for a sell-off around that event, so we expect EUA prices to ease through September, particularly in the week or so before expiry. We then see prices moving up again through October and November, although we expect that there will be a significant downward pricing event in December with the expiry of the Dec-18 call options and the underlying futures contract.
We have seen a number of developments in the European power sector that will impact coal-fired power in the future, with European utilities beginning to respond to the Best Available Techniques Reference (BREF) document—part of the EU’s Industrial Emissions Directive (IED). BREF was revised in Q2 17. The NOx emissions limit was lowered to 175 mg/nm3 (see Carbon Outlook: Brief on BREF, May 17), with which few coal plants (almost none) can currently comply.
In Spain, the combination of BREF limits and the ending of domestic coal subsidies has brought forward to 2020 the closure of up to 5.2 GW of coal plant, around half of the country’s installed coal capacity. Already, 0.9 GW is to be closed by the start of Q4 18 and there appears to be little appetite to keep the rest open given current regulations in Spain. Of the 5.4 GW that is currently set to stay open, around 4 GW of plants are receiving investments to make them BREF compliant.
In Germany, there has been little investment to make power plants to make them BREF compliant, with utilities taking a wait-and-see approach. RWE argues that the EU has given member states flexibility around BREF for countries to set their own thresholds, and it hopes German policymakers will set new limits that reflect the capabilities of current plants. RWE will only determine the consequences for its plants once the domestic rules have been amended.
In Poland, there is a need to modernise the existing power plant fleet and investment is being influenced by BREF considerations. Compliance strategies include: replacing existing coal-fired units with brand new, highly efficient coal-fired units (5.3 GW); replacing existing coal-fired units with brand new gas-fired units (2.0 GW); and undertaking standalone investment in flue gas desulphurisation and denoxification units (around 1 GW). With Poland having some 30 GW of coal-fired generation capacity, there is still uncertainty over the vast majority of its plants.
In France, a question continues to hang over the future of nuclear power and how much capacity will be closed in the coming decade. While existing legislation suggests a 17-20 GW drop in nuclear capacity, the Macron government signalled last year that it would soften that target. Since then, it has increasingly focused discussions on two scenarios that would see French nuclear capacity reduced by 2-6 GW by 2025.
Gas-fired power generation will benefit from the coal and nuclear plant closures, but given that that far more coal plants are set to be closed than nuclear plants, carbon emissions are expected to fall in the coming years. There remains plenty of policy uncertainty around the precise timing of coal closures, but the direction of travel is still towards an end of coal use in power in Europe.