EU carbon senses a renaissance

The European Emission Trading System is set to change radically on March 12, after EU ministers approved last week a regulation to delay 900 million carbon permits from 2014-16 to 2019-20.

The measure known as ‘backloading’ will tighten the market balance significantly, after a period of abundant supply of emission allowances (EUAs) and dwindling carbon prices. EUAs have already gained 40 per cent to €7/t since the start of the year, in anticipation of the auction curbs. Prices are likely to rise further once backloading begins, as it will more than halve the supply of new carbon permits. 

Auction curbs will only have a temporary impact on the European carbon market, according to Bloomberg New Energy Finance. This is because according to current legislation, the backloaded allowances will have to be sold in 2019-20. The EU is therefore likely to turn its attention now to implementing further reforms that would have a more permanent effect on the carbon market. 

Wind energy has also seen a spate of news announcements: five consortia are competing in a $US1.7 billion tender to build five wind farms, totalling 850MW, in Morocco, the state-run utility ONEE said on February 27. The North African country aims to reach 2GW of wind capacity by 2020 compared with 292MW at end-2013, according to Bloomberg New Energy Finance. The consortia are led by Acciona (Spain), EDF (France), ACWA power-ACPO.SE (Saudi Arabia), Nareva (Morocco’s royal holding company) and International Power (UK). 

Acciona was independently in the news last week, after it reported a surprise $US2.7 billion loss in 2013, equating to more than half its market value. The main reason was regulatory change, some of which is retroactive, in its home market of Spain. In order to combat cuts in renewable energy payments, the company agreed in December to sell 18 German wind farms to Swisspower Renewables for $US215m.

In contrast, US project developer Pattern Energy reported on Friday a 76 per cent surge in revenue last year and an 88 per cent increase in ebitda to $US141.8m compared with 2012. Nordex also had good news on Friday, notching an ebit of €44.3m ($US61.1m) in 2013 compared with a loss of €61.1m ($US84.3m) in the preceding year, according to provisional figures. The German wind turbine manufacturer attributed the recovery to a sales hike in its core European market, which saw a 33 per cent increase last year compared with a 40 per cent decline for combined sales from the US and Asia.

Another turbine manufacturer, Spain’s Gamesa, also returned to the black, with an ebit of €129m ($US178m) last year – a 175 per cent rise on €47m ($US65m) in 2012. Latin America was its main area of growth, accounting for 49 per cent of sales, followed by Europe.

The healthy results of turbine manufacturers for 2013 have been largely due to extensive cost cutting in the last 18 months, with Nordex and Gamesa among those announcing job cuts and factory closures. In addition, demand is likely to recover significantly in the next two years, after dropping last year to the lowest level since 2008. This improvement will probably be concentrated in markets such as the US, China, Brazil and India, according to Bloomberg New Energy Finance. 

Indeed China gave conditional approval last week to 27.6GW of new wind projects, potentially increasing its capacity by some 36 per cent. If implemented, the proposals would strengthen the country’s position as the world’s biggest wind market. The next step is for provincial authorities to assess whether the transmission grids can handle the new flows and if there is sufficient consumer demand. China is forecast to add 14.7GW of new wind power this year, up from 14GW in 2013, according to Bloomberg New Energy Finance estimates.

EU carbon

European carbon recovered after dropping 11 per cent in just one day last week, though it was not enough to erase all losses.

Dec-14 EUAs  finished the week 1.1 per cent down at €7.15/t on ICE, compared with €7.23/t at the previous Friday’s close. Dec-14 EUAs fell 11 per cent on Tuesday as profit from burning coal in Germany two years ahead fell to its lowest level since May 2011. Front-year EUAs slipped further to a low of €6.18/t Wednesday morning. Prices rebounded and climbed above €7/t on Friday, after the European Commission confirmed the revised auction schedule for backloading.

The rapid recovery from last week’s bearish EUA price correction indicates there is bullish pressure supporting allowances, even as the wide price swings are likely to remain a feature of this market for the foreseeable future.