EU ETS
CER availability will be less as industrial gas limitations reduce supply, and with industrials now likely to be short, the market could finally tighten. On top of this, a functioning set-aside would tighten this year even further and provide potential upside potential. Given all of this, the volatility we expected in the transition from phase 2 to 3 may now be pushed to the beginning of phase 3.
Price Behaviour & Outlook While there has been some better hedging activity by the utilities, the potential for this to erode dark and spark spreads and encourage bigger risk taking by utilities remains. To the extent there is some better buying, this should bolster prices into the current ranges rather than push considerable upside. At the moment, the bears are fully lined up against price improvements with:
• Early indications of deteriorating economic performance leading us
to forecast a modest reduction in IP in 2012 (-0.6%). With industrial CDS widening (although not nearly as wide as at the height of the financial crisis), industrials may see more length and have more encouragement to sell that into market. However, we do expect the CDS to have to widen much further to stimulate the sort of sell-off in 2008-09;
• The promise of more phase 2 NERs coming into the market that
will sit heavily on it, as will the early phase 3 EUA sales of 420 Mt; and;
• CER/ERU issuance, which remains heavy, will sit heavy on
the market and keep price gains modest.
With the main upside to prices,
utility hedging improving but staying on the low side for the year, buying may still be broadly aligned to the release of EUAs into the market, and this does suggest more of the same pricing for both 2011 and 2012. We have again revised our price forecasts:
72 September 2011
– H2 2011 down from €14.5 to €13.5/t (a 7% reduction), reflecting lower forecast economic activity, increasing but still somewhat limited hedging by the utilities for the rest of the year, and the effect of NER 300 volumes on Q4 2011;
– 2012 down from €17/t to €15/t (a 12% reduction), reflecting lower forecast emissions given the change in European IP, greater phase 2 NER sales and other forward sales, and more CER/ERU issuance;
– 2013 down from €23/t to €20/t (a 13% reduction), reflecting the lower starting point for prices by the end of 2012. We still expect this year to see a return to hedging as normal, and so price pressures will be greater given the reduction of the cap and a tighter system overall. These prices do not assume a functioning set-aside;
– Phase 3 down to €27/t from €30/t (a 10% reduction), given the lower expected prices at the beginning of the phase.
... our full phase 2 and 3 market balance has
increased from being long 220 Mt to being long 445 Mt of EUAs
There are many risks to these price forecasts, including:
• What is the actual utility hedging going to be and any further changes in activity against what was assumed;
• The EU release of phase 3 volumes into the market in 2011 and 2012. We currently assume that 30 Mt comes in 2011 and
390 Mt is released in 2012. Any change to the timings of this liquidity into the market will change our analysis; and
• Macroeconomic outlook and industrial output given our revisions to IP.
Phase 3: The Long-Term Outlook Our near-term changes have caused some long-term changes,
both by increasing the number of EUAs likely to be banked to the future, and by lowering future emissions estimates by lowering the basis on which they are increased. As a result, our full phase 2 and 3 market balance has increased from being long 220 Mt to being long 445 Mt of EUAs – given a target level of a 20% reduction on the 1990-level emissions. We have reduced our current EUA price view over the long
term due to the change in the supply-demand balances. We have reduced our long-term phase 3 average price forecasts for EUAs down from 30 €/t to 27 €/t, which should be reached mid-way through the next phase (2017) and 40 €/t to be reached by 2020. We note that upside risk to long-term prices includes a change to
the cap that may be implemented through the use of the set-aside. The set-aside would remove EUAs from the annual caps (from 2013 onwards) and would, if implemented, begin to tighten up the market more from 2013. There are two potentials for the EU ETS – either the EUAs are cancelled in order to implement a deeper cap, or they are released back into the market at the end. •
Trevor Sikorski is Director of Environmental Market Research with Barclays Capital in London.
E:
trevor.sikorski@
barcap.com www.barcap.com
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