Mild and windy weather, robust supply weigh on EU emissions allowances

Carbon prices under the EU Emissions Trading System have fallen in recent weeks, driven by unseasonably mild and windy weather combined with ample supply, analysis by S&P Global Commodity Insights found Jan. 6.

Those factors -- and the resumption of three of EDF's nuclear reactors in France -- reduced demand for EU allowances, according to S&P Global carbon markets analyst Michael Evans.

Platts assessed EU Allowances for December 2023 at Eur78.62/mtCO2e ($83/mtCO2e) on Jan. 5, according to S&P Global data. That was 13% below Dec. 20, the day after the December 2022 contract expired.

The price was around Eur78/mtCO2e on ICE Webex on Jan. 6.

Traded volumes down

Traded volumes between the December 2022 contract's expiry on Dec. 19 and Jan. 4 were down 50% year on year, reflecting lower overall demand from the power sector, according to Evans.

That combined with falling interest from exchange traded funds. KraneShares ETF reduced its EUA holdings 18% between mid-December and Jan. 4.

"Further bearish pressure is expected this month with the resumption of EUA auctions from Jan. 9, and as participants prepare for an increase in near-term EUA auction supply this year, under plans to raise revenue for the EU's RePowerEU plan agreed at the end of 2022," Evans said.

The pressure on the EU ETS market was magnified Jan. 4 when the December 2023 price closed below its 100- and 200-day moving averages for the first time since mid-November, according to Vertis Environmental Finance Senior Carbon Emissions Trader Gregory Idil.

"This implies that we have now formally transited into a bearish analytical paradigm and that any upward impulsions will most likely be short-lived and superficial in terms of magnitude for at least the next two weeks," Idil said.

Even though a low RSI value was observed -- close to its lower threshold of 30, this technical indicator alone will not have enough influence on the price to pull it upward, Idil said.

"The reversal in price dynamic for the EUA Dec-23 can also partially be attributed to the recent brutal drop in European natural gas prices, which has shrunk the gap existing between the German clean dark spread and clean spark spread to levels not witnessed since more than six months," Idil said.

Indeed, the gap between front-month German clean spark spread for 50%-efficient gas plants and clean dark spread for 45%-efficient coal plants narrowed to an average Eur52.1/MWh over Jan. 1-5, having averaged Eur133.2/MWh in December.

Natural gas prices on the Dutch TTF hub picked up Jan. 5 and in intra-day trading Jan. 6, yet remained firmly below levels registered in December.

Sluggish coal burn

Coal burn in Germany -- which contributed to higher allowance prices in early December -- has eased considerably as mild weather and robust renewables' availability reduced the need for thermal sources. Forecasts for the next few weeks pointed to the same dynamics.

Combined coal and lignite power generation in January so far stood at 13.8 GW, transmission system operator data aggregated by Fraunhofer ISE showed, compared with 21.2 GW in all of December.

Temperatures across Germany were set to hold at nearly 5 degrees Celsius above average until Jan. 20, according to CustomWeather. Similarly, forecasts across main carbon markets were mild, with temperatures in France seen 3 C above norms.

Moreover, robust wind generation was expected, with Germany's baseload output forecast at up 35.4 GW next week, spotrenewables forecast.