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Free allocation to industry unlikely before October - DECC

26 Jul 2013 19:58:40 | edcm

Industry is unlikely to receive its free EU allowance (EUA) allocation before October, the UK Department of Energy and Climate Change (DECC) told ICIS on Friday, which means the long-overdue step, awaited by the bloc's manufacturing sector and carbon traders, may still be months away.

Free EUA allocation was originally due by the end of February. The commission must calculate a final figure of free allowances to be handed out to installations, based on numbers each EU country submitted in a national implementation measure (NIM) plan.

But this process has been delayed at two stages. First, when only a handful of countries submitted their NIMs on time, and second, when the commission analysed the plans.

"At the moment, we do not have a firm date for when allocations will be made, but we hope to see an announcement from the commission in the next couple of months, after which member states will need to enter the allocations for each installation into the EU Registry," said a DECC spokeswoman.

DECC's understanding is that the commission is close to completing an assessment of allocations and may announce the results after the summer, the spokeswoman said. "We think it unlikely that allowances will be with operators before October."

The commission would not comment on the issue on Friday.

The Dutch emissions trading authority has said that the commission cannot calculate whether it needs to slash the figure requested by NIMs to match the available pot before August and that once this is decided it needs approval by different directorate-generals (see EDCM 8 July 2013).

Impact on behaviour

The uncertainty surrounding free allocation has led industrials - the potential sellers in the market because of their significant sectoral length - to hold onto their EUA surplus until the EU confirms the NIMs figures, analysts said.

This is because the commission could apply a cross-sectoral correction factor to the preliminary plans if the sum of the proposed free allocation exceeds the number of free EUAs available under the EU's cap.

Analysts expect the commission to cut the NIMs by 5-15% (see EDCM 12 July 2013).

"Once the final decision on the volume is published, some industrials might realise that they get less EUAs than expected, potentially triggering additional demand. However, when the allocation is transferred, some cash-strapped industrials might start selling again," said Ingo Tschach, head of market analysis at German consultancy Tschach Solutions - now part of ICIS - in a report issued in June.

Some say that industrials may try to hold on to their length, however, even once the NIMs are confirmed, until carbon prices recover.

"There are many operators that tell me they don't want to sell below €6-8/tCO2e," said a sales trader. Another trader confirmed industrials often identify a price level under which they don't want to sell their surplus, as they have a target for carbon revenues.

"Some just don't realise that the current price levels will stay around for a while.... Thus, if they don't sell when they get their allocation, they might not be able to sell for two years," the first trader said. Silvia Molteni

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