September sees lower carbon price as nuclear reaps benefit of maintenance outages

Last month, the carbon price rose beyond expectations, from €64 /tCO2 to €72 /tCO2, due to a greater-than-expected fall in renewables output and some gas-to-coal switching. Wind power dropped significantly, alongside lower hydropower output. The August natural gas price increase, driven by geopolitical factors, also triggered some gas-to-coal switching, but the resulting carbon price spike suggests a market overreaction to these events.

This may have stemmed from fears of escalation of war in the Middle East, Ukraine’s recent attacks on Russia, and Kamala Harris leading Trump in the polls, giving uncertainty about US LNG exports. Next month, we expect the carbon price to drop with improved renewable output from windier weather and recovering hydro reservoirs, alongside strong and stable nuclear power performance. However, rising gas prices and continued gas-to-coal switching remain a potential upside risk for the carbon price.

Windier weather and fuller reservoirs will depress the carbon price in September

Last month, for another month in a row, wind power output dropped m/m and fell below what were already low expectations, significantly driving up the carbon price. Over the next ten days, wind speeds are forecast to lift to slightly above average and wind power is expected to recover. The shift from well below-average to above-average wind output is expected to have a substantial downward impact on carbon prices next month. Hydropower also contributed to the price increase last month, with output dropping m/m. However, reservoir levels have begun to rise and are now at average for the time of year. With average precipitation forecast, hydropower is expected to have minimal impact on the carbon price next month.

Extensive maintenance programme pays off as nuclear outperforms expectations

European nuclear output has outperformed for another month in a row, showing noticeable improvements in reliability. The previous unreliability in Europe's nuclear sector can largely be attributed to France, the continent’s largest nuclear power producer. The challenges the French fleet faced, including an extensive multi-year maintenance programme and strike disruption, caused significant drops in nuclear output.

French nuclear output improved m/m in August, despite facing challenges from extreme heat that posed a risk to reactor cooling systems and forced EDF to reduce output at some reactors. The outlook for nuclear remains positive for September, though output could be impacted if power demand remains low due to economic conditions. Overall, nuclear power is expected to have a slight downward effect on EUA demand in September.

Gas-to-coal switching will be minimal in September but still poses an upside risk to the carbon price

In August, both gas and coal prices rose, but gas prices lifted further to become more closely aligned with coal prices, which led to some gas-to-coal switching and put a slight upward pressure on EUA demand. However, the resulting increase in the carbon price beyond that expected suggests an overreaction from the market to geopolitical factors.

The spike in gas prices was driven by fears of regional escalation in the Middle East, Ukraine’s recent attacks on Russia and uncertainties around future US natural gas exports resulting from the presidential race. Prices for gas and coal are expected to stabilise in September, so the impact of gas-to-coal switching on EUA demand should be minimal. However, geopolitical factors still pose a risk to increasing gas prices and, therefore, an upside risk to the carbon price.

Outlook for power demand, the economy and industry remains unchanged

There was a minimal decrease in overall power demand in August, indicating that the decline over the last few months is bottoming out – power demand has been well below average for some time due to a weak economy and low industrial output. Despite a slight drop in European steel profitability m/m, the economic outlook remains weak but unchanged.

With minimal changes expected in the economy and industry next month, power demand is expected to remain stable. Although September is expected to be warmer than average, it will be cooler than August, reducing the need for additional power for cooling. Overall, these factors will have little impact on EUA demand in September.

If you want to hear more about carbon market developments and our short-, medium- or long-term carbon price forecasts provided as part of CRU’s Sustainability and Emissions service, please email us at [email protected] – we’d be happy to discuss this with you

About The Authors

Lottie Zayed, Sustainability Analyst

Lottie joined CRU Sustainability in 2023. Prior to this, Lottie obtained her M.Res. in Green Chemistry, Energy and the Environment from Imperial College London and her B.Sc. in Chemistry from Cardiff University. She has also gained experience through an internship in the sustainability team of a chemical fertilizer company, where she researched the use of new technologies on reducing emissions. Lottie is based in CRU's London office.

Paul Butterworth, Research Manager

Paul moved to CRU's newly-formed Sustainability team in August 2021 where he is working closely with clients and internally on carbon market and energy transition issues. Paul joined CRU in 2012 and, latterly, was responsible for CRU's analysis across the whole steel value chain, from raw materials through to finished steel, as well as CRU's Steel cost services, a comprehensive suite of cost models covering iron ore mining, coal mining, steelmaking and ferroalloys operations worldwide.

Mark Jeavons, Head of Sustainability

Mark has over 15 years’ experience in a variety of leadership roles spanning sustainability and investment. He is the Head of CRU’s Sustainability division, providing thought leadership and guidance on sustainability, climate change and their market implications, which helps clients to better understand, address and integrate sustainability themes into their decision-making.

