Pausing German auctions as of 9 November bullish for end-of-year EUA price

This analysis has originally been published in an extended version for ICIS EU carbon subscribers on 14 Aug 2018 at 15:50 CET .

The German EUA auctions will be paused between early November and a yet to be specified date during the first quarter in 2019. The European Commission will not be able to finalise an amendment to the Auctioning Regulation in time for the EEX to seamlessly continue as Germany’s opt-out platform. This results in postponing sales of at least 21.8m allowances from 2018 to 2019. We expect this to result in a €0.50/tonne higher price for the end of this year compared to our previous assumptions. Overall we expect European carbon allowances to end 2018 slightly above the €20/tonne level. As a side effect, the market stability reserve will withdraw 1.6m fewer allowances in 2019 as this reduces the 2018 amount of total number of allowances in circulation (TNAC).

Main points

• The European Energy Exchange (EEX) was awarded in March 2018 with a three-year contract for continuing EUA sales on behalf of Germany as the current contract ends on 14 November 2018
• The European Commission was formally notified by Germany on the contract extension in April 2018 but announced on 13 August that it won’t be able to amend the ETS Auctioning Regulation in time for Germany to continue holding auctions after the end of the current contract
• This results in the last German auction for 2018 to take place on 9 November (4.36m) with sales of the last five auctions planned for 2018 with a total volume of 21.81m EUAs being shifted to 2019
• According to the Commission, the German auctions will likely resume during the first quarter of 2019, which leaves room for postponing additional sales from the auctions taking place during the first three months 2019 to later next year

Analysis

• The German opt-out platform is currently the only auction platform that requires a renewal of the contract while the common platform (EEX) is appointed until July 2021 – UK opt-out platform (ICE) is appointed until 9 November 2022; therefore, this procedure only concerns the German auctions
• The delay to appoint the EEX in time to hold the last five auctions this year and potentially some auctions early next year has implications for both, the EUA price and the supply available to the market

EUA supply

• For modelling purposes we conservatively assume, that the German auctions will resume with the start of the second quarter, on 5 April
• In addition to shifting 21.81m allowances from this year to 2019, also up to 32.9m allowances from the first quarter 2019 would in such scenario be shifted to the last three quarters of 2019, already accounting for the MSR reduction
• We assume, that these postponed volumes will be added pro rata to the scheduled auctions for the remainder of the year
• The reduction in auction volume has also consequences for the development of the market stability reserve, as the total number of allowances in circulation (TNAC) for 2018 will be lower with fewer auctions taking place
• This leads to a reduction in MSR withdrawal volume of 1.6m EUAs for the period September to December 2019 and 3.3m allowances for the period January to August 2020

EUA price forecast

• In light of the changes to auction volumes, we have adjusted our price forecast, accounting for lower supply during the last two months of 2018 and the first quarter 2019, with higher supply coming to market during the last three quarters of next year
• This leads to an increase of our Q4 2018 price forecast by €0.50/tonne to levels slightly above the €20/tonne level

Marcus Ferdinand is Head of European Carbon & Power Analytics at ICIS. He can be reached at Marcus.Ferdinand@icis.com

Our ICIS EU carbon customers have access to extensive modelling of different options and proposals. If you have not yet subscribed to our products, please get in contact with Justin Banrey (Justin.Banrey@icis.com).

As an analyst, trader or regulatory specialist now is the time to equip yourself with the latest trends in the market. The ICIS Power and Carbon Seminar 2018  is the place for traders and analysts to discuss upcoming market developments.