CO2 soars on price floor plan

This week we return to the European carbon market, where prices have soared following plans by the new German government to introduce a CO2 price floor. Listen to a discussion on the key market drivers and the outlook for the coming months. Could prices hit EUR 100/t by the end of the year or are they more likely to correct down?

Guest: 

• Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:04

Hello listeners and welcome to the Montel Weekly podcast, bring You Energy Matters in an informal setting. In today's pod, we return to the European carbon market and discuss the key market moving developments after languishing between 55 and 65 euros from around midgut. The benchmark carbon contract shot up recently to above 70. How high can prices go? How low can they fall? What are the risks of political intervention? Isn't the commitment of many countries and companies to exit coal actually a bearish driver for carbon? Helping me, Richard Sverrisson, to explain current market dynamics and to look ahead of the coming once is our old friend, Ingvild Sørhus Refinitiv. A warm welcome to Ingvild and welcome back on the pod.

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 0:50

Thanks Richard, and it's a pleasure to be here.

Richard Sverrisson, Editor-in-Chief, Montel: 0:52

Excellent. So it must be busy times for you as an analyst in these markets.

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 0:56

Yeah. Yeah. It's the price has just been rallying for the last few weeks now. So it's quite lots of stuff to look into nowadays.

Richard Sverrisson, Editor-in-Chief, Montel: 1:03

Absolutely. So I think. If we can start by looking at some of the key events this week, for instance, Germany's coalition agreement. Was this the main reason for prices spiking above 73 Euros?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 1:16

Yes, I would say so. You saw that on Wednesday that prices were. At the time of the press conference, when the coalition government put out their kind of document that will lay the Founda foundation of their policy for the next four years, and I think especially this mentioning of the 60 Euro price floor, the German, new German government wants to see. Was a new feature and a bit unexpected that came out. And then market reacted quite on that news, I would say. And of course, that news will just be amplified by technical trading.

Richard Sverrisson, Editor-in-Chief, Montel: 1:48

Germany has proposed a 60 euro carbon price floor. But is that on a European basis or on a national basis? The way I see it, I may be mistaken, but if it doesn't succeed on a European basis, then they're gonna impose it nationally within Germany. Is that right?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 2:03

Yeah, I think the what we saw from the German government document is that they are in favor of a strong carbon price. And that strong carbon price is one kind of key element to reach some of the kind of climate and end goals that they have put forward. They say that they expect the carbon price to rise. But in the case that we'll see a downturn, a structural change in the carbon price formation in the years going forward, that they would like to see a backstop to a potential downward move. Put 60 as a price floor. They say they don't expect that to happen, but that will be the case. Of course, the favorite option is of course, to implement this on the EU level, and we're in the fit for 55 discussion. There will be the EU directive is reopen and of course that could be. Kind of a new feature to the ETS directive. And we know from before that, for instance, France is a kind of a key advocate for price floors. But of course, getting all the countries in the EU to agree on a price floor might be a tricky one. And then of course they said, okay, if we can't do it on the national or on a EU level. Then we'll implement it on a national level. So to give some clarity for industries and utilities within Germany, that okay, you can't really expect a low carbon price or kind of a drop in carbon price going forward.

Richard Sverrisson, Editor-in-Chief, Montel: 3:26

The commission's always been very clear though, hasn't it? It doesn't like to set caps or flaws or to deal with prices. It's more on the supply side measures, but, so is this measure likely to succeed on the EU level?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 3:38

I think it will be a tricky one. I think there will be quite, quite a lot of countries that will oppose price floor, at least at 60. At the idea of ETS is that the market should decide on the price. And that's probably why we haven't seen a proposal by that, this previously from any of the commissions putting forward kind of proposals. It needs to be a lot of work done, at least to persuade other countries like Poland, Spain, to accept the price floor into a new directive. But of course that it's outta the question is, nothing is outta the question, but then you would, you could probably get some then, okay. Then if you want a price floor, then we want a price ceiling. Of course, there will be lots of kind of elements in a discussion. Will be part of a potential kind of price floor discussion.

