Friday, 10 March ended on a bullish note with prices settling 8.3% higher week-on-week, set to test €100/t. Energy seemed supportive, with the prospect of French energy strikes and nuclear outages driving thermal generation. The bullish sentiment in carbon (and across broader energy markets) was stymied on Monday (13 Mar), largely due to the broader financial market turbulence stemming from Silicon Valley Bank’s collapse and subsequent regulatory rescue. Tuesday’s session settled at €92.68/t with a weak auction exacerbating the slide in EUA prices. The bid-to-cover ratio at 1.16 was the lowest in more than a year. Despite a slightly stronger auction on Wednesday (15 Mar), the prevailing, risk averse sentiment from financial markets, particularly in the face of the governmental intervention to save Credit Suisse, combined with another extraordinarily weak auction, dragged prices down to close the week at €87.07/t, a drop of 11.5% from the previous Thursday.

Next week, a total supply of 9.94 million EUAs will be offered at auction. Wednesday will feature the sale of EUAAs rather than the biweekly Polish auction, resulting in 1.9 million fewer allowances brought to market compared to this week. Auctions will be key to watch this week. The auction results from 16 March featured the weakest auction in recent memory, in terms of discount to the futures market. The weakness of recent auctions may be indicative of compliance entities’ need (or lack thereof) to purchase at any price ahead of compliance deadlines. An update on free allocation progress, set to be released by the European Commission after market close today, as well as the strength of auctions in the coming week at lower prices may provide insight into demand from entities with compliance obligations. If auction interest picks up, this will also be supportive for carbon futures.

We can expect weather to be a bearish factor for the week ahead with mild temperatures and conditions for wind generation picking up. Forecasts anticipate a mild week ahead, with temperatures well above seasonal norms before dipping to slightly below average by the end of the week. Power generation from wind is expected to pick up over the weekend and rise to above average by the middle of the week. Demand for fossil fuel generated power will be limited by lower heating demand and the increased wind generation.

Gas, coal and German power reacted similarly to carbon during the past week. Initially trading upwards on French nuclear outages and energy worker strikes, prices corrected downwards with the unease in financial markets, gas storage remaining high and an abundance of LNG deliveries. Easing in energy markets is punctuated by bearish signals from weather in the week ahead. The CO2 switching price for 39% efficient coal plants to 50% efficient gas plants is now at €98.66/t. With CO2 prices falling, coal to gas switching is not likely to play a role in the week to come, a supportive factor for carbon.

French strikes are scheduled to continue on Thursday of next week. As reported by Montel, protests by energy workers from the previous two weeks led to power capacity cuts of 23.9GW across hydro, gas, coal, and nuclear plants. The strikes continue in the context of a French nuclear fleet that has struggled with reliability as a result of corrosion and maintenance. These capacity cuts send a bullish signal for energy and carbon, but not strong enough to outweigh the prevailing bearish conditions. In the event that strikes in France cease, the downside risk becomes more pronounced.

The EUA Mar-23 option expiry date will arrive on 22 March. With the price at the time of writing (€88.56/t), around 3 million call options are in the money, with the highest open interest at €80/t (2.3 million), providing support at this level. Close to 11 million put options are in the money, with the highest concentration of open interest at a strike price of €90/t (6.1 million). With the looming options expiry next week, positioning around €90/t may provide solid resistance for EUA prices.

Finally, the US Federal Reserve is set to release their interest rate decision on 22 March. Currently, another rate hike is expected, however in light of the instability rocking financial markets and CPI numbers for February showing easing inflation, the certainty that rates will increase is lower. With uncertainty in financial markets, the willingness of speculators to participate in volatile markets, like the EU ETS, is lower. With this instability, the macroeconomic context is bearish for the week ahead.

The EUA Dec-23 contract (Friday) started the week on a bullish note, continuing the bullish momentum from the previous sessions. The bellwether contract briefly tested the area above €100/t but closed just below this level. After Monday’s opening at the session-high just above €100/t, the carbon price started to slide and broke below both the €97/t level and the 50-day moving average. The carbon price closed, however, above these levels. Friday and Monday’s candles together resembled a ‘bearish engulfing’ pattern which could be seen as a reversal signal and also the second top in a bearish ‘double-top’ pattern (first top 21 February). The reversal was confirmed on Tuesday with a large bearish candlestick with the 50-day moving average providing resistance and the EUA Dec-23 contract breaking below €94/t, the high from 12 December at €94/t. Wednesday continued the downward move after an attempt to bring the carbon price towards the high from May 2022 did not succeed with the price falling below €92/t level which was December 2021 and then all-time high and also the 100-day moving average and the ‘double-top’ neckline at €91.54/t. A fourth consecutive bearish candle was posted on Thursday and the session closed below the 200-moving average. The two last sessions closed below the lower Bollinger band suggesting we could see some correction and today’s (Friday 17 March) has opened above the lower Bollinger band.

With the formation of the ‘double-top’ technical patternand the break of the neckline (€91.54/t) the technical picture is now bearish. The EUA Dec-23 contract could potentially see some support around the high from October at €85.40/t which then limited the upside. Also, the 200-day moving average, currently at €84.44/t could also provide some support. Lower we expect strong support around €77/t, which kept the price from moving lower multiple trading days in January. The technical indicator Relative Strength index is comfortably above the lower signal line, leaving more room for further downside.To the upside the neckline at €91.54/t could now act as a resistance level. Overall, we provide a bearish technical signal for the week ahead.

