Energy Monitor – Energy prices on the rise

by: Hans van Cleef

  • EU (ETS) Carbon Emission prices have gained above EUR 25/tonne
  • Also prices of natural gas, coal and therefore power prices, are rising
  • The (Dutch) consumer will receive a higher energy bill next year
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The CO2 European Emission Allowances Price jumped higher

In recent weeks, the European Carbon Emission Allowance prices, as traded within the Emission Trading Scheme (ETS), have risen above EUR 25/tonne. This is a price gain of more than 200%.At the start of this year  the EU carbon price was even below EUR 8/tonne. A  revision of the EU ETS (Market Stability Reserve or MSR) will result in that the  oversupply of emission rights will be taken off the market. Since the MSR is approved on the 8 April, carbon emission rights prices have risen. It seems that companies, which fall under the EU ETS, anticipate on further price gains and therefore hedge their future carbon emissions by buying these emission rights. It is likely that the sharp rise in prices is partly due to speculative interest. If speculative interest cools somewhat, a temporary downward price correction is possible. However, due to the new European legislation, we think that the uptrend will continue in the coming years.

The EU ETS is a tool with which the European Union tries to realize its ambition to reduce carbon emissions which emerge from human activities. This will be an obligation when the Paris Climate Agreement comes into effect The system operates by the so-called cap-and-trade mechanism. Every year a lower number of emission rights will be issued which can be traded on the free market afterwards. From 2021 the number of issued carbon emission rights will be reduced by 2.2% per year. The idea is that companies which cannot switch to a more sustainable way of working need to buy emission rights at an increasingly higher price. In the end, these companies will not be able to compete with companies that have more sustainable solutions in place. For instance, a coal power plant emits more carbon than a gas fired power plant, and even more compared to a wind mill park. Besides the fact that coal as a commodity became more expensive, a coal power plant needs to buy emission rights against an increasingly higher price. They will continue to do this until it becomes too expensive to use coal for power generation. This will happen as soon as alternative energy sources will be prioritized in the electricity merit order[1], simply because they are cheaper.

The EU ETS accounts for the energy intensive sectors like oil refineries, steel workers, concrete producers, glass, paper and civil aviation. These are roughly 11,000 electricity plants and industrial factories in the 28 countries of the EU plus Iceland, Liechtenstein and Norway. Besides that, aviation activities within and amongst these countries will also fall under this scheme. In total, about 45% of the total carbon emissions in these countries is covered by the EU ETS. The recent legislation aims at the period of 2021-2030 and will provide even more support to the ambition of the European Commission to reduce carbon emissions.

A common mistake made is that targeting a high price for EU carbon allowances is used as a purpose, while EU ETS is only a tool to trigger carbon reduction. The desired outcome is a EU ETS price of zero. After all, demand for these emission rights will drop to zero as soon as all processes will be decarbonized. The (threat of a) higher price for carbon emission allowances will help the energy intensive industries become more sustainable, but this cannot be a goal on its own.

Other energy prices also found support

Besides higher carbon emission allowances prices, also other energy related commodity prices have also risen. The price of natural gas in Europe rose substantially (both TTF and NBP). This price rally was the result of increased seasonal demand (air conditioning) as well as increased demand for heating. Moreover, gas prices have risen in recent weeks because of higher demand for refilling gas storage ahead of the winter season. For power generation, increased ETS prices have even had a more upward effect on gas prices. Also prices of thermal coal – still an important part of the Dutch electricity mix – have continued its uptrend due to ongoing strong demand as well as the positive sentiment on energy markets.

Electricity prices will find strong support

The Dutch electricity price (baseload, CAL19) gained to EUR 63/MWh. In comparison, during the first half of 2016 the price was EUR 25/MWh and even in February 2018 was trading below EUR 37/MWh. The high price for carbon emission rights as well as the higher gas and coal prices pushed power prices higher. Besides higher commodity prices we also see increased foreign demand for electricity. For instance, electricity exports to Belgium increased. Due to the shutdown of Belgian nuclear power plants because of technical aspects like maintenance and a lack of cooling water (low water in local rivers) higher demand for Dutch generated electricity also resulted in more upward price pressures.

Dutch consumers will face higher energy bills

The energy bill of an average Dutch household will rise next year. This is for the following reasons. As described above, of natural gas and electricity prices will rise. However, it will be difficult to say by how much they will rise. If consumers have a longer-term contract against fixed prices, they will notice higher energy costs for next years’ energy bill (not in 2019). Besides higher commodity prices, also taxes will increase. The ‘Opslag voor Duurzame Energiebronnen’ (ODE) will rise to EUR 133 per household in 2019 and will reach EUR 230 in 2023. This is the government’s  funding for half of the new sustainable energy sources. The other half of the funding will come from the business. Higher taxes were set during the Energy Agreement in 2013, which set the pathway for the Dutch energy transition up to 2023. The extra costs of the upcoming Climate agreement are not taken into account yet.

 

[1] A merit order is a ranked list of available energy sources with which the required amount of energy is generated on the basis of the rising price.