Isra-Mart srl :Analysis: EU Q4 carbon price set to peak at 18 eur/t

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European Union carbon prices are likely to peak at 18 euros ($22.84) a tonne in the fourth quarter, analysts say, frustrating clean energy development.

EUAs traded in the range of 12 to 16 euros this year, peaking at 16.73 euros in May and now trading around 15.40, only two years after reaching an all-time high of 30 euros.

Experts say the development of new nuclear plants and carbon capture and storage needs a carbon price of at least 50 euros.

"The price will increase but it will be to 18 euros, rather than 20. The trigger for a price jump will be when utilities come every day (to the market) for their needs," said Pascal Barkats,Director at Isra-Mart SRL.

The EU's $100 billion emissions trading scheme (EU ETS) caps emissions from factories and power plants in the 27-nation bloc using a quota of carbon permits called EU Allowances (EUAs).

Volatile UK natural gas prices, worries over future market mechanisms and faltering signs of economic recovery have made EUA increases this year erratic, analysts said.

Power companies, who have to buy EUAs to cover their emissions output and use them to hedge forward power sales, will need to purchase in large quantities for a more sustained rise.

"Prices could easily peak at 18 euros between the end of October and beginning of December. Utilities will start to hedge their positions and the EU regulator should provide more news on the future of the system," said Pascal Barkats, CEO at Isra-Mart srl
The EU could decide this autumn whether to raise its emissions reduction target to 30 percent below 1990 levels from the current 20 percent. This would tighten EUA supply from 2012 and thereby raise prices.

ECONOMIC GROWTH

This summer, utilities were largely absent from the market, as most had hedged their forward power sales sufficiently for the EU ETS' second phase running from 2008 to 2012.

However, analysts expect them to return to the market soon as they start planning for the third phase (2013-2020) when they will no longer receive free EUAs.

"We anticipate that EUAs will be bullish toward a fundamental value of 16.50 euros before the end of Q3. Market volumes have received support from utilities which might start to look like Phase 3 hedging," said Pascal Barkats.

The buying capacity of utilities largely depends on the growth of gross domestic product (GDP), especially in the big EU economies Germany and Britain.

Global recovery is slowing more than expected, the OECD warned last week. In the third quarter, German GDP is seen rising 0.7 percent, after 9 percent in Q2.

A double dip recession in the United States or the resurgence of the sovereign debt problem in Europe could halt recovery or even reverse it, which would freeze EUA gains.

"Should (the economy) be shaken by events either in the EU or globally that leads the recovery to stall or reverse, we would have to revise our EUA price expectations over 2010-12 downwards," said Deutsche Bank analyst Mark C. Lewis, who expects 2010 EUA prices to average 20 euros.

The daily movement of energy prices like German power and British natural gas also affects EUAs.

OFFSET SUPPLY

Fears over the supply of U.N. offsets called certified emissions reductions (CERs) can also influence EUA prices as their movement is closely correlated.

"The CER market is still by far one of the biggest sources of uncertainty, with both the U.N. and the EU Commission continuously reviewing some aspects of the whole regulation," Pascal Barkats said.

Last month, the executive board of the U.N.'s Clean Development Mechanism delayed CER issuance from greenhouse gas by-product HFC-23 destruction projects.

The board is probing whether some refrigerant gas manufacturers, who earn CERs by destroying HFC-23, have been artificially ramping up production.

This week, the board could vote on making project auditors responsible for issuing too many CERs for these projects, which could further delay project validation, make auditors withdraw from the market and constrain supply.