Carbon at EUR 45 by year end?

European carbon prices are set to rise to EUR 45/t by the end of this year, according to Berenberg Bank. 

Listen to analyst Lawson Steele explain his reasons in this week’s pod. 

Host:

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest:

• Lawson Steele, Senior Utility Analyst, Berenberg Bank. 

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:06

Hello listeners and welcome to the Montel Weekly Podcast, bring you the most current energy matters in an informal setting. My name is Richard Sverrisson. And I'm joined today by Lawson Steele, an analyst at Berenberg Bank. A warm welcome to you, Lawson.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 0:20

Thank you.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:20

Today we're gonna talk about carbon market you've been covering for since, basically, since the outset, since 2004. Is that right?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 0:27

Yep. Yep.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:28

And, and energy or utilities For, for 33 years, you've had some, some forecasts, which have hit right on the button. In January, 2006, you predicted that the carbon. But the price would go to zero. Uh, you've also been very bullish since January, 2018 when calm prices are very low at the moment. Calm prices are very, very volatile. We've seen 'em touching. Close to 30 and then fall back to, to 24, as we've covered in previous podcasts now. But what, in your view, have been the main drivers here this month, at least in the past or since? Since this past four or five weeks?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 1:04

Well, I think, uh, you know, the first instance going up to 30 euros thereabouts. Uh, you had. Sort of the, the two silent catalysts awareness and anticipation. So as players became more aware of the impact of the new rules on the carbon market, they began to anticipate what they should be doing in their strategy going forward, which we can discuss later, if you like. And then subsequently to that, you've had sort of, uh, the bears. Coming out of hibernation, which has been centered around Brexit or, or, or recession, uh, being the sort two primaries and, and a bit on commodity prices too.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:39

So, we'll, we'll come back to some of those drivers later. But I mean. The market still still have a surplus of 1.4 billion allowances. Uh, there's more supply coming in in September. I mean, these are, these are quite bearish factors, are they not?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 1:54

Uh, well, I, I, I, I differ there. Um, you know when, when the tri log meeting was announced back in November 17. I thought I'd just spend a couple of hours updating my model because every time that something's been announced by the EU since 2013 has been a bit of a, a damp squib. And then I dug, and then I dug and I dug, and that two hours turned into six weeks. And talk about sort of a. Yeah. Miss Mistiming things. Anyway, the, the, the, the Teaneck, the total number of allowance and circulation of 1.6 billion, the eureka moment was that, to discover that actually that wasn't a surplus, right? Mm-hmm. What it is, uh, is that if you, you break it down into two, first of all, utilities, uh, which I cover, they hedge about 1.1 billion, right? So they, they're selling forward. That is their working capital, if you like, that allows 'em to hedge.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:45

This is annually.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 2:46

Annually. Yes. So that's 1.1 billion and that's, as you say, that's just keeps on rolling over. And then you've got 500 million, which is industrials. Now industrials in the past have been of the mindset of get it and sell it by free allocations. Let's sell it, get some cashflow, get a capital gain kind of thing. Now they're having to rethink things and, and not all of, of working up to this, but you know, the free allocation is gonna get cut in 2021. Um, and, and therefore their mentality has to shift from get it and sell it to actually hang onto it and, and buy it. Mm-hmm. Um, so, so for me, the 1.6 billion is not a surplus at all. It's just the working capital of the system. It's like shares outstanding or mm-hmm. Something like that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:30

Okay. So, so in that sense you disagree with it, that is a surplus. How about sort of bearish factors then in September, such as more supply coming online from auctions?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 3:41

Uh, well, you know, going into August you had some bulls saying. Uh, well, auctions are gonna be halved in August. Uh, so that's gotta be positive. Mm. I, I think what I missed in my view is that actually demand also halves in August. Everybody goes away on holiday. Mm. And every year, you know, the markets supply the auctions are amended accordingly. Mm. So, just because we then have an increase in supply in September, back to normalized levels doesn't mean that the price should tack. Likewise, it shouldn't have gone up in August. So, so I, I never really bought into.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:15

Historically, it's gone up in August. Quite a lot, hasn't it?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 4:18

Uh, the, the, the price of carbon has. Yeah. Yeah. But of course it's been in, in its ascendancy. But I think that's really because of the rule changes rather than actually the fact that volume was low.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:28

Now you've been, as you say, bullish about carbon the price of carbon. Earlier this year you said prices could exceed 45 euros a ton and average 30 a ton in 2019. Do you still think that?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 4:41

