Utilities less well-hedged on EUAs than in early 2014 – traders

Utilities’ carbon positions may not be as solidly hedged as earlier this year, following the end-of-March crash in EU allowance (EUA) prices, traders said this month.

The benchmark December ’14 contract lost 31% of its value over two days, dropping to an ICIS closing assessment of €4.45/tCO2e on 28 March (see graph).

Previously in 2014, EUA prices had been rising (see graph) due to the start of the EU’s carbon market fix to delay supply, known as ‘back-loading’.

“They [utilities] had covered their dark spread or spark spread during the rally, buying CO2 and fuel,” one trader at a trading house said earlier this month about the early 2014 rise in the power and carbon complex.

However, power prices began a significant decline from mid-February, with the German front year contract dropping to a 2014 low of €33.80/MWh by 4 April from €36.90/MWh on 18 February (see graph).

With prices falling, utilities sold off power contracts and bought them back at a lower price, one broker said last week.

However, the utilities have policies to match levels of carbon hedging to those for power, the broker said, hence a sell-off of carbon contracts.

“I think they [utilities] are definitely less covered on forward curve than [the] proportion they had covered February or March,” the trader said.

Curve spreads

The spread of EUA curve contracts to the benchmark December ’14 product rose in the first few months of 2014, although they have since fallen back down again.

The premium of the December ’17 to December ’14 carbon contract was €0.60/tCO2e at the beginning of 2014, according to ICIS data. EUA prices across the board rose at the start of the year and the spread grew to reach €1.20/tCO2e on 21 February.

However, by 11 April the spread had retracted down to €0.70/tCO2e.

“[If] the price is under €6/tCO2e for Dec ‘14, there won’t be a supercontango,” another broker said earlier this month.

However, “if [we] go back to €6.40/tCO2e or so then spread will widen, as people believe and trade against [the] alleged back-loading shortage,” the broker added.

The German Year ’14 power contract has ticked up over the previous four sessions and this is optimistic for carbon.

When there is another rally across power and gas, carbon prices could be dragged up too, the trader said. Ben Lee