Our forecast of carbon prices rising to ~€75 /tCO₂ last month was validated, with prices closing May precisely in line with our projection.
On the fundamentals side, while both wind output and power demand softened in absolute terms in May, the underlying picture tells a more nuanced story. Wind output weakened relative to seasonal norms, whereas power demand held firm above year-on-year levels. Positive developments in US-Iran negotiations injected confidence into the broader market, while minor gas-to-coal switching emerged as anticipated. Both hydro and nuclear output were subdued, collectively providing a supportive backdrop for carbon prices. That said, the absence of a more significant price rise reflects lingering policy uncertainty surrounding the proposed MSR amendments and the still-unresolved US-Iran conflict.
Looking ahead, while a final US-Iran agreement has yet to be reached, active negotiations and reports of both sides closing in on a framework support a more positive economic outlook for June. Above-average temperatures are expected to cement power demand above the seasonal norm, and with renewable generation expected to be weak and minor gas-to-coal switching anticipated, all key fundamental drivers are aligned to the upside and we forecast the price will rise next month. This is consistent with our longer-term carbon price .
However, while June carbon prices are expected to rise, the Q2 CBAM certificate forecast comes in below the Q1 level, reflecting the softer price environment earlier in the quarter. You can learn more about CBAM certificate price forecast from our Energy Transition and Decarbonisation service, or directly request a demo here.
June will see weak wind generation
Wind generation fell m/m in May, and while , the year-on-year outperformance narrowed noticeably compared to April.
However, with forecasts showing below-average wind speeds over the next ten days, we expect wind generation will fall again in June, putting upward pressure on carbon prices. Looking ahead, if wind speeds normalise after ten days, the upward pressure on EUA demand will be modest. However, any extension of subdued wind conditions beyond this period would significantly amplify the bullish price pressure.
As expected, European hydro generation declined in May, with reservoir levels retreating further against historical averages. Although June typically sees a seasonal uplift in hydro output, below-average precipitation and persistently low reservoir levels are forecast to keep generation at subdued levels. Overall, this is expected to provide some upward support to EUA demand in June.
Power demand will increase mildly
Power demand declined m/m in May, but lifted further above historical levels, pointing to a resilient underlying performance. This aligned with our forecast from last month, where we expected demand would ease seasonally but remain above year-on-year levels.
Our forecast for steel profitability – a leading indicator of economic activity – has been upgraded for Q2, but this does not signal an economic recovery, necessarily – rather, it reflects cost reductions. However, the overall economic outlook remains positive, supported by continued progress in US-Iran negotiations. June historically exhibits stronger power demand than May, and with above-average temperatures forecast, the demand outlook looks supportive, albeit without a repeat of the late-May heat conditions. As a result, we will see modest rising power demand in June, lifting fossil fuel generation requirements. In a stronger-than-expected demand scenario, EUA demand could face additional upside pressure.
June will see minor gas-to-coal switching
Total fossil generation decreased slightly in May. The oil price shock on 29 April proved short-lived, with prices pulling back and limiting any meaningful upside risk to coal prices. Gas prices outpaced coal, driving mild gas-to-coal switching.
In June, gas prices are expected to edge higher while coal prices soften slightly, creating a mild divergence that marginally favours coal in the fuel mix. However, the spread remains too narrow to drive meaningful gas-to-coal switching.
Consequently, our base case assumes only mild gas-to-coal switching for the near term. In a scenario where switching proves stronger, it will exert more upward pressure on EUA demand.
Nuclear output will have minimal impact on the carbon price
Nuclear generation declined further in May, in line with our projections and seasonal expectations. Late-May heat mildly constrained cooling conditions, weighing on output at plants such as Slovenia's Krško nuclear plant. With temperatures expected to ease in June, no material production disruption is anticipated, and nuclear output is forecast to remain subdued, with only minimal impact on carbon prices.
If you want to hear more about carbon market forecasts and our short-, medium- or long-term carbon price forecasts, learn more about our Energy Transition and Decarbonisation service or directly request a demo here.
