EU ETS Monthly Report — April 2019

European carbon advanced 20% in April, with the December 2019 futures contract ending the month at €26.29 on Ice Futures. Screen-traded volume in the benchmark cotnract was up almost 10% on March, as activity built up in the run-up to the annual compliance deadline.

The main price influence during the month was the postponement of the Brexit deadline from March 29 to October 31. The eight-month delay gives the UK Parliament another opportunity to ratify the withdrawal agreement reached with the European Union last year, though this postponement won’t allow for UK installations to resume participation in the market.

The text of the relevant Commission decision reads: “From 1 January 2019, the Central Administrator shall suspend the acceptance by the EUTL of relevant processes for the United Kingdom relating to free allocation, auctioning and the exchange of international credits.

“This suspension shall cease from the day following the one on which the instruments of ratification of both Parties to the Withdrawal Agreement are deposited… and the end of the suspension shall be made public.”

To this end, the EU ETS as a whole can be considered shorter on an annual basis, since UK installations routinely emit less than the country’s allocation of EUAs. This bullish factor generated a slight relief rally, with prices rising from €21.91 on April 1 to €26.13 just ten days later. Carbon reached a new 11-year high of €27.85 on April 12.

Participants said this Brexit- and compliance-related rally also encouraged speculative investors to resume building long positions, which some had been liquidating in March in expectation of a no-deal Brexit, which might have triggered widespread selling by UK installations.

Carbon was also supported by a gradual increase in natural gas prices: the June TTF contract rallied strongly by mid-month, gaining as much as 13%, while June coal fell 3%.

With gas-fired generation estimated to be preferred to all but the most efficient coal plants, carbon tracked the fortunes of power and gas over the course of the month. The 30-day correlation at the end of April between December 2019 carbon and calendar 2020 power was 0.949, while for calendar 2020 gas it was 0.863. Meanwhile, for carbon and coal the correlation was 0.502.

As the market moves into May, the end of compliance is expected to lead to a decline in demand, yet at the same time, the massive jump in carbon prices year-on-year (a year ago, the market ended April at €13.59) means many compliance installations will be managing their exposure more carefully by buying regularly.

In addition, utilities in southern and eastern Europe do not typically sell forward power and hedge fuels and carbon, and so are expected to continue to buy regularly to cover their ongoing generation.

The market was also tightened in April by interruptions in the auction schedule over the Easter break, and this will be repeated at both the start and the end of May. EU member states will sell 46.6 million EUAs in coming month, compared to 52.8 million in April.

Mid-May will also see the European Commission publlish its calculation of the Total Number of Allowances in Circulation (TNAC) for 2018. This number will be the basis for the operation of the Market Stability Reserve over the period from September 2019 to August 2020.

At present, the European Energy Exchange auction calendar for the period from September through to December lists a total of 305 million EUAs to be sold, but this total was only ever notional, and will be adjusted once the TNAC is known.

By the same token, several countries will shortly announce additional supply for auction from June, which will offset the reductions through the MSR to some small extent.

ALLCOT

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