French power front-year volatile as traders weigh up carbon floor for coal plants

The key front-year contract at the French wholesale power market was volatile on Tuesday morning as the market digested news that the country’s energy ministry could ease the severity of its forthcoming unilateral carbon price floor.

Traders sought to take advantage of the choppy waters, buying back into the front-year on Tuesday after it had sunk to lows last seen in late May even though the shift in approach to the carbon floor will have little bearing on French power fundamentals.

The product for delivery in 2017 – the same year the carbon floor will kick in, on 1 January – gapped lower as the market opened on Tuesday, despite having already recorded heavy losses in the last two hours of trade on Monday.

Despite first trading at €31.10/MWh, the contract had risen to €32.25/MWh by 10:30 London time, according to trade data seen by ICIS. Other French curve contracts were also volatile.

Scale-back

The scaling-back of the carbon floor first emerged late on Monday when the energy ministry published the findings of an expert committee it had commissioned to advise on the carbon floor.

The committee proposed the floor price be focused only on coal plants “so that the environmental gain is significant while preserving the security of the electrical system”, the ministry said in a statement.

This swept away any potential obligations on gas-fired power plants to pay the minimum price for carbon emissions.

The fundamental impact will be limited, however. Fossil-fuelled power already plays a relatively minimal role in the French power mix. In January for example, when electricity production peaked, coal- and gas-fired plants accounted for just 9% of the total generation mix, figures from grid operator RTE showed. In May, the most recent month figures are available for, this fell to just 3.6%.

This means the moves on the front year on Monday and Tuesday were more sentiment-driven than based on an easing of physical supply concerns.

And this gave traders confidence to buy back into the front-year later on Tuesday morning. It was last seen by ICIS changing hands back up at €32.25/MWh, with a very wide €1.00/MWh bid-offer spread for such a liquid contract reflecting the volatility and uncertainty over fair value.

Roll-out

Although the government-commissioned report is technically advisory only and non-binding, its findings seem likely to apply. The energy ministry said that, by the end of July, government departments involved in rolling out the top-up payment for coal plants would have to look into the technical aspects for inclusion in France’s next draft budget law.

The floor is likely to take a similar form to that used in the UK, where a top-up payment in addition to the EU emissions trading system is applied per tonne of carbon emitted.

Along with its national carbon floor recommendations, the French advisory committee also recommended a carbon price corridor – a maximum and minimum price – something that France had previously signalled it would lobby for (see EDEM 29 April 2016).

“France will support this proposal which should enable the EU to meet its objectives of reducing emissions of greenhouse gases consistent with the Paris agreement on climate,” the energy ministry statement said. jamie.stewart@icis.com