London, 17 June (Argus) — The European Parliament's environment committee will vote on an amendment to a proposal to back-load EU emissions trading scheme (ETS) allowances on 19 June, but upside for forward prices in the European wholesale power market is likely to be limited even if a compromise is reached.
The committee will vote on an amendment to the back-loading proposal, after members of the European Parliament (MEPs) voted against the measure in a first vote on 16 April. The amendment is expected to pass and the revised back-loading proposal will then go to parliament's plenary session in Strasbourg, France, for a vote in early July. This has given some support to prices in the EU ETS market and, in turn, to the German base-load year-ahead power contract, which recovered from an eight-year low in 14 June's session. But the German power curve is expected to draw only limited support from rising emissions prices should MEPs pass the amended back-loading proposal on 19 June.
Germany's increasing exposure to intermittent renewable power output has weighed heavily on the day-ahead and prompt markets, and put pressure on contracts further out. The country's installed solar power capacity stood at around 33.5GW at the end of April, rising by around 6.4GW on the year. And its wind power capacity rose by 2.4GW to 31.3GW last year.
Solar and wind power capacity is expected to continue to rise steadily this year. This means that renewable power generation will increasingly crowd out thermal power plants in Germany's merit order, and limit the impact of rising EU ETS allowances prices should MEPs pass the amendment.
Germany is expected to commission several highly efficient hard-coal fired plants over the next 18 months, with a total of around 6.4GW due on line by the end of 2014. The plants will have an efficiency of over 45pc, limiting their CO2 emissions and increasing their competiveness relative to existing coal-fired units and adding to oversupply in the German power market.
The upside for the German year-ahead contract will also be limited because emissions prices are not expected rise enough after any future back-loading compromise to increase the attractiveness of gas-fired generation over coal burn. Emissions allowances are not expected to rise to more than €5-6/t CO2 equivalent (CO2e) should MEPs pass an amended, but watered-down version of the back-loading proposal. Emissions allowances for December 2014 delivery closed at €4.96/t CO2e on 14 June. Emissions contracts for delivery in 2014 were trading around €5/t CO2e before the previous vote, and fell to a low close of €2.91/t CO2e the day after. The contact has not finished above €5/t CO2e since 28 February and €6/t CO2e since 15 January.
This will not be enough to result in a structural change in the German merit order, where profit margins for coal-fired generation are significantly higher than for gas-fired power production. The recent weakness of the coal market, where API 2 coal swaps for 2014 delivery fell to 39-month low in week 24, and the relative strength of European gas prices increase the attractiveness of coal over gas-fired power generation. Emissions prices would need to be around €30/t CO2e at current fuel prices before the most efficient gas-fired plants would be competitive with older coal-fired units.
The vote is expected offer limited support to the neighbouring French market. The role of coal-fired generation in France is expected to decline steadily over the coming years with the closure of 3.2GW of coal-fired units in 2014 and 1.9GW in 2015, and rising imports of renewable power.
In the Dutch market, the opening of 3.4GW of highly efficient coal-fired power plants in late 2013 and early 2014 is expected to weigh heavily on the far curve from the second quarter of 2014 onwards, as these new units replace older gas-fired ones in the merit order.
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