EUA prices consolidate at higher level awaiting policy decisions

By Frank O. Brannvoll, Brannvoll ApS, Denmark

The increase in fossil fuels use for power generation is keeping the demand for EUAs relatively high. However, a mild winter start and a falling energy complex temper this trend. Therefore, a rally above EUR80 is not expected in the short term as an economic slowdown is expected to lead to demand destruction. Speculators have reduced their presence in terms of size and more short positions have been seen.

The market is now awaiting political decisions, particularly the proposal to sell EUAs to fund different programmes within EU efforts to support consumers. If this is implemented via front loading, ie selling EUAs of 2024-26 during next year, it will put a cap on any rallies.

EUA front-year contract, January 2021-October 2022

The EUA December 2022 price traded its last month slightly higher at EUR78 and is now testing resistance in the range of EUR65-80, within the expected 2023 range of EUR60-95, with an average of EUR82, from the Brannvoll ApS forecast revised slightly at Cemtech Europe 2022.

Issues on the political agenda include:
• increase in the linear reduction factor (LRF) to 4.2 from 2.2 per cent from 2024
• reduction of 177m allowances in 2024
• keep the Market Stability Reserve (MSR) intake at 24 per cent, not reducing it to 12 per cent in 2024
• phase out free allowances by introducing the Carbon Border Adjustment Mechanism (CBAM) between 2026-35
• introduction of trading scheme for transport and buildings from 2025-27.