UK ETS auction demand holds firm in August

Allowance volume cuts in UK EU emissions trading system (ETS) auctions this month exceeded the fall in demand over the holiday period amid an increase in thermal power generation in the region, pulling bid-to-cover ratios for the sales to their highest this year.

The second and final August auction of UK-issued carbon allowances under the EU ETS took place this morning and produced a bid-to-cover ratio of 1.87. This was the highest of any UK auction this year, and takes the average ratio for UK sales this month to 1.83, also the highest for any month since UK auctions resumed in March following their temporary suspension in 2019 owing to Brexit-related uncertainties.

A total of 2.87mn permits were on offer in the sale, as volumes across all EU ETS auctions are halved annually in August in anticipation of lower holiday demand. But the sale drew bids for 5.36mn allowances, not far below the 5.73mn on offer in auctions from earlier months.

The EU's practice of halving volumes tends to overcompensate for the fall in demand over the period, and a similar effect has also been seen in EU-wide auctions this month. Bid-to-cover ratios in such sales have averaged 2.06 in August, putting them on track for their highest monthly average since February.

But stronger fundamentals have also helped to support spot demand for allowances this month. Lower wind generation in key European power demand hubs including the UK and Germany has increased the call on thermal plants to meet power demand, encouraging higher compliance purchasing among emitters.

Output from wind farms has covered just 14pc of the UK's power demand this month, putting it on track for its lowest share in the country's generation mix since May 2019 and boosting the share of gas-fired plants in the power mix to roughly 46pc. UK power sector emissions have averaged 204g/kWh in August, which if maintained will be the highest average since November last year.

And while overall power demand in the UK has remained steady on the month, UK auction supplies are not solely made available to UK parties, meaning that higher power demand in other European countries owing to increased air-conditioning use might have added to buying interest in the sales. Temperatures in Berlin have pulled as much as 8°C above the seasonal norm this month, averaging around 3°C above.

The two UK permit auctions to have taken place in August cleared at €26.69/t of CO2 equivalent (CO2e) and €26.60/t CO2e, respectively, producing revenues of around €153mn in total for the UK this month. These were the second and third-highest clearing prices in UK auctions this year after the 8 July auction, which produced record revenues of roughly €162.9mn.

By Victoria Hatherick

UK EU ETS auctions bid-to-cover ratios