Tipping point

*** I’m taking a break from carbon markets next week. I will be back at my desk in early September ***

Over the next few years, one of the main drivers of EU carbon prices will be passed from utilities to industrials. First gradually, then suddenly.

Hedging demand by utilities is one of the most important factors affecting EU carbon prices. Utilities typically hedge 80-90% of their generation at least two quarters before delivery. That means their expectations of future generation and the associated emissions can give an insight into how demand for EUA futures will evolve.

The large drop in EU power sector emissions seen in the first half of 2023 and expectations of a significant year-on-year decline, ongoing uncertainty about near-term power and natural gas demand, coupled with the exponential growth in renewable generation in Europe is reflected in the hedging guidance from some of the EU’s largest utilities.

For example, one year ago Czech majority state-owned utility CEZ - one of the most active utilities in the EU carbon market - estimated its expected EUA requirements for the period 2023-26 as being within the range of 16-18 million EUA’s per year. In March this was cut to 10-18 million EUA’s per year, and in its most recent financial report that estimate was cut further to 8-15 million EUA’s per year (see Squaring up).