All eyes on Merkel's carbon charge

Germany

It’s been one month since the German election, yet all eyes are still on Europe’s biggest economy as it seeks to form a government. 

Clean energy investors and carbon traders both feel they have a stake in the outcome of coalition negotiations between Chancellor Angela Merkel’s Christian Democratic Union and the Social Democratic Party. 

Yet some markets are already taking hints about Germany’s potential new political agenda. 

Carbon permit prices spiked 8.5 per cent last Wednesday – the biggest jump in more than three months – after Chancellor Merkel voiced her support for a European Union plan to strengthen the region’s emissions trading market. 

Her comments, in a speech to a labour group in Hanover, were her most explicit yet in support of the proposal to temporarily delay sales of permits, an emergency solution known as backloading, to address an oversupply in the market. 

“We need a certain degree of backloading of CO2 emissions so certificate prices return to a sensible level,” she said. 

Merkel’s support may help break a deadlock in EU talks on the supply fix that has been exacerbated by the failure of Germany’s second-term government to take a position on backloading. It is still unclear how quickly Germany could announce its official support of the plan – whether before or after the new coalition takes power. 

As well as playing a key role in the future of the EU emissions-trading system, Merkel’s government will need to take on big challenges at home. Somewhere near the top of the chancellor’s list is likely the country’s future energy landscape. 

Last week, Germany’s power grid operators boosted the surcharge consumers pay for renewable energy by 18 per cent, to a new record. The four grid companies set the fee paid through power bills at €0.0624/kWh ($US0.0842/kWh) next year from €0.0528/kWh now. 

The reform of the Erneuerbare-Energien-Gesetz will become a priority once a coalition is formed. Under the EEG, the government guarantees above-market prices for wind, biomass and solar power generators. The difference between the rate paid to clean-energy producers, which get priority access to the grid, and the market price, is offset by a charge added to every household bill. Energy-intensive industries are currently granted exemptions from paying the EEG surcharge. 

The 18 per cent increase announced last week compares to a 47 per cent hike last year. The overall cost to consumers will increase from €20.4 billion this year to €23.6 billion in 2014. Still, the direct cost of feed-in tariffs and premiums will only account for €2.7 billion of this rise. The rest of the increase results mostly from the fact that transmission system operators expect €350 million less revenue from re-selling renewable power to the spot market due to suppressed prices, and from higher operational costs. 

Merkel is looking for ways to reduce the rising cost of renewable subsidies without stunting the growth of clean energy capacity after Germany decided to close its nuclear power plants in the wake of the Fukushima disaster in Japan. 

UK

Other European countries have not acted so hastily against nuclear. Indeed, on Monday it was announced that Electricite de France will build the UK’s first nuclear reactor since 1995 after reaching a deal with the government on guaranteed prices for the power they’ll generate.

EDF, together with partners Areva and two Chinese nuclear companies, agreed to construct the plant at Hinkley Point in southwest England after the government offered a power price that’s almost double the market rate. The project will cost about £16 billion ($US26 billion) and take 10 years to build.

UK Prime Minister David Cameron said in a statement released on Monday that this “marks the next generation of nuclear power in Britain, which has an important part to play in contributing to our future energy needs".

Australia

Outside of Europe, in Australia, carbon policies have had less enthusiastic supporters. Australian Prime Minister Tony Abbott’s government last week published draft legislation to abolish carbon pricing and called on the opposition Labor Party not to block the bill in parliament.

The Carbon Price Mechanism passed by former prime minister Julia Gillard in 2011 requires more than 300 of Australia’s largest emitters to pay about $US24.15/t ($25/t) for greenhouse gases this year.

The Coalition government says the Carbon Pricing Mechanism will be repealed by the incumbent Senate, however Bloomberg New Energy Finance sees little substance to this claim. The new Labor leader, Bill Shorten, has affirmed that the party will oppose any attempts to repeal the carbon price, making the passage of laws to that effect before July 1, 2014 unlikely. A more likely outcome is that the coalition will be forced to wait until the new Senate takes effect after July 1, 2014, when the government should have enough in-principle support from new senators to pass its laws. 

Stocks

Meanwhile, it was another good week for clean energy share prices. The WilderHill New Energy Global Innovation Index, or NEX, which tracks 96 clean energy companies, gained 2.3 per cent in the trading week ended October 18, propelled by gains in its largest sectors, solar and wind. 

Among other clean energy barometers, the NYSE Bloomberg Global Solar Energy Index jumped 5.5 per cent.

One of the standout performers was once again US rooftop installer SolarCity, which gained 26 per cent to close on Friday at $US59.46.

EU carbon

European Union Allowances for December 2013 advanced 11 per cent last week after German Chancellor Angela Merkel voiced support for a plan to bolster the region's emissions trading system. EUAs for delivery ended Friday's session at €5.13/t on ICE Futures Europe exchange in London, compared with €4.62/t at the close of the previous week.

The December 2013 contract jumped 8.5 per cent to a high of €5.50/t on Wednesday after Merkel said a European Commission plan to temporarily delay sales of some permits is needed so carbon prices "return to a sensible level". German power for delivery in 2014 ended Friday's session at €38.10/MWh, a 2.1 per cent increase on the previous week's €37.30/MWh close. UN Certified Emission Reduction credits for December 2013 were unchanged from the previous week's close at €0.53/t.

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Originally published by Bloomberg New Energy Finance. Reproduced with permission.