Markets not convinced French carbon floor will materialise

Joachim Moxon


Markets are unconvinced that a French carbon price floor can be implemented as soon as 2017, with several voices suggesting the measure might not materialise at all.

The extent to which a French tax will have a positive impact on gas-fired generation has also been called into question, should the initiative fail to prompt other governments to follow the French lead.

The measure will probably be similar to the climate change levy in the UK – basically a tax on non-domestic energy users – and will have to be introduced as part of a budgetary law, meaning that final adoption in parliament cannot happen before December, one utility-based analyst said. “In this scenario, the date of implementation is very likely to be pushed from 1 January 2017,” he said.

The measure was announced last week and triggered a massive price spike on the over-the-counter power market. The French Cal ’17 Baseload jumped from €29.30/MWh at the close of 25 April to €31.825/MWh on 27 April – the highest assessment by ICIS since 7 January.

However, the contract shed value over the subsequent three sessions and was last assessed at only €29.725/MWh on Tuesday.


“The announcement was the trigger but there were also other market dynamics at play,” one trader said. Fuel prices have been very bearish since the start of the year and many market participants were positioned for further losses, which exposed contracts to sudden upside. This meant that bullish drivers could easily trigger risk management limits or stop-loss orders, resulting in a sharp, compliance-enforced increase in buying activity.

“The announcement coincided with rallying fuels and a spring cold snap and we got caught in a cycle between power markets and fuel markets having a bullish impact on each other,” the trader said.

“We might see reactions from the markets once we get more details of the measure, but the impact is likely to be smaller in the future,” a second trader said.

A third trader agreed: “The market overreacted and I don’t think they will succeed in getting it implemented,” he added.

CCGT impact

The main French political opposition does support a carbon floor at €30.00/tonne CO2 equivalent on European carbon certificates but has not expressed a position on a unilateral French mechanism.

An EU-wide floor would put French combined-cycle gas turbines (CCGTs) in a position to export to neighbouring markets, where coal was previously more competitive, but the impact in the case of an isolated French measure is less clear.

“If the idea is to reduce running hours for coal and gas to 200 hours and 500 hours per year, that means killing them,” one analyst said. “This carbon floor could even trigger extra exports toward France which would come mostly from German coal units,” he added.

German-based utility Uniper has already called for negotiations with the French government to mitigate the impact of closing coal plants.

“Regarding our situation, Uniper could not bear this new carbon tax. That’s why we request to start working with the government very soon to set up social and industrial compensation measures,” a spokeswoman said.

The measure would reinforce the leading position of the historical operators and have a negative impact on competition, she added, a reference to France’s EDF-run nuclear power plants, which have dominated the country’s generation mix for years.

Meanwhile, EDF has not pledged to close its coal plants by 2018, as has been reported in some sections of the media, a spokesman told ICIS.

Similar measures?

Regarding a spread of similar measures to the carbon floor across Europe, commentators remained cautious.

“It’s possible that the Benelux countries might be interested in a similar measure, creating a block with the UK, but it seems less likely to happen in Germany,” a second analyst said. “A floor at €30.00/tonne CO2 equivalent might be sufficient at current fuel prices but the parameters could change in the future,” he said.

Another trader pointed to the precedent of the UK and argued that the carbon tax only really became effective in promoting fuel switching when gas prices began to decline relative to coal.

The measure will not reach its objectives if it is only implemented in France, he concluded.


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