EU Carbon and Power Market

 Carbon Quotas The benchmark contract for EUAs (Dec 24) has experienced some volatility in the last three weeks.  For a moment, momentum turned from bearish to modestly bullish, breaking away from its previous sideways trend of EUR 55-62/t -  as prices peaked at 65.78/t on the 25th of March.  The increase could be explained by rising gas prices following attacks on a Ukrainian gas storage facility executed by Russia, and the Easter break disrupting supply as no EEX auctions were held on Good Friday or Easter Monday. However, analysts say that the sharp increase was tied to a short squeeze on the positions held by "speculators".  On the 3rd of April, the Dec 24 contract was down to EUR 57.21/t on the Ice Index, which is the lowest since the 14th of March. Prices are currently below the EUR 60/t zone where it is expected to stay due to downward pressure caused by milder winter temperatures and high gas supplies. This leads to weaker gas prices and coal-to-gas...

Policy changes The RePowerEU is a policy change intended to reduce Europe's reliance on energy imports from Russia. As a consequence of this policy change, additional EUA's were auctioned to the market in an effort to raise funds (20 bn EUR) to finance projects, enhance energy diversifying initiatives and increase renewable energy sources. Thus, the RePowerEU is an initiative to both de-risk energy and geo-political issues with respect to Russia, but also to make way for a greater ratio of renewables in to Europe's energy mix. However, not everyone sees this as a positive factor for the Carbon Markets. Markus Krebber, head of German energy company prescribes the recent fall in EUA's  to the additional auctioning coming from the RePowerEU and he states that this will cause a downward spiral that ultimately will jeopardise the European Emissions Trading System. The European Commission assumed an average carbon price of EUR 75/t to deliver the funding target of 20 bn EUR f...

The Link Between the European Power Market and EUA (carbon credits) The price of EUAs has a direct impact on the power market, as higher EUA prices increase the cost of emitting CO 2 , which in turn affects the cost structure of different power generation methods. Higher EUA prices incentivize a transition to cleaner energy sources, impacting the profitability of traditional fossil fuel-based power generation.  The relationship between EUA prices and electricity prices is complex and influenced by various factors, such as policy decisions, economic activity, and market dynamics. For example, cold seasons can lead to increased energy demand, which in turn can result in higher carbon emissions and higher EUA prices. The trading mechanism of the EU carbon market has added a new dimension to the fluctuation of energy prices, further impacting the global energy market.  In summary, the EUA and European Power market are closely linked, with changes in EUA prices directly affecting t...

The EU carbon market The EU carbon market consists of carbon allowances that energy-intensive sectors need to buy to compensate for their greenhouse gas (GHG) emissions. This market is known as The EU Emissions Trading System (EU ETS). Currently, the economic actors mandatory for participating in this trading system are the power, industry, aviation, and from 2024 the maritime sectors. One European Emission Allowance (EUA) gives the holder the right to emit 1 tonne of CO­­­­­­­­­­­­ ­­­ 2 and is quoted in EUR, effectively putting a price on the emission of 1 tonne of CO 2 . Historical prices - timeline The graph shows the historical prices of an EUA since its launch in 2005. Uncertainties and a generous free allocation of allowances led to a slow start with prices hovering around 5-25 EUR/t. A trading collapse in 2006 saw prices drop to near zero due to excess allowances. The prices then stabilized below 20 EUR/t, before a gradual incline began in 2018. Significant market reforms int...