Further Brexit drama this week was overshadowed by a trio of news stories that had implications for the EU ETS market. The one with the greatest potential impact on the EU ETS was the announcement by EDF that some of its 58 nuclear reactors may contain key components affected by welding anomalies. We think this issue might affect up to 11 nuclear units (14.4 GW of capacity), based on the start dates of units and replacement schedules for generators (Fig 2), and from early reports from the French nuclear regulator ASN that the problems affect at least five plants. Additional nuclear outages of 14.4 GW y/y would reduce nuclear power generation by 10.3 TWh per month if all of the plants are required to be shut down rapidly and simultaneously. With most of that power likely to be replaced by thermal generation, then this could increase EU ETS emissions by between 3.6-5.9 Mt each month, depending on the mix of fossil fuels used in the replacement generation. If the nuclear units are required to shut abruptly, they could be out of action for a considerable amount of time. The announcement referred to the anomalies affecting both components in service and those not yet in service, suggesting there are no off-the-shelf parts available that could be installed to rectify the problem. The anomalies in components stems from a change in welding practices in 2008 for generator components that tend to be replaced every 20 years. This helps give an indication of the number of units likely to be affected. It also suggests that some of these reactors have already been using these components for the better part of a decade. Given the long service history of some of the components, this may suggest that ASN will take a more gradual approach to shut downs. EDF has said it does not expect lengthy outages as a result. However, ASN will err on the side of public safety, so potential outages will likely add volatility to EUA prices in the coming weeks.
|Fig 1: EUA daily moves, €/t||Fig 2: Potential EDF reactors at risk|
|Source: Refinitiv, Energy Aspects||Source:RTE, Energy Aspects|
EU price action
The other two key developments last week both tightened the European gas market. The first was a ruling from the EU Court of Justice that sided with a challenge to the European Commission derogation on third-party access rules on the 35 bcm/y OPAL pipeline, which links to Gazprom’s Nord Stream pipe. As a result, Gazprom will only be able to use 50% of the capacity on OPAL from now on. While that will disrupt up to 17 bcm of gas flows for the next 12 months, Gazprom does have some workarounds to replace most of those flows—taking more gas through Ukraine and potentially selling gas with delivery upstream of OPAL. Still, the court ruling does squeeze the market for the peak winter months. The other news involved a proposal to be discussed by the Dutch government to accelerate the pace at which the Groningen gas field is to close. The headline proposal is to reduce the Groningen production cap to 11.8 bcm for gas year 2019-20, which would be a fall of 6.1 bcm from actual production in gas year 2018-19. It will be difficult to achieve all that cut given infrastructure limits on how much other low-calorific gas can be produced. But it does signal that the government is targeting chunky y/y drops in production from Groningen. As a result of both pieces of news, the gas market’s forward curve moved up in relative terms vs coal, which will bring some coal back into merit for winter 2019-20 and is supportive of EUA prices. Meanwhile, there was more drama in the UK, with a collection of politicians—increasingly known as the rebel alliance—succeeding in passing a law requiring Prime Minister Boris Johnson to ask the EU for an extension to the Brexit deadline if he does not secure a deal by 19 October. With Johnson saying he will not ask for an extension, the stage is set for Brexit to continue to add to volatility in EUAs. We expect EUA prices to trade in a range of 24.9-28.7 €/t over the coming weeks with volatility added by any decisions from ASN.