EU ETS compliance firms top-up permit surpluses

OREANDA-NEWS. Compliance entities in the EU emissions trading scheme (ETS) are buying allowances in addition to their existing surpluses.

Most industrial units have traditionally refrained from buying additional permits and instead used large surpluses accumulated by the allocation of free allowances to comply with ETS requirements.

But a greater awareness of the price environment is leading some to change their behaviour, UK-based carbon risk management firm Redshaw Advisors' director, Louis Redshaw, told Argus' European Emissions Markets conference in Amsterdam.

"There is anecdotal evidence of industrials covering shorts out to 2020," Redshaw said. "There is a growing awareness that not paying attention to what is happening with price and allocation is a dangerous game."

And some entities that have divested the fossil-fuel divisions of their business must hedge further ahead for credit-rating or financial purposes, he added.

Swedish state-owned utility Vattenfall has hedged 99pc of its 2015 electricity generation in continental Europe at a price of €45/MWh (\\$50/MWh), while 87pc of next year's production has been hedged at an average price of €39/MWh. Utilities usually hedge emissions at the same time as power.

For long companies, banking their surpluses and buying additional permits makes sense because prices are lower than industry experts predicted. The process also allows them to maintain a strategic reserve.

Although hedging demand will decrease later in phase 3 (2013-30) of the EU ETS, because of increased renewables and energy efficiency measures, it could be partially offset by increased industrial buying, according to market analysts.

The European Commission should bear this in mind when it sets the thresholds for the tabled market stability reserve, Redshaw said.