EU ETS
Entrant Reserve (NER) will be left unallocated, how much will be cancelled, and how much sold via auction into the market.
Phase 2 NER Update Figure 2 shows the latest detail on exactly where we are with
regards to the phase 2 NER. The remainder sitting in countries EU ETS reserves is 220 Mt, down from the 370 Mt in April 2010. With regards to that, we expect: – 50-60 Mt to be allocated by governments to new entrants over the remaining year-and–a-half of the phase;
– 80-90 Mt is at risk of cancellation, with almost all of that being volumes that the German government would not be able to sell because it would take it above the 10% maximum for phase 2 auctioning; and
– 75-85 Mt of EUAs in countries that will have unallocated NER. Already the UK (8.4 Mt) and Greece (10 Mt) have sold, or announced the sales of, unallocated NERs. With the exception of the 18.4 Mt already announced/undertaken this year, the remaining 65 Mt or so is expected to be sold next year.
Figure 2: Remaining EUAs in NER (Aug 11th
10 20 30 40 50 60 70 80 90
0 Sources: Eurostat, Barclays Capital While the issue of unallocated NER is not new, we have revised
downwards our estimates of the volumes at risk of cancellation to effectively just include German volumes and those in member states in which unallocated volumes will be less than 1 Mt. As a result, our 2012 supply estimates have increased by about 50 Mt.
Utility Hedging The key upside remains utility hedging, which will be sensitive
to levels of dark and spark-spreads, in which an improvement has already started. We have moved up our assumptions on the levels of hedging expected in the next two years. We assume that:
• By the end of 2011, total demand for early hedges to be about 300-350 Mt in the market, up from the 250 Mt expected in
July but down from the 700 Mt we assumed at the beginning of the year. On the supply side, we expect usage of CERs to be 500-550 Mt over the first four years of the phase, and with the EIB potentially selling 30 Mt of phase 3 EUAs this year, the market should cover the hedges easily. With net EUA length over the first four years estimated to be about 410 Mt, the market should not have to work hard to meet the demand for those hedges.
this would make the market better balanced if all industrial length came to market. While all industrial length will not come to market, we still expect the EC to sell phase 3 EUA volumes of 420 Mt in 2012, meaning the market now appears long given the change in utility behaviour. We do expect about 50% of industrial length to be unlikely to come to market unless credit markets and IP deteriorate further.
• By 2013, we expect 50% of the early EUA volumes (60 Mt of
the 120 Mt) to be removed from the cap, and if the likely plant closures in 2012 have pushed spreads to better values, more usual utility forward hedging may return. Certainly in 2013,
September 2011 71 )
• By 2012, we forecast total demand for forward hedges to be
about 1,350-1,400 Mt (up from 1,100 in July but down from our year starting forecast of 1,540) as we expect hedging to gather pace with better demand and higher sales. We do expect some 20% of the thermal portfolio to be left unhedged by 2013 (although we see some pressure to reduce this number). Estimates of phase length have increased to about 625 Mt, up from 480 Mt, due to increases in expected NER sales and a write-down in forecast emissions. CER/ERU use is expected to be 750-950 Mt, and taking a midpoint for offsets,
... Forecast Status NER EUAs, (Mt)
10 20 30 40 50 60 70 80 90
0 At Risk of Cancellation To be Allocated To be Auctioned
DEU GBR NLD GRC BEL
POL PRT RO
ESP
FRA ITA IRL
HUN BGR SWE FIN
LTU CZE EST
NOR LVA
CYP DNK SVK SVN LUX MLT AUT
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