Carbon price increases fail to lift German far curve

Future carbon price increases are not factored in the German far curve as it is unclear how much carbon prices would go up while only their substantial increase could offset the bearish factors that the German market is facing, said traders and analysts.

German far curve prices have broken several lows recently, following coal market bearishness. Even contracts far out the curve have reached very low levels, with last Cal’ 2020 Baseload trades made just at €30.05-30.15/MWh, below where the Cal ’16 Baseload was trading as recently as in September.

Contracts farther out usually carry more risk premium and tend to be priced higher also due to low liquidity. Besides, several gigawatts of power generation capacity will be taken offline in the next few years due to Germany’s nuclear phaseout and carbon prices, which recently reached their highest level in three years, are forecast to go up significantly by 2020. This all appears to have little impact on German far curve prices.

Uncertainty

Several forecasts say that carbon prices could reach €20.00/tCO2e by the end of the decade from their current levels at around €8.50/MWh.

If carbon prices increased to €20.00/tCO2e, then €30.00/MWh would be too low a price for the Cal ’20 Baseload, a trader at an energy management company said. Other traders had similar views.

Carbon price increase to €20.00/tCO2e could add even €10.00/MWh to German power prices, another trader at an energy management company said.

However, there is too much uncertainty about future carbon price increases for this to be factored in the German far curve, say traders. “No-one is really sure about this,” the second trader said about forecasts for high carbon prices.

Carbon prices might not go up as much as expected if European economy remains weak, a trader at a energy services company said. “I don’t think economy can support carbon in the next 2-3 years,” he said.

“We think forward carbon prices are based on politics and market sentiment, rather than market fundamentals,” said analysts of Fitch ratings agency. Hence it is uncertain what carbon price levels could be at the end of the decade, they said.

Bearish factors

Market participants have taken a wait-and-see approach due to these uncertainties.

If clearer signals emerge that carbon prices could go up significantly, then they could start factoring this risk in the far curve, according to the second trader.

Some said there are too many bearish factors affecting the German market for traders to be concerned about future carbon price increases.

“There will be a lot of offshore wind [capacity added] in the next 3-5 years,” the third trader said. Besides, the coal market remains oversupplied and many expect further price decreases.

In face of these bearish factors, carbon prices would have to increase sharply to lift the German far curve. This is so also because expenses on carbon credits form a smaller part of power generation costs than coal.

Even if carbon prices increased to €9.00/tCO2e by the end of this year, German power curve would continue on a downward trajectory in case the coal market remained bearish, traders said.

While many traders expect coal prices can fall more, some think they cannot be sustainable at current levels. “Coal prices are currently a bit too low, suffering from worries related to emerging markets and a strong correlation with oil prices,” said Paolo Coghe, senior analyst at the French bank Societe Generale. And at current fuel prices and demand levels, German power is close to bottom at €30.00/MWh, according to the bank’s analysis. laura.raus@icis.com