EUAs remained firmly parked in their 21.4–25.7 €/t technical range last week, though the market did soften early in the week as coal news began to emerge from Germany. According to reports, the German coal committee had agreed that the country would end all coal-fired power generation by 2038 and that 12.5 GW of coal and lignite power capacity would be closed by 2022. The news was broadly bearish—it will take lignite plant out and allow it to be replaced with lower emitting plant, probably natural gas. As we argued on the day (E-mail alert: German coal commission conclusions curtail CO2 emissions, constructive for gas, 28 January), the complex hedging program of RWE, the company most likely to see coal capacity closures by 2022, makes it less clear there will be an unwinding of hedges back into the market. Also, the German government’s option to cancel EUAs in line with the expected impact of the coal power plant closures mutes some of the bearishness, although the market will be keen to know the exact volume of cancellations. Meanwhile, political news from the UK made no dent on the market. The ruling Conservative Party and its allies banded together to defeat parliamentary moves that would have effectively ruled out a no deal Brexit on 29 March. Instead, UK MPs passed an amendment that sent Prime Minister Theresa May back to Brussels to renegotiate the intractable Irish backstop issue. With initial indications that the EU is largely ruling out reopening the existing deal and is unconvinced that the technological border solutions the UK is suggesting (the 'Malthouse compromise') are workable, the process has reached an impasse. In attempt to find something to take to Brussels, May has set up an Alternative Arrangements Working Group of Conservative MPs to find other arrangements to the Irish backstop. While recent developments appear to have made a no-deal Brexit more likely, they also suggest an increasing possibility that the 29 March deadline will be extended.
|Fig 1: EUA daily trading ranges, €/t||Fig 2: Possible German lignite closures, GW|
|Source: Refinitiv, Energy Aspects||Source: Various, Energy Aspects|
EU price action
The EUA market continued to trade in a 21.4–25.7 €/t range that corresponds with some key technical markers. The combination of the broadly bearish events of last week and the restart of German EUA auctions meant the market was much more interested in testing the lows than any of the highs. The closest the within-day markets came to the low support was 21.6 €/t on Friday (1 February), although Friday’s 22.0 €/t close limited the EUA w/w price drop to 8.1%. The on-going Brexit saga could be a trigger to send prices out of the existing technical range, but we cannot see where sufficient Brexit clarity will come from in the next two weeks to really kick start either a sell-off (hard Brexit) or a bull-run (a soft Brexit). If anything, the fundamentals look less supportive, as the weather forecasts in Europe have shifted to be warmer than normal for the next 14 days, having had weather models for the previous month largely positing a colder than normal month. German EUA auctions restarted on 1 February after a two-and-a-half-month suspension, adding some 3.2 Mt per week more auction supply than in January. The market also expects to see an announcement soon of when the 2019 EUA auctions from Norway (46.8 Mt) will commence. With German coal commission news out of the way and Brexit set to just rumble on, this week’s EUA trading is more likely to be about moving back into the middle of its current technical trading range of 21.4–25.7 €/t. Not much in the market suggests a move to testing highs, but last week’s failure to break the lows points to more mid-range trading.