Yeah, still hold that. I mean, the average to date is about just over 25 euros. Uh, I think once we get over a couple of sort of sentimental or psychological humps we could easily end up at 45 euros by the end of the year. As you're sort of moving towards your April 30th compliance, and, and again, going back to those two silent catalyst awareness and anticipation kicking.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:02

So what are the main drivers, and for you that could. Push it up to 45. I mean, that's, that's not quite a doubling of where we are now, but it's certainly an increase of, of around 20.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 5:11

Yeah. Well, you know, if you, if for me, if you look at the abatement price. You know, I use the one year forward.'cause I think that's the way companies think. Mm-hmm. Uh, and that's the way they, they price some, some people talk about using the spot, but I think that's, I don't think that's the way the market works. Mm-hmm. Uh, if, if we are using spot then today, you know, the, the maximum payment will be 22 Euros and we would be fully abated today, and clearly we're not. So that's for me is, is a, uh. Misguided a bit. So for me the, the full abatement cost on the one year fours is trading around 41 euros per ton. And in terms

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:49

of abatement, do you mean then the swap fuel switching or sorry, yeah. So

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 5:53

coal to gas switching. Yeah. Yeah. And that's the price which makes all coal more expensive or coal more expensive and gas. And it's important to caps it all coal. Because not even with that full switching, will you actually eliminate. The deficit by quite a considerable amount. So, so even once you've done that, you're still gonna have pricing pressure, right? So we can come back to the penalty price and so on and discuss how that works, but certainly that's why I think the price still has a lot to go, not only this year, but going forward too.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:24

So. We're more likely than you, in your view, to see 30 rather than 20 euros. I mean, certainly this year. Oh yeah. That's, that's goes without saying. I think we

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 6:33

break through 30. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:34

Yeah. Uh, any indication of when or will it happen sort of more towards the end of the year or as we sort of gradual an incremental, um, in an way it,

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 6:43

it is why it's the, the two silent catalysts, right? Mm-hmm. Um, you know, if, I think last year in January when we sort of said, you know, carbon's going to 20 when it's down at seven. We were surprised by how quickly it moved 'cause without any visible catalyst. And, you know, before we knew it, we're sort of at, at 20 by. Sort of middle of the year, and I think, I think that was an element of speaking to participants and, and explaining the market dynamics. I mean, I must have done, I know, 150 meetings in, in those first three months. I'm not saying the market move, but, but you know what I'm saying? Yeah. That, that suddenly. Uh, as people begin to understand that, they obviously begin to price it in. Mm. So to, to go back to your question, when exactly it's gonna move, it's hard to say. But one thing for sudden in, in my view is that by April 30th, next year, we have an enormous deficit, which is not being solved. And we, yeah. So we may just move on to the penalty price argument that we, that was about to be my next question though, didn't you? Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 7:46

The 107 Euros, which you've kind of, of is a number that's often associated with your name. Um, yeah. So I wonder whether you could explain that a bit as well.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 7:55

Yeah. I mean, you know, I, I like to go back to basics, right? So if you think about. Carbon on a purely mathematical view. Right. Forget anything else. And simply say, look, there's one permit on the table. There's two of us. We know that if you don't deliver that permit to the old country in April, on the April 30th, then I need to. Pay a penalty of 170 Euros. Right? So, so if there's one permit on the table, what price are you going to pay to avoid paying 170 euro penalty? Mm. How much will you prepare to pay?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:32

107.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 8:33

There you go. Right. So, so now I tell you that actually it's, it's worse than that. Next year you have to give me that permit as well as the 107 penalty. And you know what that means? Is that. It's always gonna cost me 107 Euros more than the price of carbon, than buying the carbon price. So if the price goes to a thousand, I know that it's worth me buying it a thousand because otherwise it's gonna cost me 107 Euros plus a thousand or a million. So you can go to Infinity. Now, obviously carbon will not go to infinity, right? Because two things will happen, or one or two or both. One is at some point demand becomes elastic. Alright. So we're not gonna pay a thousand pounds to turn the lights on. Uh, and secondly is that there'll be political intervention. Mm. But the question is at what price?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:19

That again was gonna be my next question. So, so I mean, you know, once we got in the territory of 25, 30 euros, there were rumblings, uh, in, in, in countries which are very. Very coal dependence on, on the implications of such a very high carbon price. No, I, I think at, at what, at what price does this become politically acceptable or politically unpalatable in, in some, some areas of, of, of Europe especially, I.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 9:46

