Renewable power is booming in Europe and crashing its carbon market
EUROPE’S carbon market is heading for its worst start to a year since 2016 as a rapid expansion in renewables lowers the need for fossil fuels.
Paying for permits is meant to entice companies to invest in technologies to cut emissions. Yet much of the work to lower pollution in the power sector is being done by structurally higher energy costs following Russia’s invasion of Ukraine, which has accelerated solar and wind deployment.
The recent plunge in carbon prices is linked to a number of factors, including above-average renewables generation and a protracted industrial slowdown. Benchmark carbon futures fell to the lowest since March 2022 on Monday (Jan 22), and have dropped roughly 22 per cent so far in 2024. Contracts are almost 40 per cent below a record reached last February.
Europe has installed a soaring number of solar panels in recent years as consumers turn to the cheap and quick-to-install electricity source to limit exposure to high power prices. Annual installations in the European Union jumped to a record of more than 51 gigawatts last year, 87 per cent higher than in 2021, according to BloombergNEF.
Wind turbines have also steadily increased, and strong winds have pushed up production. A recovery of France’s nuclear fleet and hydro power stocks has helped, too.
“The level of fossil power generation has been lower than expected especially because we had quite a good renewables year,” said Marcus Ferdinand, chief of analytics at Oslo-based Veyt. That’s led utilities to sell carbon permits they didn’t end up needing in 2023, he added.
A NEWSLETTER FOR YOU
Friday, 12.30 pm
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
If power companies burn less gas and coal, they need fewer permits to account for their emissions. Overall power-sector emissions dropped over 23 per cent in 2023, according to data from geoanalytics company Kayrros.
In addition to greater clean-energy deployment, Europe’s economy has struggled to recover, leading to a drop in demand for natural gas, with lower prices undercutting the economics of more polluting coal-fired stations. Overall power consumption remains subdued, with analysts at BloombergNEF saying it’s uncertain to what extent it will recover due to the growing adoption of more energy efficient technologies and rooftop solar.
Permanent shifts in Europe’s industry may also weigh on long-term demand for fossil fuels.
“The two big things out of last year are the massive switch to increasing renewable generation and also the lack of any real rebound in industrial emissions,” said Tim Atkinson, director of sales and structuring at CFP Energy.
A lower carbon price for now could help alleviate pressure on European politicians from critics who see the bloc’s climate policies as too burdensome. And it may give companies an opportunity to decarbonize or buy permits more cheaply ahead of expected price increases later this decade.
The steep decline to start 2024 is also partially a technical one. Carbon rallied late last year as investors covered short positions amid the lower liquidity typical in late December, CFP Energy’s James Rosser said. Then in January it fell sharply to resume a steady decline from last year’s February peak. BLOOMBERG
Share with us your feedback on BT's products and services
