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No End to Power Rout as Carbon Market Vote Fails: Energy Markets

No End to Power Rout as Carbon Market Vote Fails
Electricity for next year, the benchmark contract already trading near an almost eight-year low, may drop a further 4.5 percent through June, according to a Bloomberg News survey, extending an unprecedented eight quarters of losses. Photographer: Balint Porneczi/Bloomberg

Europe’s failure to rescue the region’s carbon market is likely to encourage utilities to burn record amounts of coal, putting power prices in Germany on course for the worst-ever sequence of quarterly declines.

Electricity for next year, the benchmark contract already trading near an almost eight-year low, may drop a further 4.7 percent through June, according to a Bloomberg News survey, extending an unprecedented eight quarters of losses. Coal-fed power generation in Germany rose 16 percent last quarter, Federal Statistical Office data show.

Rising coal consumption in the region’s biggest economy belies a European Union goal of reducing emissions blamed for climate change and stimulating use of cleaner alternatives. The bloc’s Parliament last week rejected so-called backloading, a proposal that would have cut the number of pollution permits to shore up prices, threatening to turn the 27-nation area into a “dumping ground” for coal, according to Jefferies Group LLC.

“The rejection of backloading is negative for power prices and generation of power from gas,” Gareth Griffiths, chief commercial officer of the trading unit of EON SE, Germany’s biggest utility, said at an April 17 conference in Dusseldorf, Germany. “Emission permits would have to be almost 15 times more expensive to incentivize companies to move away from coal burn to gas.”

German year-ahead power may fall to 37.45 euros ($48.86) a megawatt-hour through June, according to the average forecast of six traders and analysts in the Bloomberg News survey. The contract closed unchanged at 39.30 euros today on the European Energy Exchange AG in Leipzig. It averaged about 50 euros in the past 10 years, exceeding 90 euros a megawatt-hour in 2008.

EU Vote

Power and emissions prices plunged after the April 16 vote in the bloc’s assembly in Strasbourg, France, against the proposal to delay the sale of 900 million permits over the next three years and reintroduce them to the market in 2019 and 2020. European carbon for December fell as much as 45 percent to a record 2.46 euros a metric ton on the ICE Futures Europe exchange in London and closed at 2.97 euros today.

“The vote sent a strong signal to U.S. coal producers to further increase their exports to the EU,” Matthew Gray, an analyst for Jefferies in London, said in an April 16 report. If the EU maintains existing climate policies, it will undoubtedly become the global dumping ground for cheap coal.’’

German electricity prices should rise or fall 90 euro cents a megawatt-hour with every euro change in carbon costs, according to Robert Schramm-Fuchs, an analyst in London at Macquarie Group Ltd. Coal emits about twice as much carbon dioxide as gas in power production.

‘Dirty Coal’

German electricity generation from lignite, the most carbon-intensive type of coal, rose 9.8 percent in the first quarter to 40.9 terawatt-hours from a year earlier, while generation from hard coal, a less-polluting grade, increased 23 percent to 36 terawatt-hours, data from the Federal Statistical Office show.

The premium in Germany for power produced by plants burning the fuel rather than gas for next quarter widened to a record 29.65 euros a megawatt-hour on March 28 and was at 26.02 euros today, according to data compiled by Bloomberg.

“Cleaner gas is losing out to dirty coal on pricing economics,” Sabine Schels, an analyst for Bank of America Corp. in London, said in an April 9 report. “Germany is not only boosting utilization rates of coal and lignites, but also building out coal capacity.”

Carbon Windfall

Electricity produced from renewable sources has zero fuel costs and priority to meet demand, according to German law. Coal is the cheapest fossil fuel in power generation, according to UBS AG.

“Hard coal’s role as the power-price setter will diminish and could be increasingly replaced by lignite,” Schramm-Fuchs said. “Cheaper lignite could have more of an impact on the forward power price curve.”

Some EU member measures to cut emissions from power generation may help support electricity prices, according to Gerard Mestrallet, chief executive officer of GDF Suez SA, Europe’s biggest utility by market value. The U.K. has introduced a minimum carbon price, while the Netherlands has imposed a tax on coal.

“We do not expect prices to further materially decrease,” Mestrallet said on an April 23 earnings call. “The implementation of mechanisms to strengthen environmental standards should be considered in order to penalize the most polluting coal plants, which today benefit from a windfall effect linked to the collapse of the carbon market.”

Additional steps to promote renewables at a national level undermine the EU’s internal trade rules, Peter Styles, chairman of the electricity committee at the European Federation of Energy Traders, said by e-mail.

Downward Pressure

Next-year coal for delivery to northwest Europe has dropped 8.8 percent this year to $93.50 a ton, according to broker data compiled by Bloomberg, as producers including Colombia and Australia boosted supply at a time when the region’s economies are struggling amid the debt crisis.

For Martin Brough, a London-based analyst at Deutsche Bank AG who has worked in the energy industry for 10 years, China’s quest to curb pollution may turn the nation, the world’s biggest energy user, into an exporter of the fuel.

That may add “downward pressure on prices,” he said yesterday by e-mail. “Coal prices have been just as significant as carbon in driving power prices down.”

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