EU Carbon Surplus Mostly Already in Utility Hands, Nomisma Says

Jan 20, 2014 8:08 am ET

Jan. 20 (Bloomberg) -- Most of the surplus of European Union emissions permits built up since 2009 may already be held by the bloc’s electricity industry, cutting demand from power plants in carbon auctions, according to Nomisma Energia srl.

Industrial companies may have sold as many as 1.6 billion surplus EU permits out of the estimated 2 billion-metric-ton excess they accumulated by the end of 2012, according to Matteo Mazzoni, an analyst at Nomisma in Bologna, Italy. The consultant advises energy companies, governments and banks.

The EU’s emissions-trading system forces western European power generators from RWE AG to Enel SpA to buy 100 percent of the emissions permits needed to offset their climate pollution each year since 2012. Industrial companies get free allowances to offset their discharges, which have declined since 2009 as the economic crisis reduced factory production and emissions.

“Of the 1.5 to 1.6 billion that were sold, according to our computation, I believe that the largest share, something close to 90 percent, is in utilities’ books,” Mazzoni said in an e-mailed response to questions today. “That’s roughly equivalent to 1 1/2 years’ worth of hedging.”

Utilities sell power as long as three years in advance, and buy fuel and carbon permits at the same time to lock in their margin in a process known as hedging.

“The amount of EU allowances they will need to buy to hedge for later years will be diminished,” Mazzoni said. “They will still need to buy carbon, but less.”

This diminished appetite for carbon may help maintain utility profitability, as power prices are unlikely to increase in the near term amid rapid growth in renewable-energy output, Mazzoni said.

EU nations approved a plan this month to withhold 900 million permits from auctions through 2016 as part of an effort to boost prices that fell to a record 2.46 euros ($3.33) a ton in April. The measure’s approval led nine analysts to forecast prices would jump to 7.75 euros by the end of the year.

--Editors: Dan Weeks, Randall Hackley