European carbon prices slide 17% in March as demand shrinks

31st March 2017 by CMIA

European carbon prices have begun their seasonal decline as the compliance process for 2016 nears its end. Installations appear to have mostly covered any outstanding shortfalls, and speculative trading activity is more prevalent, according to market sources.

At the same time utility hedging demand has been capped by a combination of falling power and weak natural gas prices. Natural gas, coal and power prices all dropped to multi-month lows in March before recovering at the end of the month.

The result was that the clean spark spread, a measure of the profitability of gas-fired power plants, improved relative to coal, and this dampened demand for carbon allowances, since gas-fired power requires only half as many carbon permits as coal power.

In addition, the supply of allowances sold at auction jumped 22% in March to 92 million EUAs, compared with 75 million in February, and this likely accounts for some of the price weakness.

Consequently, the December 2017 futures contract slumped as much as 21% over the course of the month, dropping from €5.93 on March 1 to an intra-day low of €4.58/mt on March 27.

However, a late burst of compliance buying drove prices back close to €5.00 on March 30.

The European Commission is scheduled to reveal the total verified emissions for 2016 on April 3, and analysts at Thomson Reuters Point Carbon predict the total will decline by 3.9% year-on-year to 1.733 billion tonnes.

Much of the 2016 decline will be due to power generators switching from coal to gas over the course of last year, the analysts said; in particular the UK, where power emissions are expected to have dropped by 21m tonnes.

Trevor Sikorski of Energy Aspects forecasts a decline of 2%, with the entire reduction coming from the power sector.

The Certified Emission Reduction market remains at a very low ebb. Prices tumbled to a low of €0.21/mt in the middle of the month before rallying to €0.28/mt by the end of March. This level is equivalent to or even below the cost of issuance for CERs, and so is unlikely to bring any new offsets to market.

The outlook for April’s EUA market is overshadowed by the end of the 2016 compliance cycle. Installations have until around the 28th of the month to surrender EUAs and CERs covering last year’s verified emissions. Analysts don’t believe there will be a significant pickup in buying activity in April, as they suggest most of the purchasing will have been done in the first quarter.

Any price decline in April may be cushioned by a 15% drop in allowance auction volumes to 78 million EUAs, but with the market already awash with allowances, there is unlikely to be much upside for prices.

If prices move back above €5.00/mt, it may suggest that speculative traders have returned to the market and are either closing out existing short positions, or preparing themselves for further gains.

Early April will also see the resumption of the trialogue process in Brussels, as the Council, the Parliament and the Commission try to reach a compromise consensus on reforms to the Emissions Trading System for 2021.

By Allcot Group