Well, first of all, it's, it's, it's been unpassable for a while, right? Mm-hmm. So, you know, Poland and, and Eastern Block have been against it for a while. In fact, you know, if you go back to 2013, obviously they were against it then. And one of the reasons I sort of es issued. Any changes the EU would try to implement was that in the past, every time they tried to do something, Poland said no. Now, since they needed a hundred percent majority, then it didn't get done. Or Poland and etal got some kind of, uh, in inducement, shall we call it. Mm-hmm. Then the EU worked out that, actually, this is just silly. Uh, so they changed the rules of approval. So now you need a qualifying majority, which is. Typically 75% thereabouts. Mm. Which means Poland can jump up and down all they want, but actually it could still get passed for the 75% majority. Point one. Second point is that when you think about what price in the UK today, you and I are already paying 50 euros per ton. Right? Because we take the EU ETS and add 18 pounds. So give or take, we're paying close to 50 euros. Now, the interesting point about that is that A, obviously it's above where the price is today. Secondly, there is nothing in the press I. About that 50 euros. What you do find in the press is, well, look, you know, we've had two weeks of, of, uh, no, uh, electricity being, being generated by coal for the first time. Pre-industrial revolution. Isn't that great? That's what you see, right? So I, I'd say that 50 euros is perfectly acceptable in the sense that I've seen nothing in the press, which goes against that. Now, the other thing to think about is. The retail consumer, right? So the retail consumer pays electricity in Germany of about 330 euros per megawatt. The cost of co-op of the electricity generation is 50 euros. Now, as the carbon price goes up, that increases the cost of generation. So let's say for the sake of your argument, carbon goes up by. 40 euros. That will be a 20 euro impact once gas is setting the price, uh, on, on the power price, which takes em 50 to 70 in itself, that seems an awful lot, and the percentage of, you know, 70 over 50 or 20 around, let's call it 40%, but on the final bill for the consumer, which is paying 330. Another 20 is kind of peanuts, right? Four 5%. And actually it's even less than that because today the consumer is paying a subsidy for renewables of about 60 euros. And that subsidy for renewables is because the power price is not high enough. So as the power price goes up, then the suby comes down and the net impact on the consumable is zero. So actually it's be, it's gonna be a while for the retail consumer to, to suffer an impact. Now, of course. Industrials is a different cattle of fish. And they will have, you know, they, they will have a, a, a, you know, as usual lobbying against it.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:59

They're exempt from the, from the, certainly the renewable energy law, the EEG in Germany, so that, that's correct. Yeah. Yeah. And,

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 13:06

and they're paying about 160 euros on their price. Mm-hmm. So it's, it's, it's, it's a bigger quantum for them. Mm-hmm. Uh, but you know, these are guys who've had four years. In the implementation of the MSR discussion to lobby. So that's already happened, right?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:21

The industrialists we're talking here rather than, yes. Yeah. Yeah.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 13:24

So, so, you know, I, I, I, I kind of think that. I don't know what this price should be, but I do think that carbon is about to ask probably the most poignant question of this generation, which is what price are you and I mm-hmm. Prepared to pay to save the planet? Mm-hmm. Mm-hmm. I know that sounds a bit sort of you. Whatever you wanna call it. But I, I think that's the kind of question it's asking. Somebody has to ask that. Now, is that 30 euros now? Is it 50 euros We're already paying out in the uk, so clearly we're prepared to pay that. Is it a hundred? It's not Infinity, of course. I dunno what that number is. Mm. But it's way north of where we are. Yeah, exactly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:04

In terms of where it's gonna really make that impact, which it was designed to do.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 14:09

Well, you, you, you, you've got the penalty price. Throws it up to infinity. Mm. Politics will say, politics will say no and demand our say no. But what is that price?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:20

And you are saying, you know, 50 euros in the uk that's, um, that the consumer can quite happily cope with that. Whereas, and, and if I understand you correctly there, Lawson, then you are saying, uh, even if prices were to go up 40, 50% in in Germany on the wholesale market, that would hardly impact. Or wouldn't make a huge dent in the, in the retail household bit.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 14:43

Yeah. Hardly. Yeah. Hardly. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:45

Okay. But if we, if we come back to the current drives, uh, we're in London, uh, there's quite a lot happening, uh, just down the road in Westminster. Uh, it seems now, earlier this month, it was likely there was a single to be full, full steam ahead towards a no deal Brexit. Now it seems to be, that seems to be, uh, less likely, at least for now. What, what does this mean for, for carbon in the carbon market?

