Last month, we predicted that carbon prices would exceed~€86 /tCO2 as strong power demand and gas-to-coal switching neutralised downward pressure from high renewable energy output. The carbon price surged to ~€90 /tCO₂ on 15 January, driven by tight supply, strong power demand and a jump in gas prices.
However, from our perspective this high level represented a speculative departure from equilibrium. The bullish sentiment at that time was fuelled by expectations of even higher prices, based on anticipated shortfalls in wind and nuclear generation. In reality, wind output recovered shortly thereafter and the impact of storm-linked nuclear outages was much less severe than feared. Consequently, carbon prices fell sharply and settled at a more sensible level of ~€86 /tCO₂ – exactly as we had forecast.
Looking ahead, a positive economic outlook and a mild projected increase in power demand will be offset by strong renewable energy output. Concurrently, the fuel price spread is widening in favour of coal, as its price is expected to fall more sharply than that of gas. This creates a clear incentive for gas-to-coal switching, presenting an upside risk for carbon prices. Although our long-term view for 2026 maintains an upward trajectory for carbon prices, near-term dynamics suggest a temporary downward correction, with a modest decline expected in February.
Wind output will show seasonal growth
Wind generation increased in January, but its share of power demand decreased as total power demand growth outpaced wind generation growth. The short-term forecast indicates wind speeds will be above average over the next ten days. We also expect wind generation to increase in February, consistent with the seasonal pattern. This will exert downward pressure on carbon prices. Looking ahead, if wind speeds normalise after ten days, the downward pressure on EUA demand will be modest. However, an extension of high winds beyond this period would significantly amplify the bearish pressure.
Hydro power generation in Europe decreased in January due to lower-than-average precipitation. Reservoir levels rose, but are still lower than the historical average. Precipitation is forecast to be above average in February. We expect February to follow its usual pattern of strong hydro output, albeit at levels below the historical average. Overall, we anticipate hydro output will only have a minimal impact on EUA demand in February.
Modest power demand expected in February
Power demand increased in January, climbing further above its seasonal norm due to economic improvement and elevated heating demand. Forecasts for colder-than-average weather in February indicate that heating requirements will continue to significantly influence power demand. The economic backdrop remains supportive, underscored by an upward revision to our Q1 forecast for global steel profitability – a key leading indicator that signals strengthening industrial production. However, based on historical patterns, February typically exhibits lower power demand than January.
We project a moderate increase in February power demand. This strength will exert mild upward pressure on EUA demand. Any outperformance, which is where the balance of risks lie, will create additional upward pressure on carbon prices.
Gas-to-coal switching will continue
Total fossil generation increased in January due to strong power demand. The jump in gas prices triggered gas-to-coal switching, thereby halting the six-month trend of declining coal use in the power sector.
For February, we expect both gas and coal prices will decline, with coal prices falling more steeply. This dynamic will sustain the incentive for gas-to-coal switching. However, as the projected price spread will be narrower than January, we anticipate actual switching activity will be moderate, rather than substantial.
Consequently, our base case assumes modest gas-to-coal switching for the near term. In a scenario where switching proves stronger, it will exert more upward pressure on EUA demand and, consequently, carbon prices.
Nuclear generation will see a seasonal drop
Nuclear generation entered 2026 robustly, remaining above its historical benchmark. Although the outage of EDF Flamanville nuclear power plant units 1 and 3 (initiated on 12 January due to storm damage) could have depressed output, overall nuclear generation still posted an increase.
We expect a slight dip in nuclear output, keeping it at historical levels. Without major news, we expect nuclear power generation will have a minimal impact on the carbon price in February, although the outlook remains positive.
If you want to hear more about carbon market forecasts and our short-, medium- or long-term carbon price forecasts, request a demo of our CRU’s Sustainability and Emissions service, or email us at sales@crugroup.com – we’d be happy to discuss this with you.