Richard Sverrisson, Editor-in-Chief, Montel: 4:24

There are also other elements here that were interesting in Ingvild, particularly coal Exit by 2030 and a gas exit by 2040. If we can start with the coal exit, does this mean potentially less demand for EUAs? Is it a bearish factor whereas the 60 euro backstop is more, more bullish? Coal exit. What? What are your feelings here?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 4:45

Yeah, you, you would say that speeder exit from coal in Germany would lower power sector emissions in Germany, and then of course power sector in the UTS. So in that sense you'll get less emissions from the power sector. But we have the more stability reserve that will be. Soaking up some surplus allowances, but also that there is a provision in the EUTS directive that was that came in the previous review when we had the phase four review completed in 2018. And then you said countries can choose to voluntary cancel EUAs from their auction volume to dam up for the bearish effect of national coal face out policies. And Germany has said previously that they are intending to use this provision with voluntary cancellation. So they will see how much is MSR soaking up of this exit surplus coming out of the coal phase out. And then do you have voluntary cancellation on top of that? To cancel out the call phase out effect. So I think the like price wise, that's going to be perhaps a limited effect because we have the MSR in place, we have this voluntary cancellation in place.

Richard Sverrisson, Editor-in-Chief, Montel: 5:52

It's quite interesting to see a treasury or a financial finance ministry. Canceling voluntarily. UAS is like almost like burning money,

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 6:01

it's probably would've been a more tricky discussion now to, to say that we should use a voluntary cancellation now when prices are above 70. Then when prices were below 20. It's a bit vague how much kind of cancellation that Germany will do.'cause that's to Germany, really Germany, and I've said they will assess by you some external expert to assess how much volume should be then canceled. But I haven't really said that yes, we are canceling this amount or corresponding to this amount of historic commissions. We don't know to which kind of a degree to voluntary cancellation will take place.

Richard Sverrisson, Editor-in-Chief, Montel: 6:35

We'll have to look out for those details in, in, in future coalition contracts or agreements There. How about the measures to tackle gas use? Is this also potentially bearish, or do you think you can also see voluntary cancellations here to cancel out the bearish impact?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 6:50

First and foremost, they've said that they will use this for coal. Of course, they haven't. Previously been talking about kind of a gas exit as such, but I think we expect to see an increase in gas usage towards kind of 2030 to dam up for some of the, as a transit fuel before kind of you have enough renewables. So I think the volun, voluntary kind of cancellation from gas is not necessarily in the, at least in the 2030 time horizon, that we expect too much gas to be phased out. So I think that will be a separate discussion than, for instance, for the forced coal phase out plants

Richard Sverrisson, Editor-in-Chief, Montel: 7:26

we see now at the moment ing with some record. Carbon prices and, but coal generation or coal fired generation is booming at the moment. Maybe only a temporary blip. But doesn't the fate of coal depend on whether renewables are built?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 7:40

Yeah. And I think the German government also, I reckon the new German government are seeing that they would need kind of a. Quite, quite more ambitious built out of renewable compared to what's planned now. Before we had this German coalition paper out on Wednesday this week, the target for 2030 was 65% of renewable electricity. Electricity in 2030. And now they say they will go for 80%. Should come from renewable sources. And that's up from 40% today. And that's even more than double the demand because you will also have an increased power demand. So it's quite ambitious, the renewable, the kind of inclusion of renewable and of course. You need to make this happen in order to be able to do the speedier coal phase out as well,

Richard Sverrisson, Editor-in-Chief, Montel: 8:30

do you have any confidence that these renewables will be built? Often in Germany, you see a lot of the permitting issues the local planning delays. Do you think these will ease up to allow the expansion o of green energy.

