EUA auction on ICE cancelled again

This analysis has originally been published in an extended version for ICIS EU carbon subscribers on 11 Jul 2018 at 13:14 CET.

On Wednesday, 11 July, the Intercontinental Exchange (ICE) cancelled its daily EUA auction as a result of the total volume of bids falling short of the volume of the allowances being auctioned. This is the second ICE auction volume to be cancelled this year and Wednesday’s cancelled auction also included volume from the last cancelled auction. In our opinion, the second auction cancellation is incidental considering the very low shortfall in bids volumes and does not point towards a fundamental lack of demand in the market.

Main points

• ICE announcement (link):

• Reason for cancellation: Total volume of bids falling short of the volume of the allowances being auctioned
• The volume will be distributed over the next 4 UK auctions

• 5.7m EUAs were planned for the Wednesday’s auction
  • the volume of bids submitted was 5.66m or short by 85.5k (see the market report here)
• This is the fourth auction to be cancelled and the second one on ICE in 2018

• On 16 May, 4.6m auction EUAs were cancelled for the same reason of too low bids volume
• The cancelled volume were shifted in equal amounts to the next four UK auction as followed
  • 30 May 2018: 5.7m EUAs
  • 13 June 2018: 5.7m EUAs
  • 27 June 2018: 5.7m EUAs
  • 11 July 2018: 5.7 EUAs

• The auction regulation (link) sets out under Art 7.5

• • “Where the total volume of bids sorted pursuant to paragraph 2 falls short of the volume of auctioned allowances, the auction platform shall cancel the auction” and
  • “Where one or more auctions are cancelled pursuant to paragraph 5 or 6 consecutively, the combined volume of allowances of those auctions shall be distributed evenly over the following auctions scheduled on the same auction platform.”
  • “[…]the combined volume to be auctioned must be distributed shall equal four times the number of auctions that were cancelled”

Analysis

• If equally distributed as specified in legislation, we assume the following volumes for the next ICE auctions including Wednesday’s cancelled volume:
  • 25 July 2018: 6m
  • 8 August 2018: 3.7m
  • 22 August 2018: 3.7m
  • 5 September 2018: 6m
  • Please note that every year, there is only 50% of auction volume in August – in that context, it it therefore unclear if the cancelled auction volume can be equally spread out over those 4 auctions (we are currently clarifying this issue)
• In our opinion, the cancellation of Wednesday’s ICE auction was incidental
  • First, the shortfall in bid volume is very marginal (less than 100k) so it could just have well cleared
  • Second, looking back, all the last 3 ICE auctions had the same 1.7m top up from the 16 May cancelled auction and had the same high 5.7m auction volumes but they all cleared
• Price wise, after opening above the €16/tCO2e mark on Wednesday morning, the EUA price gradually dropped around 20 cents before shooting back up above the €16 mark after the ICE auction was cancelled
  • The benchmark EUA contract settled at €16.32/tCO2e
  • This suggest that there was demand for auction volumes and that after failing to secure their primary auction volumes, market participants had to secure their volumes directly on the secondary market
  • Demand wise, EUA demand appears healthier at the moment amid rising German power price and improvement of the German Clean Dark Spread and a solid Clean Brown Spread
• Looking forward though, the upcoming ICE auction on 25 July and 5 September are too be watched carefully as they will bring 6m EUAs to market which is 50% more than the average auction volume in 2018

Yann Andreassen is Senior Analyst – EU Carbon & Power Markets at ICIS. He can be reached at Yann.Andreassen@icis.com

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