Net-zero 2050 will lift global power generation by 40%

Decarbonisation is expected to lead to more power generation but simultaneously lower power sector emission intensities. However, given current decarbonisation efforts in the power and other sectors, the world is headed on a trajectory of significant global warming. If the world were instead to shift to a trajectory with less warming, what would it look like? In the latest edition of the CRU Power Transition Service, we consider a <2oC scenario (which is separate from our base case forecast) where there is significantly more power generation and capacity, lower power sector emission intensities and more metal demand from installing more renewable power capacity.

The world reaches a <2oC pathway by 2050 in our scenario

In CRU’s Power Transition Service, our base case forecast is that global power generation will nearly double between now and 2050, as discussed in a previous Insight. Yet, power sector emissions decline as total fossil power generation falls. In CRU’s Sustainability and Emissions Service, we combine power with other commodity sector emissions and forecast that in 2050 the world will be on a pathway where global average temperatures will likely be 2.5–3.0oC above pre-industrial levels. Given our expectations of the political will and technological costs to decarbonise, the world will not reach a more ‘decarbonised’ pathway by 2050, despite broad consensus for a 1.5°C temperature target in the Paris Agreement in 2015.

Discussions to limit temperature rises to ‘well below 2.0oC’ and to pursue efforts to limit them to 1.5oC (with net-zero emissions by 2050) were credible targets at the time of the Paris Accord negotiations in 2015, but progress since then has rendered these targets mutually incompatible. Even if the world puts itself on a net-zero CO2 emissions by 2050 pathway starting from today, high emissions in the eight years following the Paris Accord mean it will still be off-track to limiting temperatures to ‘well below 2.0oC’ or 1.5oC.

Our analysis shows that a net-zero CO2 emissions by 2050 pathway from today would be consistent with a temperature pathway of just under 2oC (<2oC) warming, but political will would need to change significantly to allow this to happen. The difference between <2oC – our scenario – and the Paris climate target appears small but disproportionately more effort will be required to limit temperatures well below <2oC.

Check out our full insight to learn more.

FiberConnect 2024: Unveiling the Booming US Fibre Optic Market

CRU’s Wire & Cable Analysts recently took the opportunity to attend Fiber Connect 2024 – the largest fibre optics conference in North America connecting both domestic and international players operating within the region.

In line with CRU’s Optical Fibre Cables (OFC) Market Outlook and OFC Monitor, major themes continue to dominate the narrative in the US market, including the timeline and implementation of the Broadband Equity, Access and Deployment (BEAD) Program, fibre cable deployments, capacity expansions and constraints, rapid evolution in end-use markets (e.g. datacentres) and many more.

The BEAD program aims to bridge the digital divide by providing substantial funding to improve broadband access across the US. Based on data from CRU’s OFC service, as of now, 32 eligible entities have completed all ten phases of the program, while 25 are on the verge of completion. The program's success is underpinned by the Spectrum & National Security Act, which has been deliberated in the Senate as of April 2024 and still is.

Learn more in this insight.

UPCOMING EVENTS & WEBINAR

Steel Strategy: Preparing for 2025 annual contract negotiations in North America & Europe

Our "Steel Strategy: Preparing for 2025 annual contract negotiations in North America & Europe" webinar is happening on September 10th, 10:00 AM EST / 3:00 PM BST.

Register today to get insights into the key types of contracts shaping the North American and European #steelsheet markets along with their strategic advantages and challenges. Plus, gain a deeper understanding of the CRU price and its impact on purchasing strategies.

Secure your spot today.

#Steel #Webinar #SteelMarket

CRU Breakfast 2024

See you on 1st October 2024 at The Waldorf Hilton, London for #CRUBreakfast2024! Our experts and analysts will be available to discuss the critical issues, challenges, and opportunities in the commodity markets.

This is a complimentary event with limited venue capacity. Complete the online registration today to be able to catch the following sessions:

Session 1 - Welcome and Presentation: "The Transformative Forces that will Define the Next Era of the Metals Industry"

Session 2 - CRU Commodity Outlooks: "Winners and Losers of 2025"

Session 3 - Panel Discussion: "Debating the impact the Transformative Forces will have on our Commodity Outlooks"

Session 4 - Panel Discussion: "The Challenge and Cost of Standing Out in Pursuit of Decarbonisation"

Register now.

FEATURED MEDIA COVERAGES

Copper, an essential metal between the “new oil” and the predicted shortage

Robert Edwards, Principal Analyst at CRU, emphasises #copper's irreplaceable role in the economy, from construction to consumer goods, and its pivotal position in the #energytransition. Despite recent price fluctuations, the demand for copper remains robust, driven by global technological advancements and electrification efforts.

"Copper is the raw material of the 21st century, it is the most strategic metal," says Edwards. The future of copper is bright, but so are the challenges of meeting rising demand.

Read more insights in this article from Libération.

Weighty expectations for a light metal

Aluminium has a range of applications in various industries including construction and packaging. However, its future also involves the automotive sector. In a study conducted several years ago, CRU's experts predicted that while the #EV revolution could potentially impact the market for cast aluminium used in engine parts of traditional internal combustion engine (ICE) vehicles, it would also create new opportunities for aluminium sheet manufacturers.

Read more from Recycling Today.