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 8:43

I think that's what we see some contours of in the document as well. And of course you need to speed up on all kind of different levels, like approvals in order to make this happen. So it's not only a just nice wish, but it will that. It can actually happen. And it seems to be they're saying that they use, for instance, that they wanna kind of increase solar power from current 56 gigawatt installed now to 200 gigawatts by 2030. So of course, they're putting out all these plants now, and then it's up to the German government to follow through to make these plans happen.

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

Very ambitious target. So we should see how much they. They can build in the next, nine, 10 years. But moving on from Germany, we, I was wanting to ask you about your expectations for the rest of the year, basically, and five or six weeks left. How high can prices go? 80 euros doesn't seem that unrealistic. Now, could we go beyond that to a hundred? What are your forecasts here?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 9:40

I would believe more and 80 than a hundred I would say. We have some supportive factors coming up to kind of year end. We're heading into winter. It's a squeezed energy complex. And I think for instance, the weather forecast coming in going forward will be important for kind of what's going on in the fuels market. And of course, we expect high cold burn at least until kind of winter has ended. So that's a fundamental support factor. Y carbon prices shouldn't fall too much at least. And then we have the auction pause. You have daily auctions in the European carbon market. And then the last auction this year will be on the 20th of December. So from the 21st of December and until kind of 10th of January, there will be no supply coming out on auctions. And that's that's a planned a pulse and that's happening every year. That's to cater for lower demand during the holiday season. But of course often in December we see that, or leading up to December. This is a supportive factor because the prospect of lower supply coming to the market is supporting the market. So that's a supporting supportive elements and we have this year end. Into year. And you'll have kind of industries and utilities that now are more have a better overview over their actual emissions for 2020. And we'll do some kind of adjustments to their positions based on their actual emissions going into kind of, or preparing for compliance for. For 2021, emissions in or reporting in April and compliance in our end of April.

Richard Sverrisson, Editor-in-Chief, Montel: 11:10

So do you expect to be more buying then in the market this, at this stage, in those weeks

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 11:14

at least, this this perception that it's not necessarily that it's always this. But this kind of a perception in the market that you believe it's happening, especially with this auction post. That should be a known thing and that's half the auction volumes in July as well. Everyone knows it happen happens, but then every time it's this. Psychological effect that, okay, we'll be without supply for a while, but I think that's supportive factors for the carbon price heading into kind of year end,

Richard Sverrisson, Editor-in-Chief, Montel: 11:41

Somewhere between 80 and a hundred. Then if I can pin you down,

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 11:44

I, I think I would say maybe between 70 and 80. Mean, it has been quite steep, the previous price movement and I think we could also see some correction as well. So I would say maybe between 70 and 80, but you never know about this market.

Richard Sverrisson, Editor-in-Chief, Montel: 11:58

No, exactly. That's one thing we've learned here. It's always constantly taking us by surprise. But if we go into next year, England, so 2022, we, you see a tightening market the energy fundamentals, the gas coal switch from gas to coal, we'll probably continue as long as North Stream two flows aren't coming into the market. We could see a bit of a bit of colder weather. And on top of that you have the negotiations at the EU level, the fifth or 55 package. So how do you see the main drivers for Q1, Q2 next year?