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 15:08

I don't think that hard Brexit is a major issue. And I don't think it's a major issue because on April the 12th, the UK issued a guideline to all UK emitters saying to prepare for hard Brexit, all you have to do is set up a European ledger. Put your permits into that European ledger, and then you can trade them and sell them to your heart's content all the way to 2030 IE business as usual. Now they've had five months to do that. They've got another two months to do that, possibly longer. If their Brexit gets to delayed, probably late, but too late by the time this comes out. But if you look at the top 40 UK emitters, they emit 90% of UK's emissions. So you've got virtually the whole of the UK in those top 40, 30 of those. Power companies, oil and gas companies. Power companies, oil and gas companies have trading platforms. So if they have not done this, something's radically wrong with their trading platform. So for me, the idea and lot

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:10

of the MAP headquarters outside of the UK anyway

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 16:12

Exactly. Already have European

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:13

lecturers.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 16:14

Yeah. Yeah. So, so for me it's a, a red herring, but psychologically or sentiment wise, you know, when the bears come out of a hibernation, then they can play with that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:24

Absolutely. But how about the UK industrials? Um,

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 16:27

well, the UK industrials, you know, if you look through that top list, you know, there are some chemical companies, uh, of those top 40, and as I said, 30 year power has about five chemicals in there. But they're not the big players. But, but again, you know, they're not just domestic, as you say, they're not just domestic businesses. They have European businesses, so,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:48

you know, global maybe as well. Yeah,

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 16:49

global too. And, and so these companies will, will carry their permits on the European ledger. Mm-hmm. And transfer to the UK ledger on a just in time basis, two days before the compliance on, say, the 28th of April. Mm-hmm. Mm-hmm. So, I don't think it's such an issue,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:05

but in, in general about sort of industrial carbon strategy, what, what do you think, um, that should be? I mean, they've been. Certainly several years ago they were not sort of active on a daily basis in the market. I mean, what, what, what do you think the industrial should be doing in terms of, uh, their carbon exposure

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 17:23

At a pan-European level? Yeah. pan-European level. Yeah. Um, I, if I was an industrial today, I would be buying carbon permits, and the reason I do it is for one. And or two reasons. If I am at carbon, then obviously I know that or should know that over the next 10 years we have a deficit. And if you think about the deficit and that infinity argument, and yes, it won't go to infinity, but nevertheless goes high you should be buying carbon permits. Secondly, if you consume electricity, it's an extremely good way to hedge your electricity. You can of course go and ask for a three, four year long term contract when typically you've had a one, two years, for example. But you can also just go and buy carbon permits'cause that's the reason an electricity's gonna go up. So you have to do it because A, to stay in the game. If your competitors are doing it, and B, if your competitors aren't doing it to win market share. For me, buying carbon is a very important thing for industrials to do.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:24

Do you think they do it themselves or do they throw it through a, through a intermediary.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 18:30

Lots of ways you can do that. Yeah. You can buy physical, more difficult or you can go into financial products. Yeah. Lots. So there's different ways of doing that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:40

Yeah. And depending on the company and what Yeah. The risk portfolio. Yeah, sure. If we turn back to some sort of some bearish elements here, Lawson, I mean, we hear, you know, that the macro economic. Uh, picture is looking fairly grim. There are some, some, some clouds on the horizon. Trade war concerns, fears of recession in Germany. Um, could these exert more bearish pressure that could maybe hold back that, that upswing in the autumn that you, you mentioned

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 19:08

previously? Again, I think it's, uh, it will, it will reduce the size of the deficit. Mm. Uh, but there's still a deficit. So for this year. Assuming there's coal, gas switching and everything else in our model, uh, I, I have a 292 million ton deficit, right? Mm-hmm. On a, you know, that's, that's almost 30%, uh, of demand. If we have a 10% recession, which is pretty damn severe, and we didn't have, have that in the financial crisis, I think it was about 8%, then that would be 170 million tons. Yeah. So therefore your deficit would come down from 2 92 to 122. Much better than 2 92, but it's still a 12% deficit. There's still going to be 122 million permit shortage, which have to be bought in the market with to in order to offset or, or prevent paying that penalty of 1 0 7. Uh, so. You know, it is, it would move the right way. But, but also I've said 10% of an annual number. It won't be, of course, you know, already in September. So maybe you can have a quarter of that. So, however you skin that cat, it's, you're still gonna have a deficit.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:28

Mm. So just to be clear about the deficit, that's, that's what you highlighted, highlighted at the start of, of, of our discussion when you, you, when you mentioned the 1.1. Uh, billion allowances that, that utilities were, were using. And plus then the industrials as well, which is sort of 1.7 just to highlight that because there's often, uh, some confusion deficit sur but you are very clear that it's a, it's a deficit. Uh,

