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Berenberg raises 2021 EUA forecast by 30% to EUR 65/t

CO2Power

11 Oct 2019 09:21

Photo: Pexels

Photo: Pexels

Frankfurt

11 Oct 2019 09:21

(Montel) European carbon prices could average EUR 65/t in 2021, though sink back to EUR 50/t from 2022-2025, as the market was likely to remain short over the next decade, Berenberg bank said on Friday.

The forecasts were up from previous expectations of EUR 50/t and EUR 30/t, respectively, for the timeframes, added the bank in a research note.

“The carbon market is in a structural deficit for the next decade – a recession will not cure that – and we believe the impact of Brexit will be fairly muted,” said Berenberg, noting the recent strong decline in prices was “perilously” ignoring the bigger picture.

“There is no escaping scarcity of permits, which means the price of carbon has to go up to meaningful levels,” it said, noting there would be a 424m trading deficit in the EUA market in 2022, which could widen on several factors.

Growing deficit
These included the possible cancellation of German EUAs amid the country’s coal exit, additional hedging by power generators due to higher prices, the EU raising its 2030 carbon reduction targets or UK companies using the EU ETS as a “proxy hedge” after Brexit.

The analysts also pointed to a changed political environment, with a new lobby arguing “we have to save the planet, now”, which was likely to see carbon prices high enough to promote decarbonisation, said Berenberg.

For this year, the bank lowered its average estimate for EUAs to EUR 25/t, from EUR 30/t, but still expected the price to end the year at EUR 45/t.

The benchmark Dec 19 EUA contract last traded at EUR 23.82/t, up EUR 0.56 from Thursday’s close on Ice Futures. The contract rose near EUR 30/t in July but has been in a decline since then.

“The carbon price has been hit by short-termism,” Berenberg said, adding the “pullback has merely created a highly attractive entry point”.

The analysts also increase their estimates for German and Nordic power, based on the higher assumptions for carbon.

German power should average EUR 65/MWh in 2021, up from the previous forecast of EUR 59/MWh, and EUR 58.50/MWh, instead of EUR 49/MWh, in 2022-2025.

Nordic power was now seen averaging EUR 49.10/MWh in 2021, up 11% and EUR 43.90/MWh in 2022-2025, up 21%.

More bearish
Other analysts have taken a much more bearish view of the carbon market, however, especially in the case of a recession, with Refinitiv believing it could drive prices below EUR 20/t.

It last forecast prices to average EUR 25/t in 2019 and pegged the 2020 average at EUR 26/t.

Marcus Ferdinand, of Icis, expected an EUA price of EUR 24.70/t at the end of 2019, he told Montel on Friday, and slightly lower at EUR 23.20/t for 2020. Levels should then rise above EUR 36/t by the mid-2020s, he added.

“However, we think that a no-deal [Brexit] scenario is not priced in at the moment and that could spur a bearish reaction in the near term.”

There are concerns that the UK leaving the EU without a deal could see a flood of certificates from British installations coming onto the EU ETS.

Updates article published at 10:12 CET with fresh Icis EUA forecasts.

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