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LNG glut to dampen European carbon price rises

LNG glut to dampen European carbon price risesLONDON: A glut of liquefied natural gas (LNG) over the next couple of years is likely to drive down power sector emissions in Europe, cutting demand for carbon permits and keeping a lid on prices, analysts said as they slashed price forecasts.

“We think a bearish cloud is on the horizon … as Europe accommodates the increased global LNG supply by pushing gas into power at the expense of coal,” analysts at Energy Aspects said in a monthly research note published this week.

The analysts cut their price forecasts for EU carbon allowances (EUAs) in 2019 by 44 percent to 10 euros a tonne from 18 euros/tonne and their 2020 price forecast by 33 percent to 14 euros/tonne from 21 euros.

The EU Emissions Trading System (ETS) regulates around half of Europe’s output of heat-trapping gases by forcing more than 11,000 power plants, factories and airlines to surrender a carbon allowance for every tonne they emit.

Coal-fired power stations emit almost double the amount of carbon dioxide as gas ones, making them large buyers of carbon credits under the scheme.

Both coal and LNG are oversupplied after high prices in the past decade triggered investments in new projects and expansion plans but gas is expected to grab more market share from coal over the next few years particularly where governments penalise coal via taxes or emissions trading schemes.

The analysts said imports of lower cost gas will dampen the impact of a Market Stability Reserve (MSR) introduced by the European Commission to from 2019 to remove some of the surplus of carbon allowances generated by recession that has depressed prices in the scheme.

Analysts at Thomson Reuters Point Carbon agreed falling gas prices could lead to weaker than anticipated carbon prices although they currently forecast higher gas prices in Europe than Energy Aspects and less fuel switching away from coal.

“If we were to change our gas price forecast significantly down in relation to coal prices, we would also see a drop in our carbon price forecast,” said analyst Marcus Ferdinand.

Thomson Reuters Point Carbon have nominal price forecasts of 17.3 euros/tonne in 2019 and 18.3 euros/tonne in 2020.

Benchmark EUAs currently trade around 8.50 euros/tonne.

Copyright Reuters, 2015

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