EUA carbon prices could soar as utilities hedge coal and gas powergen

Quantum Commodity Intelligence - European carbon prices could be poised to explode towards the current coal to gas switching price of €80 to €100/mt, warns Bjarne Schieldrop, chief analyst commodities at SEB Research.

Coal is currently in the money, while natural gas is out of the money, for the rest of this year and 2022 for power generation in Europe.

The EUA carbon price, the trading unit of the EU emission trading system (ETS), would need to rise to around €100/mt from the current €58/mt for December 2021, to enable switching away from gas this year, or to €80/mt for next year, said Schieldrop.

Hedging by utilities could start to push carbon prices up towards these levels, Schieldrop warns. 

Cheaper gas prices in the future may be mitigating bullish rises currently. 

Gas prices are in backwardation, reflecting the impact of Nord II stream coming online at the end of this year, the gas pipeline running from Russia to Europe across the Baltic Sea, as well as an expected surplus of LNG building over the next three years.

The coal to gas switching dynamics fall to €46/mt in 2023 and €34/mt in 2024.

"This is probably holding back the EUA from following front-end and front-year switches higher," said Schieldrop.

However, the driver of coal to gas switching could be overwhelmed by the "staggering" path of CO2 emissions reductions required in the EU ETS from 2021, which will see the cap for emissions cut in half by 2030, Schieldrop added.

December 2023 and 2024 EUA prices are currently trading at around €59.02 and €59.61/mt respectively, according to the ICE bourse, much higher than the coal to gas switching price.

"We are likely to see prices dip below €50/mt as natural gas prices normalize over the next 2 to 3 years," said Schieldrop.

"But that is likely plain buying opportunities."