ETS players see ‘even spread’ of UK volumes in 2020

The UK's carbon allowances under the EU emissions trading system (ETS) from 2019 will likely be sold "evenly" throughout 2020, market participants and analysts have said, but their views differ on the exact timings for when the supply will enter the market.

Market participants are waiting for confirmation of when auctions of the UK's share of EU ETS allowances will restart. The EU suspended UK auctions at the beginning of 2019 because of uncertainty over whether the country would remain part of the ETS throughout 2019 or crash out of the market under a no-deal Brexit.

But with a no-deal Brexit now appearing unlikely, the UK's auction volumes for both 2019 and 2020 will be auctioned this year. UK sales can restart once the EU and UK parliaments have ratified a withdrawal agreement, which is expected to happen before the end of this month.

‘Even spread'

Most market participants and observers Argus spoke to expect the UK's 2019 auction volumes to be distributed evenly throughout allowance sales in 2020.

This scenario is more likely than a "front loading" approach, which would see the UK's 2019 allowances sold before the EU ETS compliance deadline at the end of April, they said.

"The auction calendar needs to have as minimal impact on allowances prices as possible. Front loading would not achieve that objective," UK-based carbon consultancy Redshaw Advisors' head of trading and risk management Tom Lord said.

Investment bank Berenberg's senior utilities analyst Lawson Steele agreed that UK allowances are likely to be spread over the whole of 2020. Multiple EU ETS traders said they also hold this view.

Pushing the UK's 2019 permits into the market ahead of the April compliance deadline could cause a drop in ETS prices, as the market may struggle to absorb the supply in such a short time. This would not square with the European Commission's aim to support the carbon price and maximise allowance auction revenues, Steele said.

A senior analyst at environmental commodities trading firm Vertis Bernadett Papp said that "in theory" UK firms should be granted access to the country's 2019 allowance supplies ahead of the April compliance deadline for that year's emissions. But she also concurred that the EU would be unlikely to support a move which could cause European carbon prices to dip.

"UK installations are entitled to have access to the 2019 EUAs [before] the end of the compliance season" Papp said. "That means that the 2019 volume should be auctioned in a very short time between mid-February and the end of April. [But] everybody recognises that the issuance of this huge volume would have a significant negative effect on the carbon price, which is not in the interest of the EU and the UK."

Other analysts believe that selling the 2019 volume of allowances within the early part of this year remains a possibility. UK consultancy Energy Aspects' head of natural gas and carbon Trevor Sikorski expects the UK to sell its 2019 auction volumes over the February-April period, and then sell its 2020 auction volumes in May-December. This would mean the volumes are "not quite evenly spread, but not massively front loaded", he said.

And carbon market advisory firm ClearBlue expects the UK's auction volumes to all come to market before the EU ETS compliance deadline. This is based on comments made by a UK government representative last year, ClearBlue managing director of markets Nicolas Girod said.

Restart date, volumes

The earliest date that UK auctions could restart is mid-February. In previous years UK sales have been held on alternating Wednesdays, rotating week by week with auctions of Polish-issued permits.

The UK will need to agree an auction calendar with the European Commission, which it can only do after the Brexit withdrawal agreement has been ratified. The Intercontinental Exchange, which hosts auctions of UK allowances, plans to publish the UK auction calendar two weeks before the sales begin.

Analysts expect the UK to auction between 110-135mn EU ETS allowances this year — a combined total that includes the country's auction shares for both 2019 and 2020.

The amount of UK-issued permits that would have been auctioned last year remains unclear, but analysts suggest the figure is likely to have ranged from 55mn-70mn permits.

Free allocation

The UK will additionally issue its 2019 share of free allowances this year, which the EU also withheld owing to Brexit uncertainty.

The government had planned to issue 49.7mn free allowances during 2019.

Views are mixed on when this supply will come to market. Vertis, ClearBlue and Energy Aspects expect the UK to distribute these allowances at the same time as it gives out 2020 supplies, likely in February.

But some traders and analysts said they expect the UK will release its free permits as soon as it can — if possible, before 2020 free allocation. "I do not see the upside to waiting for the 2020 free allocation to go out," Tom Lord said.

By Kate Abnett