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 March
Power demand increased further in February and, looking ahead, a supportive economic outlook is tempered by seasonal and weather factors. Upgrades to our global steel profitability forecast for Q1 point to firmer industrial activity. Part of this strength can be attributed to E.ON's €48 bn investment plan, announced on 25 February, which aims to expand and protect grids and is illustrative of a general uptick in grid investment. Warmer-than-average March weather is expected to reduce heating needs, tempering power demand growth, and historical patterns show March typically posts lower power demand than February.
Our power market demand forecasting points to moderate growth in March, supported by a robust economic backdrop, delivering mild upside for EUA demand. With the balance of risks skewed higher, any outperformance would amplify upward pressure on carbon prices.
Higher gas prices will spur minor gas-to-coal switching
Total fossil generation increased in February due to strong power demand. The sharper decline in coal prices compared to gas has also incentivised sustained gas-to-coal switching since the beginning of 2026.
For March, we expect both gas and coal prices will rise, with gas prices rising more steeply. This dynamic will sustain the incentive for gas-to-coal switching. However, as the projected price spread will be narrower than in February, we anticipate actual switching activity will be moderate.
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
February saw nuclear generation decline – a seasonal move that kept output within historical ranges and had little bearing on carbon prices. We expect nuclear output will dip slightly in March while remaining within historical norms. No strikes or reactor closures are currently planned. Given no significant deviation from seasonal patterns is expected, we anticipate a neutral impact on EUA demand.
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.
