One of the key uncertainties hanging over the EU ETS has been what will happen to UK installations come Brexit. The vote in the UK parliament, which will now take place on Tuesday (15 January), on Theresa May’s negotiated Brexit deal could help provide some clarity. If the withdrawal agreement is approved, UK installations will stay in the EU ETS until the end of the transition period (currently end-2020). If parliament votes against the deal, as widely expected, then the uncertainty will persist. How events unfold will depend, to a large extent, on the scale of the defeat. In the event of defeat, the government must report back to parliament within three days on its ‘Plan B’. If the defeat is by a relatively small margin (say less than 50 votes), then May could try to secure concessions from Brussels on a few key issues, including on the Irish backstop. A moderately revised version of the deal would then be voted on by the UK parliament. A more comprehensive defeat (+100 votes) is likely to usher in a period of extreme political uncertainty in the UK. The Labour opposition may table a vote of no confidence in the government, which if passed that would trigger a general election. Even if that vote fails, there has been growing clamour in Westminster for either a second referendum or a general election to resolve the Brexit deadlock. While May has ruled out both options, failing to get her deal through parliament might force her hand. In the event of another election / referendum, the UK would need Brussels to agree to extend the Article 50 deadline beyond 29 March, or face the UK crashing out of the EU on that date with no deal —with UK installations immediately leaving the EU ETS. There are suggestions that the European Council might consider a two- to three-month extension, although the EU wants Brexit sorted for the start of the new EU Parliament in July.
|Fig 1: Scheduled EUA auctions per week, Mt||Fig 2: UK based emissions and EUA supply, Mt|
Source: EEX, ICE, Energy Aspects
|Note: Supply = free allocation + UK government auctions
Source: EUTL, ICE, Energy Aspects
EU price action
Overall, the Brexit vote this week is more likely to amplify uncertainty than deliver clarity. The Brexit uncertainty is already having an impact on EUA prices, which shed some 4.2% w/w to close at 22.74 €/t on Friday. The promise of a bearish event—UK installations crashing out in March and selling any surplus quickly back into the market—has likely been keeping more speculative longs out of the market for now. We still think there will be speculative appetite in 2019. Rather, it is just unlikely to be seen in meaningful volumes while Brexit uncertainty is in the foreground, meaning that a rejection of the existing agreement by UK Members of Parliament will push back the date when we might expect to see any speculative upward push in EUA prices. Another bearish development on the prompt last week was the regulatory confirmation by the European Commission of European Energy Exchange (EEX) as the auctioneer for German primary EUA supply, and then subsequent confirmation by EEX that German auctions will restart on 1 February. The weekly average level of sales in 2019 will be 3.2 Mt, down from the 2018 average of 4.36 Mt, which includes the volumes not sold between November 2018 and January. UK auction volumes are still suspended for all of Q1 19 and, if the 29 March Brexit deadline gets extended, then we expect the cessation of EUA auctions will be extended in line with the new deadline. For the coming week, EUA price development will continue to be largely technically driven but will be sensitive to the outcome of Tuesday’s vote. If anything, the direction is more likely to be to the downside, but we still expect to see prices trade in the 21–25 €/t range over January.