While the EUA market continued to orbit 20 €/t last week, there were two policy announcements with longer-term ETS implications. On 27 November, the French energy ministry released a new energy policy that represented a considerable deceleration in the pace of nuclear plant closures envisaged in the 2015 Energy Transition Law. The 2015 law requires a reduction in the share of nuclear power in the generation mix from the current 75% to 50% by 2025. The new plan is for no material change in nuclear capacity before 2025, with the closure of 1.8 GW at Fessenheim in 2021 being largely offset by the slated start-up of the heavily delayed 1.6 GW Flamanville plant. Two more reactors could close in 2025-26, provided the move is not deemed to endanger security of supply and surrounding European neighbours “massively increase renewable generation, leading to lower European power prices”. Another two approximately 50-year-old reactors (as yet unidentified) are slated to close in 2027-28. This modest loss in nuclear generation out to 2030 is to be matched by an increase in the share of renewables in total energy consumption to 32% by 2030, with the thermal plant set to see no increase. As for EU ETS balances, the plan means European power emissions are now set to stay considerably lower to 2030 than under the previous legal framework (every 1 GW of nuclear capacity, if replaced by thermal, leads to a 7–10 Mtpa emissions hike). On 28 November, the European Commission released an initial report setting out pathways to get from the existing 2030 climate targets to carbon neutrality by 2050. With no proposed change to policies out to 2030, the report is more an indicator of future policy direction than a document with implications for the market now.
|Fig 1: Potential French nuclear capacity closures based on age, GW||Fig 2: Cumulative call option OI, Mt|
Note: New policy is closest in line with the 50-year reactor life scenario
Source: EDF, Energy Aspects
|Note: ICE OI only
Source: ICE, Energy Aspects
EU price action
The EUA price continued to trade around 20 €/t last week, with Friday closing at 20.5 €/t. The market remains in the grip of technical traders, but pricing has become much more concentrated around 20 €/t, and with less than two weeks to go until EUA option expiry, it is likely to stay that way. With that expiry now firmly in the market’s headlights, call option open interest (OI) across the two exchanges is now hardly changing w/w. By the end of last week, the cumulative net (calls minus puts at the same strike) OI in call options of a 20 €/t strike totalled 335 Mt and just 20 Mt at a 15 €/t strike. So, where the market prices in the run up to next week’s expiry will determine how big a downward pricing event this will be. If the market prices down over this week and the start of next week, then the downward repricing on the day is likely to be limited. This is what we expect to see. If the market closes next Tuesday (11 December) above 20 €/t, then the downward pricing impacts on the day will be more significant. Once Dec-18 expiry is over for both the options, and then the forwards at the start of the following week, we become much more bullish. EU auctions are then halted for the winter holidays (last auction on 17 December), and Q1 19 is still promising low auction volumes given the removal of UK allowances (at least for Q1 19), the ongoing temporary suspension of German EUA auctions (4.4 Mt/w) until sometime in Q1 19, and the MSR reducing auction supply (down at 104 Mt in Q1 19 vs 240 Mt in Q1 18). But before we get to Q1 19, we expect technical trading to continue driving the market, with prices volatile and trading within the 15–21 €/t range over the coming two weeks.