Spotlight on carbon emissions markets

Over the last couple of months, UK wholesale power prices have rallied to 2-year highs, due in part to the influence of numerous global drivers and support from wider energy and commodity markets.

One notable driver on UK power prices since the start of 2021 has been the influence of the carbon emissions market, but why has its influence on UK energy prices has become increasingly relevant for electricity consumers and generators?  

What is carbon trading?

Carbon trading is the largest component of the emissions trading market, a system designed to lower greenhouse gas emissions from large installations and energy intensive industries by creating a gradually lowering ceiling for permitted pollution levels, whilst incentivising a move towards cleaner industry. 

Emissions Trading Systems (ETS) operate via the free allocation or auctioning of a given number of emission allowance credits to eligible entities, with each single allowance permitting the emission of one tonne of carbon dioxide. 

If an installation is to surpass this cap, they must purchase additional allowance permits to cover the extra emissions they produce above the agreed level – the upside of this being that, if emissions are reduced accordingly, remaining emissions allowances can be traded by the holder, providing a further financial incentive to reduce carbon emissions.

Recent carbon market activity 

EU allowance (EUA) prices have been on an upward trajectory following the beginning of a post-lockdown recovery in late 2020, catalysed by the EU’s proposed acceleration of its emissions reductions targets which subsequently made EUAs a more valuable commodity. Trading at €33/t at the turn of 2021, EUAs hit €57.65/t into July, demonstrating how far the market has risen as nations continue to push towards a greener future.  

With the UK leaving the European Union as of the 1st of January 2021, however, participation in the EU ETS has been replaced by a contained UK ETS, which has become the new platform for UK-based businesses and energy extensive installations to trade allowances upon.  

With the UK ETS opening for trading on May 19th 2021 alongside a swelling EUA market, prices in both systems remained high despite an initial fall in EUA prices as lower volumes of EUAs were traded amongst the uncertainty surrounding the new UK system. 

The newly opened UK ETS market traded above €50/t into its first week supported by low wind generation levels and gas storage concerns. However, the market started to fall back into June due to buying hesitancy stemming from the UK government’s consideration to sell additional carbon allowances, which could result in another 19 million UKAs entering the market.  

Moving into July, the UK ETS market has remained relatively flat relative to the upward trend seen in the EUA market. However they do remain relatively supported, trading in the mid-€40/t region which, although below EUA prices, is still positive in terms of the direction in which emissions trading is moving, given that EUA prices were sitting around €29/t at this point last year.

How could this impact me as a consumer or asset owner?

Extended activity in the carbon market also plays a role in the wider energy complex in that carbon prices have a close correlation with UK wholesale power prices which, in turn, affects the price we pay for our electricity. Putting a price on carbon emissions can increase operating costs for the power generation sector, which increases wholesale prices if these generators determine the market clearing price.  

With power markets on the rise in the last few months it has created a good opportunity for generators to achieve a higher PPA. The Carter Jonas brokerage team has secured a number of these out to as far as 2025 at very competitive rates.  

On the flip side, high consumers of electricity are looking at a significant jump in costs and managing the risks involved with this is a constant challenge. Monitoring markets and managing this risk on behalf of clients and businesses is something our brokerage team have extensive experience with, so please get in touch if you would like to discuss further with a member of the team.

For information on our in-house brokerage service please get in touch with Jake Copsey, Energy Specialist at Carter Jonas, on 07717 766227 or jake.copsey@carterjonas.co.uk.

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