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 20:53

yeah, I mean that, that just to again, cemented that 1.6 billion is the working capital of the system. Exactly. The annual demand and supply. Is 1 billion. Okay. It's actually 1.7, but there's 700 million free allowances. So I, I just say there's a, you know, those 700 million free allowances are covering 700 million of, of emissions, so let's forget about them. But, you know, in the past, that 1 billion demand supply has been pretty well balanced at plus or minus 10, 20 million a year. Now, with the new legislation, the MSR coming in, the suppliers dropped by 400 million tons to 600. Right. So all of a sudden you had this, this huge gap, uh, which wasn't there before. So that, that to me is the deficit.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:35

Thank you. Now you mentioned fuel switching. So we've seen a lot of of gas fired plants coming in. On the back of higher carbon firm, firmer coal prices. Do, do you expect this switch to gas to continue in the coming months? And, and, and how, how could that impact the carbon market?'cause obviously that would be less, less, less demand for, for, for carbon allowances for uas.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 22:00

Uh, yeah, but it's, it's the carbon price, which will, which will drive that switching. Mm-hmm. Right. So if carbon stays as it is today at sort of near, give or take 25 euros that is not sufficient to be. Fully switching the coal, gas fleet. So, so my switching level is 23 to 39. I said 41 earlier, but whatever. Yeah. So, uh, you, you need that 39, 40 euros to fully switch all your coal to gas. Now I have a. I've done a model which is ridiculously large. It's 60 1600 rows in Excel and in turn feeds off a 44,000 row model where we look at every single power plant and we know when that's built and the efficiencies and everything else, you know, so, so I know that at 39 Euros or the coal, which can switch off because it needs. Gas availability to do so, uh, will save about 104 million tons, uh, of carbon. Right. And I assume that happens as carbon gets to that price. There's also a further 76 million of, uh, of, of, of renewables of coming in, which for last 76 million tons of, of savings. So at, at its. Most, we're talking about a hundred and up. What it's annual run rate is gonna be 180 million tons. Mm. So I've, I've factored that in. Uh, and still we have a deficit.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 23:23

Do you have a view on gas prices going forward?'cause we've seen, I mean, 10 year lows, we've seen, uh, you know. Seven euros, uh, for the TTF, um, day ahead prices. I mean, these are, we haven't seen these for, for many, many, many years.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 23:38

No, I mean, you know, the, the, what what is interesting actually is that, uh, not only is gas coming down, but coal is coming down with it. Mm. And I suspect there's, there's the, these coal suppliers predominantly Columbia's into Europe are saying, well, you know, if gas comes down. I have to bring my coal price down because I've gotta keep selling that coal. Mm. And don't forget, they're, they don't care about the marginal costs so much. Because they've got a big fixed cost and any cashflow they. Can get to keep those mines operating as welcome cash flow. So they have the sort of quite flexible pricing if need be. You know, where's gas going to go to? You've got, I think you've got bear argument. Obviously you have more and more capacity coming on stream. Everybody knows that. I think the one which could surprise people is. Russia, Ukraine gas contract renegotiation. Now, if you remember back in 2010, we had the big Ukraine, Europe, Russia bust up. Where they decided not to allow the gas to flow from Russia to Europe and siphoned it off effectively. Eventually that contract was renegotiated, but it. Scared the heebie-jeebies out of Europe and now we're heading towards that contract being coming to its life. And at the end of this year, Russia would like a short extension because they want Nord stream to, or once Nord stream to come on stream, which is probably. And it's towards the end of 2020 at this rate, then they wanna switch to Nordstrom two and, and bypass Ukraine. Well, Ukraine don't want do one year contract. So there's gonna be quite a bit of argy barge as we get up to that. And, and if you take that gas out of Europe, all of a sudden the prices will go up fairly dramatically. So it, it is not quite as plain sailing. I'm not too worried about it, you know, fundamentally. I, I think the commodities given the way the penalty price works, are a red, red herring. Mm. Now the market focuses on them, understandably.'cause you can all have, we can all have our abatement costs and everything else, our switching costs. But I go back to the fundamentals. If you are short and you're facing a penalty of 1 0 7, as well as still having to give the permit the following year. You are gonna pay up for that carbon permit no matter what the cost of coal or

Richard Sverrisson, Editor-in-Chief Europe, Montel: 25:55

gas is. Lawson Steel, thank you very much for, for joining the Monte Weekly podcast. A fascinating discussion. And I hope you can join us again at some point.

Lawson Steele, Senior Utility Analyst, Berenberg Bank: 26:03

Yeah, it's my pleasure. Thanks for having me. And if anybody wants to have a chat with me, I'm on LinkedIn. So feel free to get in contact

Richard Sverrisson, Editor-in-Chief Europe, Montel: 26:10

listeners. Remember to keep up to date with all our stories on Monte News and follow us on Twitter and LinkedIn and subscribe on Apple Podcasts and Spotify. Goodbye.