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 12:26

Yeah, I think also Q1 will be much of the same. You have kind of compliances and then end of our starting of q2. And of course we often see this compliance. Season as a supportive factor. There are there could be indu industrials or utilities that are not mandated to buy in the forward market. So they need to buy in the primary market just ahead of compliance, which we have seen kind of news reports on in earlier, earlier years. That kind of big players or big utilities or big industrials need to buy in very last minute. So I think that's. That's one kind of important factor for next year. And as you say, the winter, I think we'll still see a stress kind of energy complex throughout the winter. So that will of course be important. Also the weather forecast. Will we have a cold winter with the low wind generation or will it be a mild. Mild winter with high wind power generation. I think that will also kind of, of course be have some impacts on the carbon market. But then you said we have the policy process as well. We will have kind of a more intensified discussions on, on the Fit for 55 package. And of course there has been voices that, they're stressed about this whole energy situation in the energy market and how carbon is also contributing to that. Of course, this bringing up like speculators role in this market. Have they contributed to this increase in prices that we have seen previously? Last weeks we saw the EU securities market market regulator esma. They came out and said that they had no evidence of anti-competitive trading behavior. In a preliminary assessment. I guess the overall the overall kind of agreement is that kind of much of this uptick we have seen is especially this autumn has been much due to the crazy moves in the gas market. But of course, I think even though kind of the. Speculators part has been been said not guilty as of now. I think for instance, there will be still countries that want to discuss the role of those that have no, no compliance obligations in. Also the policy discussions going forward. It's a shrinking market and I think there are some still some worries from countries that, that there are participants in the market that could come as a, at the expense of utilities and industry players in Europe. So for instance, that is one element that. Might not be a part of a final framework, but that, for instance, that is one of the topics that could come up and, could limit the appetite for the upside. And I think it will be interesting to see the bigger groups, like political groups in the European Parliament, what they comes up with, the kind of their amendment proposal from the commission what member states how the grouping is for a different. A different proposal if we'll see that there are big resistance for elements of the proposal that was put forward by the commission. So I think perhaps depends a bit on how the discussions are proceeding, but I think potentially some policy risk to those kind of factor into the market as well.

Richard Sverrisson, Editor-in-Chief, Montel: 15:27

I'd just like to return to that report by the European Securities and Markets Authority or esma as is also known. How much stock can we take or how much can we read into their conclusions? A 'cause it was preliminary and B, they didn't have any access to that much data. There was no access, there's no data from the uk, for instance.

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 15:45

I think the increase in prices has not happened in a vacuum for carbon markets. For one, you have had support from the fit for 55 package and also that has been moving, not necessarily now lately, but in the autumn has been moving very in line with, for instance, the gas market. Of course, there is a risk when they're looking more into the details that they could come to a different conclusion, but. At least seems to be a bit of a relief now that ESMA now came with a preliminary report saying that, okay, we don't see any evidence as of now for this, for speculators to have kind of a big role in this this increase in prices.

Richard Sverrisson, Editor-in-Chief, Montel: 16:25

You know, I think that was very, maybe a bit of relief to some who are fearing a political intervention on, some member states Spain or some Eastern European countries already. Threatened more of a probe into what's going on and maybe a move to intervene. But do you think if prices go much above 70, that these kind of noises will reemerge? That some of these countries will, say they will look at what's happening in the market and maybe, threaten a, some kind of intervention.

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 16:55

'Cause it's not so much that the politicians can do. You can't do too much about the gas market and too much about the coal market. But of course the carbon market is policy made. So it's really at least someone, some see this as in kind of the only place where you can actually make an impact. That could have an impact on power prices. But of course, I think also that not necessarily too worried about short term interventions in the market, but I think that. These highest prices and this energy crunch, could those kind of flavor kind of the discussions around the fit for 55 debate? There are elements that can be altered which kind of won't change the overall target, but could have big, large impact on our price expectations and the market balance. So for instance, that's a sign of the marketability reserve and I think that. High prices, high carbon prices will set the scene of where kind of the policy discussions will take place or could take place that you could maybe would have kind of a, some other proposals and some other kind of worries that you didn't have when prices were in at low. Low levels. Low levels where we have seen kind of previous policies, discussions taking place. So I think I know this could call color kind of the long-term debate more than kind of short-term interventions in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 18:13

I think one thing is, it's for sure here, ard, I think we mentioned this on the pod before, buckle up because there's quite a big coronacoaster ride ahead for the coming months and years. Ingvild will, thank you very much for being a guest on the Montel pod this week.

Ingvild Sorhus, Lead EU Carbon Analyst, Refinitiv: 18:28

Thank you. Thank you, Richard.

Richard Sverrisson, Editor-in-Chief, Montel: 18:30

Listeners, you can now follow the podcast on our own Twitter account, aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.