Gain an insight on the UK ETS launch and why strong Day Ahead prices continued this week
The first UK ETS auction sees volatility from the off
The first ever UK Emissions Trading Scheme (UK ETS) has now replaced the UK’s participation in the European Allowance (EUA). This differs from the EUA in two significant ways. Firstly, the cap on emissions has been reduced by 5% compared to the European scheme. Secondly, the Cost Constraint Mechanism is much lower at £44.74/mt.This means that if the UK ETS price is higher than this for three consecutive months then the treasury can intervene to reduce these prices. They can do this in a couple of ways, such as bringing future emissions forward or release allowances from the New Entrants Reserve to increase the supply and therefore drop the overall price.
The UK ETS opened for trading at just above £50/mt, as expected, therefore trading at a premium to the EUA scheme by around €7/mt more. This price began to drop throughout the day and settled at £43.99/mt. There was also a drop in the price of EUAs too, because there was a sell sentiment in order to free up funds in order to invest in the UK ETS. Since the auction on Wednesday the UK ETS price has climbed up to £48.75, which is around a €5 premium on the EUA. It is expected that there will be volatility within the UK ETS within the first few weeks of trading before settling around the same price as EUA’s. This is because this market is much smaller and will be reasonably illiquid compared to the EUA. By Midday on Wednesday there had been over 500 times as many lots (1,000 carbon emissions allowance) of EUAs as there were of UK ETS. The UK is drip feeding the allowances, which means that everyone is trying to buy these allowances. There is a second auction coming up, but it is in two weeks time which means there is a huge bottle neck of demand. There are two ways of looking at the premium prices of the UK ETS. On the one hand you could count it as a success, it shows the UK is taking stricter measures to accelerate the transition towards renewable energy. This would suggest that any form of intervention, such as the Cost Constraint Mechanism, would be unlikely because the politicians can claim what a great success this is. However, for the time being, all it is doing is increasing the price for the consumers, with those who are the poorest being disproportionately affected to the point where they may not be able to afford heating and electricity.
Strong prices continue in the energy market due to continued low winds
For the first three days of the week, Day Ahead prices have reached above £100/MWh during every single morning and evening peak this week, due to wind generation continuing to stay well below seasonal norms. Wind generation has rarely broken above 2GW which has been driving these strong Day Ahead prices. This has meant that over 80% of available CCGT volume have been running on Physical Notification, leaving only the more expensive CCGT’s, gas peakers and pumped hydro plants available to be called upon if needed. This has resulted in volatile system prices because it has meant that as soon as the system flips short, system prices shoot up to as high as £150/MWh. On Thursday, wind had a significant ramp up, moving from 1.3GW overnight to 13GW by 4pm. On Friday morning system prices dropped negative between 2am and 5am, almost reaching -£50/MWh. Instead of an under supply of generation that needed to be managed, there is now an oversupply of wind which is having to be bid off and replaced with CCGT’s to stabilise the system.
There has been the most incredible volatility in the forward market this week, in part due to the UK ETS. Last Friday, the Winter-21 Baseload was £84.50, whereas on Thursday it had dropped to £75.45. This was driven by the price of both carbon and NBP crashing. Carbon reached a high of €57/mt this week, before crashing back down to €49/mt. Gas prices dropped by 9p between Tuesday and Wednesday, due to an increase in supply from Norway, before retracing back up by 5p by Friday. UK Winter-21 Baseload dropped by £7.05/MWh over Tuesday and Wednesday, but has since bounced but up to £80.75/MWh, highlighting the impact the UK ETS has had on the whole energy market.
Carbon Trust publish their ‘Flexibility in Britain’ report
The Carbon Trust published their report on flexibility within the British electricity system this week. In this they highlight three main points:
- Embedding greater flexibility across the entire energy system will reduce the cost of achieving net zero for all consumers while assuring energy security.
- Investing in flexibility is a no-regrets decision as it has the potential to deliver material net savings of up to £16.7bn per annum across all scenarios analysed in 2050.
- A more flexible system will accelerate the benefits of decarbonisation supported by decentralisation and digitalisation.
Limejump is completely aligned with these views and is proud to be a part of the flexibility revolution that the UK Energy network is undergoing at the moment in order to help the UK reach its goal of net zero by 2050, if not before!
Outlook for next week
Wind is forecast to stay above 10GW on Saturday but then ramp back down below 4GW. Current forecasts suggest that wind generation will then be volatile for the rest of the week, but averaging below monthly expectations. Following a week filled with overcast and rainy conditions, solar is expected to return towards standard levels of generation. Temperatures also see a slight increase whilst continuing to be lower than usual. We see significant improvements in Nuclear availability which should mean there is a healthier energy stack for next week.