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EU ETS
Carbon market outlook
Trevor Sikorski, October 2016
EUA outlook: What challenges?
3 Natural Gas outlook
EUA prices: A rocky road
PRICES (1/1)
Brexit makes all price expectations lower…though forecasts assume BAU
Forecast prices €/t
Forecast against out-turn €/t
Forecasts and out-turn: lots of volatility
4
5
6
7
8
9
Jan 15 Jul 15 Jan 16 Jul 16
EUA spot EA Forecast Q1
0
2
4
6
8
10
12
14
2011 2014 2017 2020
Forecast Forward curve
4 Natural Gas outlook
The supply side has two waves of LNG in the coming five years
NATURAL GAS (1/6)
Source: Company websites, US DOE, Energy Aspects
360+ Mtpa of US projects; 61 Mtpa new or under construction
Wave 2: US – 2016 to 2020 Mt
100+ Mtpa of Australian projects; 66 Mtpa new or under construction
Wave 1: Australia – 2014 to 2018 Mt
0
20
40
60
80
2016 2021 2026
Corpus Christi
Cove Point
Freeport 2
Freeport 1
Cameron LNG
Sabine Pass0
20
40
60
80
2014 2017 2020 2023
Prelude
Ichthys
Wheatstone
Gorgon
Gladstone
APLNG
Queensland
Curtis (BG)
5 Natural Gas outlook
How does the market balance?
Source: Energy Aspects
NATURAL GAS (2/6)
85
20
33
15
40
4
5
3
5
Demand
Mtpa
3 10
Supply
Mtpa
35 45
+50
44
15
+60
90
10
6 Natural Gas outlook
How does the market balance?
Source: Energy Aspects
NATURAL GAS (3/6)
85
20
33
15
40
4
5
3
5
Demand
Mtpa
3 10
Supply
Mtpa
35 45
+50
44
15
+60
90
10
1 - Qatari spot pushed out of Asia
7 Natural Gas outlook
How does the market balance?
Source: Energy Aspects
NATURAL GAS (4/6)
85
20
33
15
40
4
5
3
5
Demand
Mtpa
3 10
Supply
Mtpa
35 45
+50
44
15
+60
90
10
1 - Qatari spot pushed out of Asia 2 - NA pushed out of Asia
8 Natural Gas outlook
How does the market balance?
Source: Energy Aspects
NATURAL GAS (5/6)
85
20
33
15
40
4
5
3
5
Demand
Mtpa
3 10
Supply
Mtpa
35 45
+50
44
15
+60
90
10
1 - Qatari spot pushed out of Asia 2 - NA pushed out of Asia 3 - NA pushed out of Europe
9 Natural Gas outlook
Europe - the residual LNG taker
NATURAKL GAS (6/6)
EU: gas imports versus terminal capacity Mt
Plenty of capacity, with around 160 bcm/y of unused regas—maybe 120 bcm is realistic factoring in maintenance
EU: fuel switching capacity bcm
Plenty of latent power sector demand to stimulate…about 90 bcm in total. Actual realisable around 50-70 bcm
Source: Bloomberg, Energy Aspects
0
10
20
30
40
50
60
70
80
UK
Be
lgiu
m
Fra
nce
Ne
the
rla
nd
s
Lit
hu
an
ia
Po
lan
d
Ita
ly
Gre
ece
Ibe
ria
NW
Eu
rop
e
Unused Cap
Imports
0
5
10
15
20
GB
Be
l, N
et,
Fra
De
u, A
us
Po
l, H
un
, C
ze
Ita
ly
Ibe
ria
Gre
ece
10 Natural Gas outlook
Any evidence coal to gas is happening now?
Gas prices- TTF supported at first switching level €/MWh
While this episode might not last into Q4, it is a warning of what is to come.
Source: Fearnelys, Energy Aspects
FUEL SWITCH (1/1)
Gas prices- NBP is already fully in the money p/therm
Impact of carbon “price floor” tax
5
10
15
20
25
Jul 15 Oct 15 Jan 16 Apr 16 Jul 16
TTF D+1 50% v 30%
45% v 30% 45% v 34%
0
20
40
60
80
Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16
NBP D+1 56% v 30%
50% v 30% 45% v 34%
11 Natural Gas outlook
Watch the inventory…
CARBON BALANCES (1/1)
EUA Inventory per year Mt
Aggregate length starts to fall….
EUA Inventory – Desired Carbon Inventory Mt
Market starts to dip against desired carbon inventory…
(500)
0
500
1,000
1,500
2,000
2,500
08 10 12 14 16 18 20
(1,500)
(1,000)
(500)
0
500
1,000
1,500
2015 2018 2021 2024 2027 2030
Base Base - no MSR
12 Natural Gas outlook
So what questions does this raise?
QUESTIONS (1/1)
• Do even lower EUA prices matter?
• Does it matter if emissions reductions are delivered from somewhere else?
• Will the market be better if there is rapid upwards price volatility?
• The goal of the carbon market is a zero price
14 Natural Gas outlook
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