EMISSIONS: Power Demand, Renewables to Weigh on EUAs in March

BNEF sees the EUA market slightly bearish in March due to an expected drop by 30% in power sector emissions due to lower demand with milder weather and higher renewables generation.

• Power sector emissions declined by 4% m/m in February on recovering temperatures that reduced electricity demand.
• Solar and wind generation is expected to grow by almost 50% in March m/m, with solar output helping to cut 30% of power emissions.
• Falling demand in the primary market can be expected as 53 million allowances will be auctioned in March, up from 49.5 million last month, and the average auction coverage ratio reduced by 1.6% m/m as of 27 Feb.
• Emissions from industrial production dropped by 10% m/m in Feb, with industrial production and consumer confidence coming to a halt. Uncertainties on the US industrial tariffs for steel and aluminium will likely to weigh on industrial confidence.
• Long positions dropped by 11mn allowances in late February, which was spurred by trends in the EU gas market.
• Open interest of the March contract indicates a bearish sentiment as financials have opted for more puts than calls. However, the relative strength index for EUAs is approaching oversold territory.
• EUAs are likely to remain highly correlated with EU gas prices, with gas declines weighing on EUAs recently after an announcement on a potential adjustment of European gas storage targets and Germany’s discussion of a subsidy to aid gas storages.