This week is set to feature some important events with implications for the carbon market. The first is Brexit and the fate of UK installations in the EU ETS. After a period of intense political maneuvering, UK politicians have started to move away from more extreme positions (a ‘no deal’ Brexit on one side, no Brexit on the other side) and instead work towards a compromise position close to a slightly abridged version of prime minister Theresa May’s deal that was so overwhelmingly rejected just a few weeks ago. The next move is due on Tuesday (29 January), when the UK parliament will vote on several amendments put forward by members of parliament, regarding delaying the Article 50 Brexit and parliament’s role in the process, for example. Tuesday’s votes should help clarify some of the next steps for the UK parliament, rather than spell out what the UK government wants. The second big event is the final set of recommendations from Germany’s coal commission, due by 1 February. The headline proposal will be a timetable for closing lignite mines and associated power plants. Reports over the weekend suggested that the commission will propose the closure of some 5 GW of lignite power plants and 8 GW of hard coal plants by 2022, which was at the more aggressive end in terms of expected closures. The drivers for closures are the combination of vocal opposition to restarting mining at Hambach Forest and the considerable investment needed to make those power plants compliant with the tighter NOx restrictions starting in H2 21. If these closures are agreed, it would be bearish carbon due to less hedging demand for lignite and there could be some selling of EUAs from RWE, owner of most of the plant likely to be closed, but bullish continental power dark spreads and gas. We note that there is a high possibility that the German government will cancel some EUAs from its auction pots—EUAs that would have been used to cover emissions from the lignite plants that are required to close—and this would dent the bearish impact of the announcement on EUA prices.
|Fig 1: German lignite plant by age, GW||Fig 2: German lignite plant by owner, GW|
|Source: RWE, LEAG, Energy Aspects||Source: RWE, LEAG, Energy Aspects|
EU price action
The EUA market is behaving as we had been expecting, trading in a 21.4-25.7 €/t range that corresponds with some key technical markers. After spending last week testing resistance at the highs of that range and hitting a within-day high of 25.5 €/t last Wednesday (23 January), the market then came off and traded in the middle of the range. While EUAs fell in price by 3.7% w/w to Friday’s 23.9 €/t close, all that really happened was a cycling of prices in this technical range. The market is looking for something to push it out of that range. This week’s expected political drama in the UK parliament is unlikely to deliver the level of clarity the market is wanting. The fundamentals remain mixed, as the weather in Europe is looking less cold than predicted in previous weeks, with forecasts for much colder-than-normal winter weather giving ground to moderately colder-than-normal weather. Over last week, this change in weather forecasts removed some support for power sector demand for thermal generation (and emissions) and allowed the fuels complex, particularly gas, to ease back down. German EUA auctions will restart on 1 February after a suspension for two and a half months, adding some 3.2 Mt per week more auction supply than in January. This eases the supply side and, combined with the uncertainty around Brexit and the coal commission timetable, this week is more likely to be about testing support against the lows than resistance against the highs. We continue to expect prices to trade in that 21.4–25.7 €/t technical range over February and through the period when the heightened Brexit uncertainty remains.