EU Power-Price Boost on Hold as Traders Doubt Carbon Tax

Updated on
  • France seeking to persuade Germany to introduce carbon tax
  • EDF’s balance sheet would benefit from higher power prices

A jolt in power prices because of the introduction next year of a carbon floor price in France has so far failed to materialize as traders suspect the measure may be delayed or won’t happen at all.

French Environment and Energy Minister Segolene Royal said last month that the nation will introduce a floor price for carbon of about five times current permit levels. The tax would probably boost power prices because of higher running costs for price-setting coal-stations, potentially leading to closures and increased imports.

“A rational market participant wouldn’t have priced in the carbon price floor yet, after all it’s still very uncertain whether such a minimum price will be introduced in France,” said Michael Redanz, chief executive officer of the energy trading unit of EWE AG, a municipal utility in Oldenburg, Germany.

France would like to see its carbon plan implemented across Europe and is seeking to persuade Germany to join it as a front-runner. An 80 percent plunge in the price of carbon permits from a 2008 peak eroded the penalty for burning coal, the most polluting fuel. The European Commission said May 26 it would not support the introduction of a floor price and would prefer to strengthen the Emissions Trading System, its own mechanism for curbing greenhouse gases.

While the French next-year power contract gained 4.9 percent since the May 11 announcement, the increase is probably more a result of a wider advance in energy costs than the new policy. Coal to northwest Europe rose 12 percent, while oil advanced 4.6 percent.

France has five coal units with a capacity of about 3 gigawatts, according to grid operator RTE. They provided about 1.6 percent of the nation’s total production last year.

A 30-euro ($34) tax would increase the running cost of generators needed to cover French peak demand during the winter months. The price of power is set by the operating cost of the most expensive unit used to meet consumption.

An increase in running costs would probably lead to coal-fired units becoming unprofitable and more imports to France from Germany, Belgium and the Netherlands, Bengt Longva, an analyst at Oslo-based researcher Nena AS, said by phone.

Coal Generation

The need for imports from coal-fired stations in neighboring countries “might in the end be used as an excuse not to introduce the tax,” said Roland Vetter, head of research at CF Partners U.K. LLP in London, a trading firm.

While Nena’s Longva says the carbon floor would lead to a “significant increase” in French power prices, Omar Ramdani, head of analysis at RheinEnergie Trading GmbH, said he doesn’t see a “tremendous effect."

About 73 percent of France’s electricity comes from reactors operated by Electricite de France SA, the state-owned utility. The company would benefit from an increase in power prices as executives try to shore up its finances by selling about 4 billion euros of new shares by early next year, deeper cost cuts, and a plan to dispose assets worth 10 billion euros by 2020.

A carbon price floor in France would increase domestic power prices by 5 euros a megawatt-hour, according to Jefferies Group LLC. A 1 euro lift in the price of 2018 electricity would boost EDF’s 2018 earnings before interest, tax, depreciation and amortization by 280 million euros, according to the bank.

“EDF produces the most decarbonated power in Europe,” Emmanuel Macron, France’s economy minister said at a May 25 Senate hearing. “If you increase the price of CO2 you mechanically improve the financial situation of EDF.”

— With assistance by Francois De Beaupuy

(Updates with analyst comment in 10th paragraph.)
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