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UK vs EU Carbon, Will the UK be More Expensive?

May 2021

Market Summary

Short & long-term electricity and gas prices remain high and on a bullish trend because of poor UK weather, gas reserve pressures, and the effect of the carbon market. Gas prices are generally much higher than seen for several years, but the warmer weather expected in June should help to bring them down.

The new UK ETS held its first carbon trading auction this month which affects large energy providers and UK commodity market prices.

EU carbon’s price has been soaring once again hitting new highs of €56/tonne due to sterner energy targets and reduced credits available in the market. The 19th May was the UK’s first carbon auction on its new UK ETS platform, which will continue every fortnight allowing 6 million credits available for each auction. The UK has set a limit of 83 million credits for 2021 which has pushed the cost to £55/tonne, higher than the EU price (€53/tonne). Analysts anticipate the price of carbon could reach £120/tonne going forward due to the investment needed to reach the ambitious targets/projects needed to become net zero.

For a summary on the UK ETS and how it affects market prices read here.

Electricity Market

Renewable energy generation from wind and solar could hit 35% over the next few weeks as the hot weather is predicted to continue. This should ease pressure from the grid which should in turn lower the UK’s high electricity prices.

The high carbon price of €56+ and UK carbon auctions during May has put huge pressure on commodity prices, hiking them up to highs of £85 MWh (W21) and £63 (S22).

Gas Market

UK gas prices continue with steady gains in 2021, with all seasons seeing a 10% rise. A 12-month fixed price contract is now more expensive than at any point between January and September in the last 4 years, with only the winter of 2018 proving more expensive.

Prices have seen new highs hitting £74 p/therm (W21) and £52 p/therm (S22) with fears that the UK gas storage facilities will remain empty over Winter 21 spooking the market. Gas demand over the past month has been higher than normal due to below average temperatures which we expect to fall because of the expected UK heatwave during June.

Oil Market

Source: Morningstar

Colonial the operator of the biggest fuel pipeline in the US closed for five days due to a Cyber-attack causing chaos on the East Coast.

During the Covid-19 lockdowns in April we saw oil reach below $20 a barrel as demand flattened, we have now seen brent crude oil hit $70 a barrel putting the price at pre-pandemic levels.

View the full BBC article and video here.


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