The EUA price will increase to between €85–90 /tCO₂ in the next four weeks. Although elevated energy prices are hitting industrial profitability and output, gas-to-coal shifting due to high gas prices and a deeper and wider consensus on climate goals will support the EUA price in the next month.
Escalating gas supply shortage will boost EUA demand
The gas supply squeeze has caused gas power costs to jump in July, rendering gas-fired power generation significantly less competitive than coal.
Higher gas prices and concern of a winter shortage resulted in notable ‘gas-to-coal shifting’ in July and we expect further shifts as currently unused coal generating capacity is reactivated. This will support EUA demand by as much as ~2%.
Extreme weather supports solar but reduces hydro and wind, with resulting neutral impact on EUA demand
The heatwave and above average solar radiation led to a surge in European solar output earlier in July and, although average wind speeds were seasonally low, wind generation was higher due to capacity increases. Contrarily, heatwave-induced severe drought across Europe lowered hydropower output.
Based on latest weather forecasts, we expect renewables generation will be at average levels over the next four weeks, excluding the impact from higher capacity, suggesting an overall neutral impact on EUA demand and EUA price.
Weak industrial demand puts downward pressure on EUA price
Increasing energy prices and weakening global demand resulted in continued weakening of industrial output in July. European steel mill spot margins turned strongly negative and aluminium capacity in Slovakia was shut due to losses. We expect near-term industrial profitability will fall further and have a negative influence on EUA prices.
Broad consensus on climate policy will support EUA price
Despite the deepening energy crisis and growing concern over European winter gas supplies, long-term climate policy goals have not been undermined. Indeed, European lawmakers plan to finalise legislation on a revised EU ETS and the introduction of a Carbon Border Adjustment Mechanism before COP27 in November. This will provide support for EU ETS reform and the EUA price.
The cut-off date of the data is 17 July 2022.
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