Carbon-electricity correlation at highest since April
The correlation between emissions and German electricity prices has peaked in September to date, ICIS data shows, as the prices of the two commodities returned to move in tandem.
The coefficient of determination between the EU allowance (EUA) December Year 2013 and the German Baseload Calendar Year 2014 rose to an average of 0.97 for September to date. It averaged 0.28 in August and 0.25 in July, according to ICIS data (see graph).
The coefficient measures the link between two data series over a specified period. The closer the figure to 1.0, the stronger the positive correlation; the closer the figure to -1.0, the stronger the negative correlation; and the closer the figure to 0.0, the weaker the overall correlation.
The September coefficient strengthened over 1-12 September as the German Cal ’14 rose by €2.30/MWh, or 6%, to €39.65/MWh and the EUA Dec ‘13 rose by €1.10/tonne of CO2 equivalent (tCO2e), or 24%, to €5.65/tCO2e.
Between May and June, the correlation was low – even turning negative at some point ( see EDCM 22 May 2013 and EDCM 17 June 2013 ).
“Anticipation of energy reform in Germany has driven a strong rally in German power prices [recently],“ said Paolo Coghe, European power, coal and carbon senior analyst at French bank Societe Generale. German power market participants also mentioned positive economic data and a strong energy complex among the bullish factors which drove up German power prices recently.
“If German power goes up, then utilities hedge power forward, and buy carbon accordingly,” Coghe said.
Correlation between the carbon benchmark and the front-year coal contract CIF (cost, insurance & freight) ARA (Amsterdam-Rotterdam-Antwerp) also strengthened in September to 0.86 – the highest this year – after averaging -0.59 in August.
With coal and carbon prices rising less than power in absolute terms, the German front-year clean dark spread – the profit margin for coal-fired generators when taking into account the cost of carbon and coal – calculated by ICIS on Thursday rose to the highest since June 2012, ICIS data shows.
According to Trevor Sikorski, head of natural gas, coal and carbon at consultancy Energy Aspect, the ramp-up in carbon prices does reflect some hedging demand and some positioning in the run-up to the German elections on 22 September.
“The German power-carbon correlation is often strongest when the other drivers (mostly coal prices) aren’t doing very much and carbon does something more dramatic – so the effect of the movement in carbon prices is more apparent in the movement in power prices,” he said, adding that at the moment there is a trend movement on carbon while coal is trading relatively flat. Silvia Molteni
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