CO2 Prices: Cracks In The Power Prices’ Last Defence?


EXANE BNP Paribas | After providing rare support for wholesale electricity prices in Europe last year in a falling energy commodity complex (a timid +EUR1/t), CO2 prices have lost 19% YTD. We see three reasons.

Cash stress for steel producers and backloading effects – more supply Steel producers hold reserves of CO2 rights. The current stress on cash positions (ArcelorMittal CDS up 87% in Q4 15) and announced plant closures (Tata) may force them to offload CO2 rights to raise cash. In addition, the phase-out of t he backloading is set to incrementally increase the volumes of CO2 rights auctioned by governments by +100m in 2016, and another +200m in 2017.

Warm winter: less demand for heating, hence emissions and the need for CO2 rights (EUA).

On the demand side, heating degree days in Decem ber 2015 in Western Europe were at a record low (26% below the 30yr average).

Policy risks remain – new Polish government hostile to ambitious EU climate policy

In late Dec. 2015 the Polish government stated its int ention to file a lawsuit to annul the decision on the Market Stability Reserve reached by Member States and the EU Parliament last year. Without the MSR, EU CO2 prices have no safety net until 2030…

Mandated carbon reduction triple hit for generators

A mandated reduction in CO2 – via thermal plant cl osures and roll-out of must run technologies – has a negative effect on generators in three ways : 1) reducing CO2’s importance as a price signal, 2) weakening the link between CO2 and power pric es and 3) lower conventional volumes and therefore profitability. Fortum and Verbund (and increasingly in a liberalised market, EDF) are the most exposed to CO2 prices (positive correlati on) and RWE least exposed (negative correlation).