EU Power Pricing Trends | 14 May 2021
European power generators are facing a vicious cycle of rising costs which is translating into record-high prices for power futures. Generators are subject to substantially higher direct costs for carbon EUAs which they are required to purchase under their EU ETS obligations. Simultaneously, record EUA prices have been driving gas and, paradoxically, coal prices higher, further inflating the input costs for generators. Gas prices, supported by both a tight demand-supply dynamic and carbon EUAs, have been pushing more generators towards coal – a dirtier generation alternative – which has further supported the demand for EUAs amid the extra emissions forecast as a result of additional coal-fired generation. Last week was another week in which there was no let-up in this circular dynamic, and annual power futures posted their largest weekly gain since December 2016.
EU Natural Gas Pricing Trends | 14 May 2021
Short and long-run dynamics pushed European gas benchmarks substantially higher last week. Month-ahead and annual futures across northwest Europe climbed around 8% on average as European gas storage levels fell even further behind the average for the time of year. Aggregate storage levels rose week-on-week, but slower than in 4 of the last 5 years. Moreover, temperatures forecast for late May remained notably below seasonal averages. Further support was provided by significant gains in carbon and coal, as well as ongoing Russian reticence to send more gas to western Europe via Ukraine.
EU Energy Complex | 14 May 2021
Carbon EUAs jumped a further 12% last week, the largest weekly gain since early February, as speculative interest continued to mount. Exchange Traded Fund KraneShares Global Carbon surpassed $300 million in market capitalisation, up from $25 million at the turn of the year, with increasing numbers of investors looking to gain from the significant bull run EUAs have been on since late 2020. In addition to carbon, the European energy complex was also supported by gains in coal, with futures lifted higher as natural gas prices surged for yet another week. Oil closed the week flat, despite whipsawing throughout the week, as COVID-19 continued to generate concern for the near-term demand outlook, with the ‘Indian’ variant of the virus grabbing headlines worldwide.
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