<article><p class="lead">The EU emissions trading system (ETS) allowance market recorded its steepest week-on-week price fall since early October during trading last week. </p><p>This came after a leaked draft German government report showed a plan to postpone a decision on whether to cancel EU ETS permits alongside coal plant closures, and amid forecasts for much milder weather conditions in late November than had previously been expected. </p><p>The EU ETS December 2019 contract ended week 46 at a near five-week low of €23.83/t of CO2 equivalent (CO2e), having shed a combined €1.04/t CO2e over the course of the week — the product's steepest week-on-week fall since the one beginning on 30 September. </p><p>This was the carbon market's second consecutive weekly price fall and left the front-year contract some €1.78/t CO2e below its end-of-October value and €1.19/t CO2e lower than where it ended 2018 trading. The market has not recorded a year-on-year price fall since 2016.</p><p>The majority of last week's losses were recorded during the session held on 12 November, when the December 2019 contract shed €0.81/t CO2e on the day. This came after a leaked report accompanying the German government's draft coal phase-out law appeared to identify plans to postpone to 2022 a decision on whether to cancel EU ETS allowances to offset the effect of reduced demand following plant closures. </p><p>A decision on this had been expected early next year. German environment minister Svenja Schulze had <a href="https://direct.argusmedia.com/newsandanalysis/article/1937247">said in July</a> that her department would back permit cancellation, a move that had sent EU ETS front-year values soaring to near record highs of above €30/t CO2e. But it appears that other government departments are reluctant to lose the significant revenues that the sale of Germany's share of EU ETS allowances each year brings. These amounted to more than €2.5bn ($2.76bn) last year. </p><p>Although the draft law on the coal phase-out indicated that Germany will not force closures until 2026, it suggested that financial incentives will be used to encourage plant owners to end operations before this. And an oversupply of EU ETS allowances could consequently build if demand from these facilities is removed.</p><p>In addition to political market drivers last week, the carbon market also came under pressure from a milder weather outlook for the next few weeks, which pulled European fuels and power markets lower. </p><p>Temperatures across key European energy demand hubs are forecast to turn out comfortably above long-term seasonal norms during the final two weeks of this month, which should reduce the requirement for supply from thermal forms of power generation, and consequently spot demand to cover related emissions.</p><p>Weakness in European power and carbon markets last week pulled expected German clean dark spreads for next month narrower, leaving the country's coal units in an even less competitive position with gas. The projected base-load margin for a 38pc-efficient coal unit next month ended the week at around minus €1.65/MWh. In comparison, last year the December clean dark spread at this efficiency ended November at around €4.30/MWh. </p><p>German coal-fired power output has risen from October as expected in November, but remains significantly lower on the year. The country's coal plants have produced an average of around 8GW so far this month, compared with a 10.2GW average in November 2018. </p><h2>Technical picture weakens </h2><p>The carbon market's losses early last week pulled the front-year contract's value down further below key technical support levels, triggering further downside for the market later in the week. The contract ended last week at comfortable discounts to its moving averages on 50, 100 and 200-day bases, while the product's 50-day level was left at a premium of only around €0.05/t CO2e to the 200-day — the narrowest this spread has been since mid-August 2017. </p><p>Moving average crossovers are used in technical market analysis to identify upward or downward price trends. A market's downward momentum can be confirmed when a shorter-term moving average falls below a longer-term one, while a bullish trend is identified when the opposite occurs. And the market could therefore come under further downward pressure this week if the 50-day moving average does slip below longer-term levels.</p><h2>Outlook</h2><p>A return to a full five-day primary market auction schedule this week could weigh further on allowance values. Only four auctions were held last week, owing to the continuing Brexit-related suspension of sales of UK-issued permits, and the absence of fresh supply that this caused on 13 November last week resulted in a slight €0.25/t CO2e gain on that day. </p><p>But lower market prices seen towards the end of last week did draw increased auction demand, with the sale of German-issued permits held on 18 November becoming only the second this month to have achieved a bid-to-cover ratio of above two. And increased supplies this week could be at least partially offset if weaker market prices continue to attract stronger demand from buyers.</p><p><div class="picture"><div><span class="pic_title">EU ETS 2019 weekly price change</span> <span class="units">€/t CO2e</span></div><img src="https://argus-public-assets.s3.amazonaws.com/2019/11/18/euets2019weeklypricechange18112019051147.jpg"></div></p><p><div class="picture"><div><span class="pic_title">EU ETS Dec 19 vs moving averages</span> <span class="units">€/t CO2e</span></div><img src="https://argus-public-assets.s3.amazonaws.com/2019/11/18/euetsvsmovingaverages18112019051158.jpg"></div></p><p><div class="picture"><div><span class="pic_title">German base-load margins</span> <span class="units">€/MWh</span></div><img src="https://argus-public-assets.s3.amazonaws.com/2019/11/18/germanbase-loadmargins18112019051208.jpg"></div></p></article>
