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“Not enough data” for MSR review in 2021 – analyst


04 Mar 2020 06:33




04 Mar 2020 06:33

(Montel) The EU ETS has not had enough experience of the market stability reserve (MSR) to make any changes to the mechanism at its scheduled review in 2021, according to an analyst.

“I don’t think we have enough data to do this review,” Trevor Sikorski of Energy Aspects told the Argus Emissions conference on Tuesday.

“We’ve just got the MSR working, we still have huge oversupply and we don’t know how the market would react and how we should operate it when that surplus is smaller.”

“We’re almost putting the cart before the horse,” he said. “Let’s have a little bit more experience of it before we decide to review it.”

EU regulators are set to consider next year whether to revamp the design of the MSR, which could include extending the period over which the mechanism takes out 24% of the calculated oversupply in the market before reverting to its originally designed 12%.

Sikorski pointed out that the annual market supply is still fluctuating after the UK was suspended from issuing and selling EUAs in 2019.

This year’s total supply calculation, to be published in May, will reflect the lack of supply from the UK in 2019, and the MSR withdrawal will be correspondingly lower, while the 2021 calculation will include two years of UK supply in 2020 and the withdrawal will be considerably higher.

Over the course of the fourth phase, however, overall demand is expected to decline as more coal plants are closed, and this may require some additional changes to the MSR, such as changing the threshold levels at which EUAs are removed or added to the market.

“I do think they will lower the threshold,” Sikorski said. “Power is decarbonising and utilities need fewer hedges, therefore the 833m [upper] threshold and the lower 400m threshold could be brought down.”

Tom Lord, head of trading and risk management at Redshaw Advisors, said that the MSR review will come on the back of quite a few bearish years, and this is not a good example of what the MSR is capable of.

“But even if you revert to [a] 12% [annual withdrawal] the MSR is still there, and there will only be a couple of years of [lower withdrawals] before the EU Green Deal begins to bite,” Lord said.

“One way or another it will tighten the market.”

Tighter market
Lawson Steele of Berenberg Bank said the ETS could face a within-year deficit of around 250m EUAs in 2021, as a withdrawal of surplus supply of around 400m allowances is only partially offset by abatement totalling 150m.

“The maximum abatement [through fuel switching] I see possible [in 2021] is 100m tonnes, with another 50m tonnes coming from renewables,” he said.

“If you take into account that the market stability reserve is going to reduce supply by 400m tonnes, and subtract 150m tonnes of abatement, you are left with 250m tonnes.”

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