In March, we forecast a carbon price drop from €72 /tCO2 to ~€70 /tCO2. The price did fall to €70 /tCO2 due to wind output which, although lower in absolute terms, increased relative to the seasonal average, which lowered fossil-based power needs. This was in combination with low power demand as the economy braced itself against global macro uncertainty resulting from rising trade tensions. Some gas-to-coal switching took place, given relative coal and gas prices, which added to EUA demand, but the drop in power demand prevailed and decreased the carbon price.
As indicated, wind output increased in March when factoring in seasonality, lifting the wind share of total power. This recovery is expected to continue into April, with wind speeds forecast to rise over the next ten days to above the seasonal average. In addition, higher coal prices are expected to reverse some of the gas-to-coal switching which took place in March and both dynamics will lead to lower emissions and lower demand for EUA.
Warmer-than-average temperatures are forecast for April and along with weak economic prospects – indicated by low steel profitability and poor economic growth (n.b. see the Global Economic Outlook for more) – power demand will remain low, dragging down the need for fossil power even further. Given power demand was already very low in March, the expected out-turn for April will have minimal differential impact on EUA demand.
However, there are downside risks given global macro-economic uncertainty and the possibility of wind output remaining higher for longer. Nuclear and hydropower will fall again in April, but this is expected due to seasonality and neither will significantly influence EUA demand.
With these factors, we forecast the carbon price will drop in April. CRU Online subscribers can access the full report here, otherwise please speak to our sales team to access more in-depth information from CRU.
Recovering wind will reduce fossil power generation
Forecasts over the next ten days predict that wind speeds will rise to above seasonal average levels and our base case carbon price forecast assumes wind output will be above seasonal average levels for the month. This will reduce requirements for fossil-based power and put downwards pressure on the carbon price. There is downside risk to our price forecast if wind speeds remain at above average levels for the whole month.
In March hydropower output was below the typical levels for the month, and reservoir levels also declined, currently resting below average levels. Predictions indicate that rainfall will be within average levels. However, due to low reservoir levels, it is anticipated that hydro output will remain below average throughout April. As a result, hydropower will have minimal impact on EUA demand and the carbon price.
DATA: WindEurope, CRU Sustainability; NOTE: the cut-off date of the data used in the blog post is 24th March 2025
Gas-to-coal switching reversed
Gas-to-coal switching continued in March, which was unexpected given that gas prices dropped further, relative to coal. However, for April, we expect gas use will increase relative to coal as the prices of the latter are expected to rise, lowering the relative price of gas. Along with an overall drop in fossil fuel use, caused by the increase in wind production and low power demand, this will put downwards pressure on EUA demand.
There are further downside risks that gas prices might fall, or coal prices could rise further than expected, which may lead to an added increase in gas use with a concomitant lower demand for EUA.
Low power demand continuing
Power demand was low in March even compared to the previous month which showed poor power demand, considering seasonality. With warmer-than-average temperatures expected and a poor economic outlook, power demand will remain low in April. However, we think this will have minimal differential impact on the carbon price as power demand is already very low. There is a downside risk if temperatures are warmer than expected or if economic activity drops further in the current uncertain environment, which will decrease industrial activity further.
Nuclear output will continue decreasing
Nuclear output decreased in March, in line with historical precedent, and is fully expected to continue to fall in April. With no news to suggest a different trajectory, we anticipate nuclear power will have minimal impact on the carbon price.
If you want to hear more about carbon market forecasts and our short-, medium- or long-term carbon price forecasts provided or to request a demo as part of CRU’s Sustainability and Emissions service, please email us at sales@crugroup.com – we’d be happy to discuss this with you.
These and other economic developments that impact commodity markets are discussed with CRU subscribers regularly. To enquire about CRU services or to discuss this topic in detail, get in touch with us.
