Last month, we forecast that strong wind would offset rising power demand and lower the carbon price from ~€72 /tCO₂ to ~€71 /tCO₂. However, while the price briefly dipped to ~€71 /tCO₂, it rose again after the US court ruled most of Trump’s tariffs illegal, providing positive market sentiment that laid the foundation for a price increase.
While the 30 September compliance deadline can trigger last-minute buying, we believe this was not a significant driver of the price rise. Market fundamentals played a larger role – power demand returned closer to historical levels and wind output was strong, but importantly much lower than the seasonally expected level. Nuclear output was affected by a jellyfish swarm and French strikes. The economy is also showing a gradual recovery. These signals created room for speculative buying, which pushed prices higher. Ultimately, carbon prices settled at ~€76 /tCO₂ after peaking near ~€77 /tCO₂.
October is expected to see an uplift in power demand due to a recovering economy which is the main factor that will support the carbon price next month. Wind speeds over the next ten days are forecast to be lower than historical levels and this will put more upward pressure on the carbon price. No gas-to-coal switching is expected next month, while hydro and nuclear output will have minimal impact on EUA demand in October. Speculative activity lifted carbon prices in September, but with sentiment cooling we expect prices will return closer to fundamental levels. However, strong power demand and weak wind are expected to provide upward support, keeping prices at a high level.
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Strong power demand in October
As we expected, power demand increased in September due to cool weather and a recovering economy, but it is still lower than the seasonal average. Looking ahead, temperatures should return to seasonal averages next month, but colder weather is expected to lift heating demand, so the effect should be muted since it fits the seasonal pattern. Our forecast for steel profitability – a leading indicator of economic activity – has been upgraded for Q3. We believe October will see an improvement of industrial production.
Overall, for our base case, power demand is expected to increase, but should remain below historical levels, having an upwards impact on EUA demand. If power demand rises more, the uplift could expand.
Wind is expected to ease next month
Wind generation was high in September, but much lower than the historical average, which disappointed the market and contributed to the price uplift. Looking ahead, wind speeds are expected to be lower than the historical average for the next ten days. Thus, we believe wind generation will fall back in October. If wind speeds normalise after the next ten days, this will put a modest upward pressure on EUA demand. If subdued wind conditions persist, EUA demand will rise further.
Hydropower output dropped again in September and stayed below historical averages for this time of the year. Reservoir levels are still lower than seasonal expectations and precipitation is forecast to be lower than average in October. Therefore, hydropower generation is likely to be low in October, but should have limited differential impact on the carbon price.
No shift between gas and coal in October
Although wind output rose sharply, fossil energy generation still increased in September as power demand growth outpaced wind. Moreover, there was a reversal of gas-to-coal switching as coal prices increased slightly relative to gas. The latter also offered greater flexibility to manage volatile wind output.
For October, both gas and coal markets are expected to stay calm with stable prices. Overall, with gas consumption near capacity and helping to smooth variable wind output, additional moves toward coal are not expected and should have little effect on EUA demand.
Nuclear outlook for October is stable
At the start of September, jellyfish disrupted the Paluel nuclear plant, while output at Flamanville-1 was lowered as part of nationwide strikes. As a result, French nuclear generation declined in September.
Although EDF is targeting a restart of Flamanville-3 on 1 October, the unit is not expected to reach full power until mid-December, limiting any immediate impact on supply. From a seasonal perspective, French nuclear output in October is expected to pick up slightly. Without major news, we expect nuclear power generation will have minimal differential impact on the carbon price next month.
If you want to hear more about carbon market forecasts and our short-, medium- or long-term carbon price forecasts, request a demo as part of CRU’s Sustainability and Emissions service, or email us at sales@crugroup.com – we’d be happy to discuss this with you.
