Despite particularly weak hydropower generation and low nuclear generation due to drought conditions, which will support EUA demand, we forecast that the EUA price will fall to between €84–89 /tCO₂ in the next four weeks from the current €90 /tCO₂. This is primarily due to downward pressure from the weak – and weakening – economic outlook.
Low hydro and nuclear power will support EUA demand
Severe drought conditions across most of Europe have caused hydropower generation to drop significantly. Although precipitation levels will recover over the coming weeks, we expect below average hydro power generation to continue and this will lift EUA demand.
The prevailing drought has also caused nuclear power generation to fall in the past two weeks, because of reduced supply of cooling water, and nuclear generation will remain low over the next four weeks, which will also provide some support to EUA demand.
Less available, higher priced coal to reduce EUA demand
Drought has caused a partial halt of river transportation, impacting current coal deliveries to power plants, and coal supply more generally has become more constrained due to the EU’s embargo on Russian coal that came into effect on 10 August. We expect the situation will continue and coal competitiveness and availability will fall, limiting gas-to-coal shifting and negatively impacting on EUA demand over the next four weeks.
DATA: derived from Bundesnetzagentur | SMARD.de, used under CC BY 4.0
Weakening industrial output further reduces EUA demand
The poor economic outlook had a negative impact on industrial production. To illustrate, European steel and aluminium prices dropped over the past month and both the aluminium price and steel profitability are now at one-year lows due to the weakening demand. We expect more production cuts will ensue and this will put downward pressure on the EUA price.
Stable ETS market policy has neutral impact on EUA price
Although energy prices lifted further in August due to a Russian coal import embargo, we do not expect a weakening commitment to green targets. Equally, we do not expect any more aggressive policy decisions in the near term, as this would add to spiking inflation across Europe. We forecast EU ETS policy will remain stable in the next month and this will have a neutral impact on EUA prices.
The cut-off date of the data is 15 August 2022.
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