Quieter week ahead, neutral signal for carbon

Week 11 was busy in high level events and policy initiatives. That said, most of the policy files that were processed or presented have little direct impact on the EU ETS, justifying the neutral signal for policy as a driver this week.

The European Parliament held a plenary session that included votes on some key FF55 files, most notably effort sharing, LULUCF, and the Market Stability (MSR) intake rate. On the latter, MEPs voted overwhelmingly in favour of the trilogue outcome that stipulates a continued intake rate at 24%.

Also, the EP plenary voted on energy efficiency in buildings, paving the way for that file to go into trilogue negotiations with the Council. MEPs confirmed the industry committee position that calls for upping the target proposed by the European Commission. The Parliament wants to ensure that all new buildings should be zero emissions from 2028, and those that are public sector-owned already from 2026.

The ETS reform was not discussed during this session, nor is it expected to be on the agenda for the short plenary session on 29-30 March. Instead, the plenary approval of the ETS trilogue outcome will most likely come at the 17-20 April session. Once that is done, the last step will be formal adoption by the Council, probably in late April.

In the Council, member states’ environment ministers met on Thursday (16 March) and agreed to a position on the proposal to revise the Industrial Emissions Directive, meaning that the Council is ready for trilogue with the European Parliament on that file. The ministers also held a policy debate on the recent proposal to set up an EU certification framework for carbon removals.

On the international scene, China is taking Europe’s CBAM scheme to the World Trade Organization. Beijing is following CBAM very closely and fears it might harm Chinese exporters of emission intensive products such as metals and chemicals. This week, China asked the EU to present a report on the CBAM, to serve as basis for WTO members to discuss if the instrument is legally compatible with WTO rules.

New initiatives: power market reform, net-zero industry, raw materials

Over at the European Commission, a raft of new initiatives was presented this week. They have all been prepared over the last few months, partly in response to the energy crisis triggered by the war in Ukraine, partly in response to the vast US support package for cleantech (the Inflation Reduction Act), partly to reduce dependence on imported raw materials for manufacturing green energy equipment.

First out was the power market reform, with draft legislative proposals to amend the Regulation on the internal market for electricity (2019/943), the Directive on renewable energy (2018/2001), and the Regulation on ACER (2019/942).

The package targets three areas of action. First, to decouple consumer prices from the short-term markets, through use of long-term contracts. Second, to triple Europe’s renewables deployment rate, by requiring member states governments to use two-way contracts for difference when they grant subsidies to new investments. Third, to improve consumer protection, e.g. by introducing the right to energy sharing, e.g. among neighbours.

Overall, Europe’s energy providers expressed relief that the proposals did not go further. Industry associations complained they will not be sufficient to address their need for cheaper electricity. The Spanish government, long seen as one of the key champions for a deep reform, said it was satisfied with the focus on support for long term contracts, but added that it will work to “enrich” the text during its upcoming presidency of the Council.

Next up among the new policy initiatives was industrial policy. On Thursday (16 March), the Commission presented the long-awaited 

, a massive support scheme to ensure that at least 40% of cleantech sold in Europe must be produced here. Presented as a necessary response to the $369 billion US Inflation Reduction Act, the switch to a more hands-on industrial policy marks a rupture from the EU’s long tradition as champion of free competition. The Net-Zero Industry text is ambiguous on the possible role for nuclear in the net-zero framework.

Also, on the same day, the Commission put forth draft legislation to 

reduce dependence on imported raw materials

. The fact that China controls so much of the metals and minerals used for manufacturing solar panels, wind turbines and batteries is a topic of concern for European policy makers and stakeholders, who push for the continent to develop its own cleantech supply chains. The aim for the new package is for the EU to extract domestically at least 10% of the strategic raw materials it uses by 2030. As for processing, the domestic target is set at 40%, of which at least 15% should be recycled.

Furthermore, the Commission presented a proposal for a European Hydrogen Bank, to boost subsidies for an energy carrier that is considered key to the green transition. As of now, some €800 million will be up for grabs in a reverse auction – in which project developers compete – later this year.

Overall, the boost in cleantech support has no immediate impact on the EU ETS, but in the mid- and long-term it will almost certainly affect both industrial abatement and competitiveness in Europe.

The week to come should be quieter on the energy policy front, with no big new files scheduled. The European Parliament’s environment committee meets on 22-23 March, with nothing carbon relevant on the agenda. Member states energy ministers will gather for a 

 on 28 March, to discuss the Gas and Hydrogen package, and the electricity market reform. 

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EAC Market Report - In The Midst Of A Bullish Wave

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The EUA front-Dec contract softened under broader financial market uncertainty in this week. For the week ahead, uncertainty is likely to continue, with eyes on the upcoming US Federal Reserve interest rate decision, on 22 March. On a fundamental level, mild, windy forecasts are set to ease demand for emissions-heavy power generation, providing downwards pressure on carbon. Policy is neutral for the week to come. Technical signals are bearish, with key resistance at €91.45/t and support at €85.40/t. Overall, we have a bearish view for the EUA Dec-23 contract for the week ahead.

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Week 11: EUAs slip on financial market uncertainty, weak auctions

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