Mon. Oct 18th, 2021


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The increasing gas supply crisis in Europe has increased the price of allowances related to carbon emissions, while energy producers are switching to cheaper but dirtier coal.

The EU carbon allowance amounted to € 65 per tonne for the first time last week. Grants under the burgeoning cap and trading system of the UK amount to a record £ 76 (€ 88) per tonne.

Under the EU and UK emissions trading systems, polluters buy credits that give them permission to emit one tonne of carbon.

Rising gas prices Led by a shortage of inventory, energy generation from coal has become more profitable in the short term. As coal is more polluted than gas, demand from power producers for grants in the EU and the UK has increased, causing prices to rise, energy market analysts said. Coal accounted for more than 5 per cent of UK power generation in early September, the highest level since March.

The price increases are ‘driven’, we believe, by a greater demand for utility, due to an increasing generation of fossil fuels’, said Tom Lord, chief trading officer of consultant Redshaw Advisors.

UK credit chart now trades at a premium to EU grants

Traders have assumed that “for some time”, possibly in 2022, there will be the fuel switch from gas to coal and thus a greater emission from the power sector “, says Sebastian Rilling, analyst of power and carbon markets in the EU at ICIS, the market intelligence group.

EU and UK systems are aimed at reducing carbon dioxide emissions. Energy producers and industrial groups regularly buy allowances in advance to hedge their exposure to the carbon price, and to ensure that they have enough credits to cover the expected emissions. Speculators have also shown increasing interest in the market.

The EU ETS rose above € 50 for the first time in May and has generally remained above that level ever since. The UK launched its own post-Brexit system in May. Grants in the two markets traded evenly until September, but UK credits traded at about two weeks at a higher premium.

Redshaw’s Lord said the British system, in addition to gas market problems, also lacked an insufficient supply of credit. The newly formed UK ETS has bi-weekly auctions and few industrial sellers, and ‘does not have a surplus like the EU market’, he said.

The UK utilities need to hedge because of the switch to coal and because they used EU grants to hedge their exposure before the UK system was introduced, he added.

According to analysts, the price of grants under both systems will depend in part on gas prices. Falling gas prices could cause a return to fuel and away from coal, lowering the price of allowances.

But a severe winter that increases the demand for fuel could mean a sustained demand for coal.

‘I do not think there is much room for further price increases [EU allowances] at the moment in the absence of an even tighter gas market, ”says ICIS’s Rilling. But “it seems unlikely that [they] will soon reach their highest levels ”.

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