EU ETS price slump yet to boost coal plant margins
Fears over the economic impact of the continued spread of the coronavirus pandemic have left EU emissions trading system (ETS) allowance prices this month on track to record their steepest month-on-month decline since the start of the carbon market's full launch in 2008.
But the European coal market's resistance to the downside seen across global markets so far has meant that the carbon market's slump has done little to improve profit margins for coal-fired plant operators in the coming months.
The EU ETS market's front-year contract dropped below the €16/t of CO2 equivalent (CO2e) mark for the first time since July 2018 during trading earlier today, with the product now having shed more than a third of its value since the end of February. This has left the European carbon market on track to record its steepest month-on-month price decrease since April 2006, which fell in what was just a pilot trading phase for the EU ETS before the market's full launch in 2008.
The market's steep losses have come as the coronavirus has prompted a significant reduction in power demand across Europe this month, amid a general economic slowdown and as governments have encouraged remote working where possible. With this having coincided with an unseasonably mild end to the winter period, the requirement for the most emissions-intensive power stations to operate has been significantly reduced, and this is expected to result in a marked fall in the volume of EU ETS allowances required to cover this month's emissions under the scheme.
German coal and lignite-fired power output have averaged only about a combined 12.9GW in March so far, compared with 15.5GW in the same month last year.
Weaker economic conditions are also expected to result in a decline in European industrial activity over the coming months, further limiting related demand for EU ETS allowances, while the coronavirus outbreak has also prompted both governments and airlines to roll out extensive limitations to air travel that are expected to result in a sharp drop-off in aviation-sector emissions under the European carbon market this year.
Further price losses for EU ETS allowances in the coming weeks will risk completely wiping out the historic gains recorded over the past two years. Market values more than tripled over an 18-month period that began in early 2018 and peaked when front-year delivery permits under the scheme reached highs of close to €30/t CO2e last July.
The market's strength has played a significant role in reducing the profitability of coal-fired power production in Europe over this period, helping swing generation economics in Germany in favour of gas-fired facilities that produced more electricity than coal-fired units for the first year on record in 2019.
Lower carbon prices seen this month have raised fears among some environmental groups that a rise in power-sector coal burn may be triggered.
But while the carbon market's losses this month have allowed projected profit margins for German coal-fired generators to widen narrowly, spreads remain at levels that are unlikely to result in any resurgence in production in the near term, with front-quarter spreads still virtually unchanged from where they ended in February.
The expected base-load clean dark spread for a 38pc-efficient German coal-fired unit in the third quarter of this year was calculated at minus €7.65/MWh at yesterday's close, compared with minus €7.55/MWh at the end of February, while the projected year-ahead spread at this efficiency remains at only about €0.55/MWh.
This has come as the effect of the carbon market's losses for clean dark spreads has been offset largely by resistance in European coal swaps values, which are now up marginally on the month. The API 2 contract for the second quarter of this year ended yesterday at $50.25/t, which was about $1.65/t higher than where it stood at the end of February, bucking the trend seen across global energy markets amid support from the physical coal market ahead of an expected production strike in Colombia.
The coal market's resistance means that, at current price levels for European power and fuels markets, the EU ETS front-year contract's value would need to fall by roughly half again from current levels to about €8/t CO2e to take a 38pc-efficient coal-fired unit above a gas-fired plant of 55pc-efficiency or lower in the expected German base-load power sector merit order for next year.
With there appearing to be limited near-term fundamental support for the carbon market as the end of winter approaches, market participants have said the spread of the coronavirus will continue to be the predominant price driver for the foreseeable future, with a period of sustained weakness looking likely.
But the EU ETS continues to sit against a backdrop of potentially supportive supply-side factors in the longer term, including German government plans to cancel a share of allowances alongside coal-fired plant closures, a planned review of the effectiveness of the scheme's market stability reserve (MSR) next year, and the EU's review of its 2030 emissions reduction target later this year, meaning that long-term prospects for the market do remain positive.
If market prices are unable to recover from the price falls early this year, the EU could feasibly opt to accelerate the MSR's supply absorption rate or tighten the market's overall supply cap in an effort to provide support and return values to the levels that would be required to deliver any new 2030 emissions cut goal that is set.
