EU carbon price could double this year-Espirito

Fri, Mar 2 2012

  • EUAs seen at 15-20 eur/t by year-end if set-aside passed
  • Higher price would raise profitability of nuclear, hydro

LONDON, March 2 (Reuters) - The price of European Union emissions permits could rally to double their current value by the end of the year if a plan to withhold permits is passed, Portuguese Espirito Santo Investment Bank said on Friday.

This could raise power prices and the profitability of nuclear and hydro plants, it said.

"There is a chance that the carbon price could rally significantly ... That would be good news for Fortum, Verbund, E.ON, RWE and Cez. It would be marginally positive for Iberdrola, Centrica, International Power and GDF Suez, Endesa and Gas Natural," the bank said in a research note.

The benchmark EUA contract was trading at around 9 euros ($12.00) a tonne on Friday.

A price of at least 15 to 20 euros could easily be reached by year-end if the set-aside plan is approved in the next few months, Lawson Steele, utilities analyst at the bank, told Reuters.

The EU's emissions trading scheme (ETS) caps the emissions of factories and power plants in the 27-nation bloc, forcing them to buy carbon permits called EU Allowances (EUAs) to cover their emissions output.

Earlier this week, EU politicians backed a proposal to withhold an unspecified number of carbon permits from the ETS from 2013, paving the way for the EU Commission to intervene in the market to prop up low prices caused by over-supply and eurozone economy concerns.

Before it can become law, the plan still needs approval from the EU Parliament and governments. It also left open the question of how many permits could be withheld, how and when it would be done and whether it would be permanent or temporary measure
"The market is heading into a surplus of permits in excess of 1.6 billion tonnes (about 900 million tonnes EUAs and 700 million tonnes U.N.-carbon credits)," the bank said, compared with annual emissions of around 2 billion tonnes.

"Without outside help, the market will take until 2018 to work off the excess, we estimate," it added.

A price rally would impact power markets. In markets where coal is predominant, like Germany, a 1 euro change in the carbon price would translate into a 0.96 euro per megawatt hour power price - nearly a 1:1 ratio, the bank said.

"The German 2013 forward baseload price stands at 53 eur/MWh. In markets where gas is the more frequent price-setter, like the UK and Spain, the impact is about 0.5:1," the bank said.

This would make little difference to thermal generation as the carbon cost is passed onto the power price, but it would make a difference to nuclear and hydro plants, and to a lesser extent wind.

"For those technologies, there are no additional costs and all the revenue flows through the profit and loss account."

The bank estimates that a 5 euro change in the carbon price would raise earnings per share by 10 to 15 percent for Fortum and Verbund, by 7 to 10 percent for E.ON , RWE and CEZ and by less than 5 percent for Iberdrola, GDF Suez, Centrica , International Power, Endesa and Gas Natural.