EUA Dynamics: Decoding the Dance of Utility Demand and Emission Allowances
As Europe's electricity generation evolves and industrial demand wanes, the intricate balance between power, emissions, and EUA prices unveils a captivating narrative for 2023
In the theater of European carbon markets, there's a noticeable ebb and flow. As we approach the end of 2023, a spotlight is being thrown onto electricity generation's influence on European Union Emissions Allowances (EUA). A staggering revelation emerges - nearly half of the entire EUA demand is tethered to this very sector.
European carbon prices had their brief stint in the limelight, rising above €100 per tonne earlier this year. Fast forward to September, and the benchmark for December futures settled at a humbler €81.52 per tonne, marking a 2.9% dip from its December 2022 finale. A backdrop of dwindling industrial output coupled with the gnawing bite of inflation eating into electricity demand paints Europe's current macroeconomic canvas.
Recent data from the venerated Fraunhofer Institute showcases a 3.5% dip in the EU's public power generation on a year-on-year basis. Dive deeper into these statistics, and a greener shift emerges. Power harnessed from carbon-dense sources such as hard coal and lignite plummeted 33% and 24% respectively, while natural gas saw a 9.7% decline. In stark contrast, renewables surged by 4.7%.
Considering electricity generation shoulders almost half of the EUA demand, these numbers hold gravitas. It's particularly striking when juxtaposed against the fact that carbon emissions from coal and lignite are twice as potent as those from natural gas.
The plot thickens with a peek into power companies' modus operandi. A significant chunk of their generated power is sold up to three years in advance, and to secure these forward sales, utilities stock up on fuel and carbon allowances. The tumultuous energy costs of the previous year echoed into a dip in forward electricity sales, thus trimming the EUA demand by utilities.
ICIS, the Independent Chemical & Energy Market Intelligence, posits an interesting observation: utility hedging, for the past three quarters, hasn't rebounded to its pre-Ukraine crisis levels. Their recent analysis points to the inertia in the German Year+1 electricity contract for 2023. Despite some utilities expressing intent to amplify forward hedging, the prevailing energy market uncertainty prompts a cautious approach by many.
Yet, not all is bleak. ICIS suggests a potential uptick in EUA demand as activity in the German year-ahead electricity contract shows hints of revival. The industrial front, however, doesn't mirror this optimism. A projected 5% slump in 2023's industrial emissions, led predominantly by the metals, chemicals, and cement sectors, spells concern.
The overarching sentiment? A tangible revival in industrial emissions seems distant, at least until the latter half of 2023. Tightening credit conditions could further muddy these waters.
Given this intricate dance of factors, ICIS forecasts the curtain drop for EUA prices at €81 per tonne by year-end, which aligns with a 3.5% year-on-year downturn. Although there might be transient dips below the €80 mark, annual supply shortfalls will act as a tether, ensuring prices don't drift too far adrift.
