Carbon Credits Jump Most in a Year as Utilities Buy, EU Squeezes Supply

By Mathew Carr and Catherine Airlie - Apr 21, 2010 7:17 PM GMT+0200

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A file photo shows power lines and pylons standing in the darkening sky near Cologne. Photographer: Wolfgang von Brauchitsch/Bloomberg

A file photo shows smokestacks and cooling towers emiting smoke and water vapor at the E.ON-owned Scholven coal-powered electricity plant near Gelsenkirchen, Germany. Photographer: Wolfgang von Brauchitsch/Bloomberg

The price of polluting jumped 15 percent in Europe this month, the biggest gain in a year, as utilities including E.ON AG amass carbon credits and regulators restrict future supplies.
E.ON, the largest power producer in Germany, needs European Union carbon futures now for generation in 2013 and beyond. It’s purchasing United Nations credits, a less-expensive alternative for complying with EU caps, to “minimize its exposure,” said Eliano Russo, E.ON’s head of carbon supply.

Europe designed the world’s biggest cap-and-trade program to limit greenhouse gases by doling out fewer allowances each year through 2020. While an unforeseen recession derailed plans set before 2008 to create a shortage of permits, an economic rebound and EU squeeze on allocations for phase three, starting in 2013, has utilities scrambling for longer-dated futures.

“The market is long today but will definitely be short in the future,” Russo said in an interview. “Whatever happens at the global level, the EU emissions trading system will be in place until at least 2020.”

Carbon futures for delivery this December traded today on London’s European Climate Exchange at 14.66 euros ($19.64) a ton, near their highest since December 2009. The contract so far this month is up four times as much as oil’s 3.5 percent gain.

E.ON, which hedges about 40 percent of its electricity three years before it’s delivered, said in a regulatory submission last year that emitters will probably spend about 24 billion euros annually on carbon auctions starting in 2012.
Near-Term Glut
The Dusseldorf-based utility, with 150 million euros budgeted to curb greenhouse gases in developing countries, is applying its European technology to cut emissions from rubbish dumps in Vietnam and China and power stations in Indonesia.
E.ON is among investors shifting their focus from a near- term glut of permits to a likely shortage after 2012. Carbon contracts outstanding for 2012 delivery jumped 10 percent in the past month to a record 165,532 contracts, 2.7 percent more than open interest for the 2010 benchmark, according to ECX data.
The concentration of longer-dated carbon contracts stands in contrast to the oil market, where traders have four times as many bets on 2010 contracts as they do for December 2012, according to New York Mercantile Exchange figures. What’s more, open interest in CO2 exceeds that of oil for the December 2012 contract.
Immediate Auctions
The EU regulator is resisting a call from utilities to schedule immediate auctions for CO2 permits valid from 2013 and beyond, said Mark Lewis, a Paris-based analyst for Deutsche Bank AG. Without those futures, utilities are forced to buy current allowances, he said. Generators generally sell power forward only when they can also buy fuel and carbon allowances to lock in the profit.
EU carbon prices may rise to 30 euros a ton in 2012 if the regulator sells significantly less than about 600 million tons in “early” auctions, Trevor Sikorski, a London-based analyst at Barclays Capital, forecast yesterday in an e-mailed note.
About 11,000 factories and power stations are in the EU program. Emitters with spare permits can sell them, while those that exceed their allocations can buy them on the open market or at auction. The knowledge that supplies will shrink as the EU distributes fewer allowances going forward is spurring demand for carbon now, said Laurent Segalen, the London-based head of commodities and environment at Nomura Holdings Inc.’s international unit.
“Emitters with surplus allowances seem unwilling to sell them at current price, while utilities are buying,” Segalen said. “All this is a correct configuration for a bullish market, which can go toward 20 euros.”
Insufficient
Utilities are concerned “there may not be a sufficient number of EU allowances to cover utilities’ needs to hedge for the years after 2012,” E.ON Energy Trading AG spokesman Jamee Majid said by e-mail on April 19.
The carbon price rebound from as low as 12.41 euros in January comes even as cap-and-trade stagnates outside Europe. Bloomberg New Energy Finance estimates the global carbon market will be valued at $1 trillion by 2020, 28 percent less than previously forecast, as the U.S. Senate jettisons a House proposal to cap and trade emissions from oil refineries and most factories.
“Cap-and-trade by definition is dead,” NRG Energy Inc. Chief Executive Officer David Crane said in a March 4 interview. The comments from the Texas power producer echoed similar words from Lindsey Graham, a South Carolina Republican working with Massachusetts Democrat John Kerry and Connecticut independent Joseph Lieberman on the Senate energy bill.
‘Work in Progress’
While the bill is “a work in progress,” it likely will include a cap-and-trade system only for utilities, Graham told reporters in Washington on March 26. The senators are scheduled to unveil the bill on April 26.
In Europe, carbon markets had to overcome recession, regulatory missteps and the failure of global climate talks. In one of the most recent setbacks, the EU had to revise its rules after Hungary sold “recycled” permits that had already been counted once before in Europe, halting spot trading on the BlueNext SA carbon exchange in Paris for three days last month.
Carbon markets also sagged after last year’s climate summit in Copenhagen. UN envoys there failed to extend the 1997 Kyoto Protocol, whose current targets expire in 2012.
“We were on the cardiac table,” Brett Genus, a London- based carbon broker for Evolution Markets Inc. said April 15 by phone. “Now we’ve got a heart beat again.”

Source of publication - By Mathew Carr and Catherine Airlie - Apr 21, 2010 7:17 PM GMT+0200
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