Oslo, 8 December 2010

Next year, EU Allowances (EUAs) are forecast to cost €22/t, rising to €25/t in 2012, according to Point Carbon, a Thomson Reuters company and the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.

Price volatility will continue for the remainder of phase 2 of the EU’s Emissions Trading Scheme (EU ETS), which runs to the end of 2012, due to expected increases in demand from power companies that will not be met by additional supply before the second half of 2012. But prices are predicted to become more stable from 2013 onwards as the level of supply comes to the market on a regular basis. By 2020, Point Carbon predicts that EUAs will cost €36/t.

Point Carbon’s price estimates are based to a large extent on the predicted demand for allowances from the participants in the EU ETS. Most power companies hedge part of their future power production by selling power and simultaneously securing their direct production costs for fuel and carbon allowances needed for this production.

“Hedging profiles within the power sector vary significantly across European companies and regions”, explains Kjersti Ulset, Head of European Carbon Analysis at Point Carbon and author of the analysis, “Typically large companies located in north-western Europe have the most extensive hedging policy. Companies located in the southern part of Europe appear to have a far less extensive hedging profile, while eastern European power companies seem to have quite limited hedging activity, so while some companies look 3-4 years into the future, others focus mostly on the current year”.

As a result of the recession, most industry sector companies will have a surplus of allowances in phase 2 of the EU ETS (2008-12), estimated to be close to 1 Gt or 25% of the industry sectors’ forecasted emissions during the same period. Point Carbon expects 60% of this surplus to be banked into phase 3 of the EU ETS.

Another important factor in 2012 is the timing of the release of allowances held back in reserves. Some have been held back for new entrants to the scheme, and a further 300m EUAs are to be sold into the market to raise financing for carbon capture and storage and renewable energy projects.

These reserves make up a significant share of the supply in 2012. “The exact timing of when this supply will come to market is still uncertain and that makes the 2012 price correspondingly challenging to predict”, Anne Kat Brevik, Senior Analyst and co-author of the report, concluded.

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