Fuel for Thought – Jan 13th13 Jan, 2012
EU carbon permit set-aside: The principle behind a ‘cap and trade’ emissions market is to fix an allowance ‘quota’ and let a freely floating price determine how this volume will be achieved. But it seems increasingly clear that many EU member states are uncomfortable with a carbon price outside a certain band. A price that is too low fails to provide a meaningful signal for investment in carbon reduction. A price that is too high sits uncomfortably with business and industry particularly in a weak economic environment. The current price of below €7/t has spurred plans for intervention to temporarily withhold supply of allowances. While a large enough intervention may provide price support in the short term, the uncertainty introduced by temporary intervention of this nature is not consistent with the development of a credible emissions market. Patching over structural problems with the EU ETS in this way comes with the cost of significantly increased investor premiums to compensate for regulatory risk.
USD rally impact on fuel prices: A pronounced rally in the US dollar against European currencies over the last few months looks to be challenging a strong downtrend that has been in place since 2009. The fall in the euro and sterling against the dollar has been driven by the impact of the debt crisis on growth prospects, increasingly aggressive monetary policy from the European Central Bank and a general scramble for dollars as risk aversion bites and liquidity contracts. As a consequence Brent crude in EUR terms is testing the level it reached at the peak of the commodities boom in 2008. The impact of a USD rally in supporting European coal prices may threaten the recovery of dark spreads that coal generators have enjoyed through 2011. USD strength has a less direct impact on European gas hub pricing, but supports a continuation of the divergence between oil indexed contract prices and spot gas prices.
European LNG imports sluggish: A mild winter, slowing economic growth and a significant premium of Asian LNG prices over Europe have led to declining levels of deliveries into European LNG terminals over the last year. The fall in Spanish LNG demand has been particularly pronounced (around 20% yoy) as industrial demand has slowed and pipeline imports have increased as a substitute for imported LNG. Spain’s declining imports may mean that the UK is now the world’s third largest importer of LNG (after Japan and South Korea). The UK has retained a steady flow of LNG imports from Qatar and is attractive for LNG traders and producers because of its robust spot and forward market liquidity relative to continental European markets.
Picture of the Week:
A dramatic picture of the Datong coal fired power station in China. Despite a tripling of solar capacity last year and substantially increasing wind and hydro capacity, the country is struggling to cap the growth of generation from coal. China will soon account for over half the coal burned on the planet. Earlier this week the director of the National Energy Administration called for an absolute cap of 4.1bn tonnes of coal equivalent per year by 2015. If adopted this would be the first environmental constraint that didn’t explicitly consider the impact on economic growth (previous carbon intensity targets have been specified relative to economic growth).