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Australia’s ANZ bank to end new gas, oil lending
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Sydney, 9 May (Argus) — Australia-based bank ANZ has updated its oil and gas policy, with it to no longer provide direct financing to new or expanding upstream oil and gas projects. The bank declared its new policy as part of its 2024 half-year results released on 7 May, saying it would also decline to integrate new customers primarily focused on upstream oil and gas. ANZ said that while it believes gas plays a "material and important part in meeting Australia's current energy needs and will do so for the foreseeable future", it will instead collaborate with energy customers to help finance their transition away from fossil fuels. The bank has a 26pc greenhouse gas (GHG) emissions reduction by 2030 goal and committed in 2020 to exit all lending to companies with exposure to thermal coal, either through extraction or power generation by 2030 as part of lending criteria to support the 2015 UN Paris climate agreement target of net zero GHG emissions by 2050. ANZ has however promised to consider exceptions on a case-by-case basis, if any national energy security issues arise. Australia's banks have been under sustained pressure by environmental groups to exit lending to fossil fuel projects, as upstream gas firms also face shareholder rebellions over climate action plans. But Australia's federal government has conceded gas will likely be needed post-2050 as a firming power source for renewables and industrial feedstock for some sectors. But investment in upstream exploration has been extremely low in recent years, with imports of LNG likely in southern Australia from about 2026 to meet demand for industrial users and power generation. By Tom Major Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
LNG imports loom as Australia unveils gas strategy
LNG imports loom as Australia unveils gas strategy
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EPA sets new oil and gas methane reporting rules
EPA sets new oil and gas methane reporting rules
Washington, 7 May (Argus) — Federal regulators have updated emissions reporting requirements for oil and gas facilities as they prepare to implement a methane "waste" fee for the industry. The US Environmental Protection Agency (EPA) on Monday finalized new rules it says will improve the accuracy of data from the oil and gas sector under the federal greenhouse gas emissions reporting program. Oil and gas facility owners and operators will be required to estimate emissions from additional types of equipment under the rule, and they can draw on newer technologies, like remote sensing, to help estimate emissions. "EPA is applying the latest tools, cutting edge technology, and expertise to track and measure methane emissions from the oil and gas industry," agency administrator Michael Regan said. "Together, a combination of strong standards, good monitoring and reporting, and historic investments to cut methane pollution will ensure the US leads in the global transition to a clean energy economy." Data to support new fee The revisions to the "Subpart W" reporting requirements will be used to determine the amount of methane that will be subject to a "waste emissions charge" created by the Inflation Reduction Act. Under the law, the charge will be calculated based on the annual data that about 8,000 oil and gas sources are now required to report. The charge will begin at $900/t for 2024 methane emissions above a minimum threshold using current measurement data. It will then rise to $1,200/t in 2025 and $1,500/t in subsequent years. Industry officials had raised "serious concerns" about several aspects of the original proposal , warning it could lead to inflated emissions data. "We are reviewing the final rule and will work with Congress and the administration as we continue to reduce GHG emissions while producing the energy the world needs," American Petroleum Institute vice president of corporate policy Aaron Padilla said. The industry group previously said it will ask Congress to repeal the fee, which is only likely to occur if Republicans win control of the White House. Data collected since 2010 Oil and gas facilities have reported emissions under Subpart W since 2010. To simplify reporting, operators often count the equipment they have deployed, and use industry-wide averages to estimate emissions, in addition to other direct and indirect measurements. The industry has argued the Subpart W data is not accurate enough to collect the methane charge, which is expected to cost operators more than $6bn over the next decade. Environmental groups have had their own criticisms of the data, which they say omits vast amounts of emissions such as those from "super-emitter" events and poorly maintained flares. The final rule seeks to respond to some of those concerns by relying on updated emission factors, incorporating additional empirical data on emission rates, collecting data at a more granular level and relying on remote sensing technologies to detect large emission events. EPA also revised Subpart W to include more types of sources, including produced water tanks, nitrogen removal units and crankcase venting. The final rule also sets a threshold of 100 kg/hr of methane for requiring the reporting of emissions from "other large release events." The new data rules will take effect on 1 January 2025 and will first apply to reports submitted in early 2026 for next year's emissions. EPA is allowing the use of the new methodologies for calculating 2024 emissions, but operators can still use the existing rules. By Michael Ball Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
UN carbon market enshrines appeal, grievance processes
UN carbon market enshrines appeal, grievance processes
Berlin, 3 May (Argus) — The much-debated procedure for appeal and grievance processes for people negatively affected by carbon mitigation activities was finally passed this week by the regulator of the future UN carbon market. The supervisory body of the Paris agreement crediting mechanism, under Article 6.4 of the Paris climate agreement, called the appeal and grievance procedure a "crucial step towards developing a new international carbon market that sets the benchmark for high integrity carbon credits". The mechanism is expected to be passed at the UN climate summit Cop 29 in November in Azerbaijan. The appeal and grievance procedure sets the fee for filing an appeal at $30,000, compared with the $5,000 fee suggested in earlier iterations, which was seen by some supervisory body members at this week's meeting in Bonn, Germany, as "too low for project developers, but too high for vulnerable groups". The fee will be waived for appellants who are appealing for vulnerable groups, such as local communities and indigenous peoples. But the supervisory body failed to pass the mechanism's long-awaited sustainable development tool, instead launching a call for input. Members had criticised the lack of a validation and verification process for the tool, and its unclear delimitations, given that some of its objectives will be addressed in future rules on carbon removals activities or the carbon reduction methodologies under the mechanism. Making the tool mandatory was demanded by both countries and non-governmental organisations at recent Cop summits, with the lack of a grievance process and sustainable development tool part of the reason why the pricing mechanism was not finalised at Cop 28 in Dubai last year. The sustainable development tool of the Kyoto Protocol's clean development mechanism (CDM), which the new mechanism broadly aims to replace, was never made mandatory. A total of 1,796 carbon mitigation activities have now requested to transition from the CDM to the new mechanism, of which more than 300 have not yet provided full details and could miss the 31 August deadline, the UN's climate arm said in Bonn. The supervisory body called for an extension of the transition period to 4 November. Work on the new mechanism's registry is also advancing, with the supervisory body agreeing to launch a consultation on the "legal, technical and financial implications of providing functionality for the treatment of financial security interests in Article 6.4 emissions reductions within the mechanism registry". By Chloe Jardine Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
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