Factor

EU ETS allowance auction demand at 5-month low

08 May 2020 | Trading

Demand for carbon allowances during primary market auctions held under the EU emissions trading system (ETS) continued to slide on the month in April despite the impending compliance deadline for 2019 emissions at the end of the month, as the overall fundamentals picture for the market continued to be weak amid Covid-19 restrictions.

The bid-to-cover ratio achieved by EU-wide auctions of ETS allowances averaged 1.84 in April, down from an average ratio of 1.99 for such auctions held in March and the lowest average for any month since November last year.

This was in contrast to the previous year, when the average bid-to-cover ratio for such sales had jumped to 2.05 in April from 1.86 in March.

The deadline on 30 April for firms to surrender the allowances necessary to cover their 2019 emissions under the EU ETS failed to spur a significant rise in demand for permits, with most firms likely already having completed their compliance purchases for the year.

Overall compliance demand will also have fallen on the year, given that EU ETS-covered emissions dropped by more than 8pc last year from 2018 levels.

The carbon market's front-year contract closed at an average price of €20.09/t CO2e in April, up marginally from €19.90/t CO2e in March. This appeared to prompt renewed interest from speculative investors, many of whom had closed out their positions in the market in March as values tumbled.

But a weak fundamental outlook for allowances over the coming months generally subdued buying pressure in April, both from investors unsure of price direction, and from utilities likely to require a much lower number of allowances to cover compliance for the year.

The majority of Europe remained under strict Covid-19 lockdown measures in April, limiting power demand and therefore thermal plant output. And most flights were still grounded, significantly cutting aviation permit demand. Environmental think tank Sandbag said last month that it expects EU ETS emissions to be down by at least 14pc on the year in 2020.

Spot demand is also limited during this time of the year, with the key European demand hubs sitting in the shoulder period between peak heating and cooling demand. Temperatures in Berlin averaged 10.5°C in April, around 0.5°C above the seasonal norm.

European countries such as Germany, Spain and Italy have begun to ease Covid-19 restrictions in recent days, with others including the UK expected to follow in the coming weeks, which could lead to some increased spot carbon allowance demand this month as industrial activity — and consequently thermal plant output — begins to pick back up.

The longer-term profitability of coal-fired generation has also seen something of an upturn in recent sessions, which might stimulate an increase in compliance purchases. German clean dark spreads for a 38pc-efficient plant and 2021 base-load delivery have averaged €0.62/MWh so far this month, up from an average of €0.37/MWh over April.

But with the overall fundamentals picture for the carbon market remaining largely the same as in April, minus residual compliance buying before the 30 April deadline, overall demand is likely to continue its downward trend into May.

The first EU-wide auction of the month attracted a bid-to-cover ratio of just 1.01, the lowest for any such auction so far this year — excluding that of 17 March, which was cancelled after bids fell short of the number of allowances on offer. This came despite no primary market auctions having taken place over the two preceding sessions, owing to public holidays.

 

Source: Argus