Although elevated energy prices are hitting industrial profitability and output, we forecast the EUA price will increase to between €81–86 /tCO₂ in August. Gas-to-coal shifting due to high gas prices and gas rationing, as well as a reconfirmation of current policy consensus on climate goals, will support the EUA price.
Gas rationing from August onwards will boost EUA demand
The EU has agreed a gas rationing plan between 1 August–31 March 2023, proposing a voluntary demand reduction target of 15%. There is coal capacity available in the power sector and we forecast gas-to-coal shifting will accelerate as a result. We expect this could increase EUA demand by as much as ~2%, however, any increase will be at least partially offset by further production cuts in the industrial sector.
Neutral impact of non-fossil power generation on EUA demand
Nuclear power generation remains low in France due to ongoing maintenance and rest-of-Europe generation was stable in July. We expect nuclear generation will be stable over the coming month.
Weaker-than-average wind speeds, stronger-than-average solar radiation and a forecast of below average hydropower generation in the next 28 days suggest slightly below average renewable power generation, excluding any impact from higher capacity.
Overall, we forecast a stable non-fossil fuel power generation in the next four weeks, which will be neutral for EUA demand.
Weak industrial demand puts downward pressure on EUA price
Falling prices and lower profitability resulted in weakened prices and production cuts across European steel and aluminium sectors; key inputs to and indicators of industrial output. We expect both the gas shortage and poor demand will continue to impact industrial output over the next four weeks and this will put downward pressure on EUA prices.
Stable ETS market policy will support EUA price
We do not expect the ‘carbon price cap scheme’, proposed by the Spanish government, to pass the European Commission. Recent policy decisions have shown there is a consensus to maintain climate goals and such a move would undermine this. This reconfirmation of current policy consensus will support the EUA price.
The cut-off date of the data is 31 July 2022.
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