Reposted by NOT MANY PEOPLE KNOW THAT
March 23, 2021
By Paul Homewood
A good analysis from Timera on how EU carbon pricing policy has driven both natural gas and electricity prices higher this year. Of course, this has a negative effect here.
CO2 fuel gas, electricity and LNG prices higher
European gas prices are determined by the competitive dynamics between gas and coal-fired power plants. As a result, the 80% increase in carbon EUA prices since November 20th is pulling the European gas curves upwards. The prices for European electricity and Asian LNG are following the example as they are anchored by TTF. (Gas futures market).
With rising carbon prices, coal-fired power plants are becoming less competitive compared to combined cycle power plants. This supports the production of gas, increases gas demand and puts upward pressure on hub prices.
Switching levels at which tranches of coal-fired power plants displace gas are a key driver of TTF price dynamics. Switching levels, however, are a moving target. As coal and carbon prices increased in 2021, conversion levels also increase.
In today’s article, we examine the effects of rising carbon prices on conversion levels and gas prices. We also set out why TTF will become more sensitive to rising carbon prices in 2021.
What’s wrong with carbon prices?
Carbon prices have soared over the past year. EUA prices are up 190% from the Covid low (last March), 80% since last November and more than 30% this year. Around 42 € / t are currently being traded.
Rising prices are a market reaction to a concerted push by the EU to accelerate emissions reductions. This was reflected in the increase in the emissions target for 2030 to 55% (compared to 1990) in the fourth quarter of 2020 as well as in the ongoing discussions about a further increase in the reduction.
Part of the rise in EUA prices is due to an increase in demand from non-compliance companies, loosely known as “speculative buyers”. This includes, for example, the compliance demand of funds and financial institutions (e.g. electricity producers) in order to sell at a profit at rising prices in phase 4 (2021-30).
There is also evidence that compliance buyers (e.g. European utilities) are buying EUAs on a forward basis in an attempt to generate positive margins on coal and lignite assets.
Despite the current momentum behind carbon prices, sustained increases are not a one-way street. Rising carbon prices are driving coal and lignite power plant generation margins into negative territory, which is likely to prompt producers to unwind EUA hedges. There is also potential headwinds from UK buyers reducing EUA positions once the UK ETS offers a viable alternative.
Regardless of whether they go up or down, carbon prices have a significant impact on European gas prices (and thus also on electricity prices).
The increasing influence of carbon prices and the dynamics of lignite switchover can be seen in Figure 2, which shows the TTF forward curve (i) at the beginning of January 2021 versus (ii) at the end of February 2021 versus (iii) last week.
Finally, let’s look at European electricity prices. Carbon works in two ways to raise electricity prices. Gas, coal and lignite power plants go through the EUA costs directly when setting the marginal electricity prices. With GKKT dominating the setting of electricity prices across Europe, the impact of carbon on gas prices is also an increasingly important secondary factor driving electricity prices up.
Like this:
Loading…
Comments are closed.