European carbon trading drives up fossil fuel prices

The price of pollution across Europe is about to rise atmospherically, says L. Michael Buchsbaum. And for the first time, new onshore wind and solar can compete directly with the short-term costs of generating electricity from existing coal and gas plants.

Hambach forest treetops with coal plant and wind turbines in background

There’s no reason for new coal to be mined in the Hambacher Forest, pictured here (Copyright L. Michael Buchsbaum)


By the third week of August, the European carbon trading price or European Emissions Allowance (EUA) hit and exceeded €20 for a metric ton of carbon pollution, the highest prices seen in over a decade.

But beyond the EUA prices, the actual costs of generating electricity from both coal and gas have also surged since the beginning of 2017 as imported coal and gas prices have risen. Measured together, over the last 18 months, the UK energy think-tank Sandbag reports that average year-ahead coal generation costs have increased by 72% to €46/MWh, and gas generation costs have increased by 43% to €49/MWh.

Facts now apparently underscore an inherent economic weakness in fossil generation compared to solar and wind: rising fuel and delivery costs that are tied to depletion, speculation-based commodity markets, and now speculation-based pollution markets that drive up prices.

Conversely, over the last 18 months, wind and solar generation costs have been trending in the opposite direction. In Germany’s two most recent renewable auctions, the lowest wind and solar bids were around €38/MWh, almost €12 lower than current gas prices. Thus, according to Sandbag, rising carbon, coal and gas prices now mean that for the first time new onshore wind and solar can compete directly with the short-term costs of generating electricity from existing coal and gas plants.

But that’s just at today’s prices. Since May 2017, the price of EUAs has gone up over 310 percent–over 120 percent just since the beginning of 2018. Driving them higher is the fact that there are only five months to go before the Market Stability Reserves (MSR) start to be reduced by another 24 percent of the outstanding cumulative surplus each year through 2023.

Indeed, the market is now counting down to the biggest supply squeeze since the European Trading System began. And because all utilities and industrial polluters need certificates to cover the greenhouse gas emissions they produce, the price of pollution across Europe is about to rise atmospherically, economically speaking.

Going forward, a recent analysis by Carbon Tracker posits that carbon prices will jump from €25 per ton by the end of this year to €35/ton next year as reforms kick in, jolting fossil generation costs higher. “This is an important milestone for the EU emissions trading system and something that seemed like an impossibility just a year ago,” said Jahn Olsen, an analyst at Bloomberg New Energy Finance. “There was a feeling that the recently finalized reform was the ‘last chance saloon’ for the ETS. The recent price movement is a strong indicator that the EU finally got it right.”

But prices won’t stabilize anytime soon. Carbon Tracker predicts the MSR measures will send them between €35 to €40 a metric ton on average by 2023 with rates spiking towards €50 over the winters of 2021 and 2022.

Moreover, according to an estimate by Berenberg Bank, the foreseeable long-term shortage for CO2 allowances could cause prices to skyrocket to even €100 per ton in 2020. While certainly bad news for consumers locked into buying electricty from coal-dependent utilities, those numbers are terrible for firms like RWE AG, the worst polluter in Europe. Beyond €50 per ton, many lignite-fired power plants (of which RWE has a fleet of over 20 in Germany alone), will in most cases no longer be profitable to operate.

Of course, RWE is doubly wedded to lignite. Beyond burning highly polluting brown coal, it extracts almost 100 million tons of it from its three German mines including the giant Hambach Mine. There, according to RWE, every day, workers can extract 240,000 tons of coal or cubic metres of overburden as the mine’s machines creep ever closer to the ancient, “occupied” Hambacher Forest, site of on-going protests both against RWE and lignite usage in general.

While actively battling protesters in court and delaying any proposed coal exit, RWE, like many European producers, has likely stocked up on emission allowances to forestall their affects. Die Welt newspaper reports that RWE has probably bought enough EUA (at around €7 per unit) to last through 2022. But afterwards, Frank Peter, vice-president of Agora Energiewende, predicts that a rapidly rising CO2 price could swiftly render Germany’s lignite sector unreasonable economically.

One solution for utilities is to switch to gas instead of coal-fired generation since it produces roughly half as much CO2 pollution and only requires about half the allowances needed. But increasing gas demand is already reducing constricted supplies, prices of which are currently trading at the highest level for this time of year in at least two decades. Since January, the year ahead gas price has climbed over 28 percent (coal has also risen 30%).

According to the UK Telegraph, prices in the UK for winter gas are already spiking 50 percent higher than this time last year and prices may rise further. Dutch and German traders are also paying €25.58/MW for winter gas compared to €17.02/MW this time last year. After being depleted from last winter’s “Beast from the East,” replenishing reserves has become more difficult and expensive because North Sea production is dwindling.

In addition, production and fracking in the Netherlands is due to fall by 25 percent compared year-over-year after the government agreed to wind down output from the giant Groningen gas field following earthquakes. While certainly there’s no shortage of fossil gas available worldwide, many suppliers would rather sell into Asia where returns are up to 25% higher for LNG cargoes. Meaning in order to buy fracked LNG gas from the US or conventional supplies from elsewhere, Europeans are going to have to pay ever more.

by

L. Michael Buchsbaum

L. Michael Buchsbaum is an energy and mining journalist and industrial photographer based in Germany. Since the mid-1990s, he has covered the social, environmental, economic and political impacts of the transition from fossil fuels towards renewables for dozens of industry magazines, journals, institutions and corporate clients. Born in the U.S., he emigrated to Germany and Europe to better document the Energiewende.

4 Comments

  1. That’s odd, you’re giving very clear arguments why we DO need the new Nord Stream pipeline. Especially since these two articles came right after each other.

    • Energiewende Team says

      Sorry, which article were you reading? No reasons for Nordstream listed here, rather arguments to switch to renewables

  2. Pingback: Vad är det för fel på en varmare värld? - Klimattjat

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