EU carbon prices could surge to €100 mt on bullish talk as fuel switching ends
London (Quantum Commodity Intelligence) - European carbon prices could be driven to €100 mt ($122/mt) on bullish talk as the fundamental drivers of switching between coal- and gas-fired power generation become obsolete, warns SEB Research.
Current EU Allowance prices may have already exposed switching dynamics no longer play a role.
“The short- to medium-term practical capacity to switch from coal to gas both on a spot and forward basis has probably already been reached at current coal, gas and CO2 prices,” Bjarne Schieldrop notes, chief analyst at the bank notes.
Pockets of coal-fired power plants in Germany are staring at a loss-making forward curve, but have to continue to run because they are the only supplier, and there is a lack of power lines to link with gas-fired power plants.
On Friday, the forward cost of running a 38% efficient coal plant was €73/MWh, higher than the German power price in 2022 of €62/MWh.
But gas-powered power plants in Germany were able to lock in a profit with the forward cost of running a 49% efficient plant at €60.9/MWh.
“The crux here is that if a coal fired plant cannot be closed down due to lack of local alternatives and power grid constraints, then the local power price around it necessarily needs to be high enough to support running that plant,” said Schieldrop.
“As a result the regions in the EU where the coal fired power plants cannot be turned off due to grid restrictions ends up being high-power-price-islands in a larger EU ocean of lower cost gas-based or renewable based power.”
At the start of the year, coal power generation in 2022 could be locked in at a healthy profit, but that started to erode sharply in mid-May.
EUA prices now look set to price above the coal to gas implied fuel switching bands that have been driving buying and selling patterns.
“The EUA market is now too tight for such switching dynamics to matter anymore,” warns Schieldrop.
“If so the EUA price will then have very little visible and explicit guidance. It will be set free to trade at whatever level the market wants," he said.
“Such a change in dynamics could then open up for an easy move up towards €75/mt or even €100/mt without any explicit explanation other than that ‘the market is bullish’”.