EU ETS

Carbon market outlook

Trevor Sikorski, October 2016

EUA outlook: What challenges?

3 Natural Gas outlook

EUA prices: A rocky road

PRICES (1/1)

Brexit makes all price expectations lower…though forecasts assume BAU

Forecast prices €/t

Forecast against out-turn €/t

Forecasts and out-turn: lots of volatility

4

5

6

7

8

9

Jan 15 Jul 15 Jan 16 Jul 16

EUA spot EA Forecast Q1

0

2

4

6

8

10

12

14

2011 2014 2017 2020

Forecast Forward curve

4 Natural Gas outlook

The supply side has two waves of LNG in the coming five years

NATURAL GAS (1/6)

Source: Company websites, US DOE, Energy Aspects

360+ Mtpa of US projects; 61 Mtpa new or under construction

Wave 2: US – 2016 to 2020 Mt

100+ Mtpa of Australian projects; 66 Mtpa new or under construction

Wave 1: Australia – 2014 to 2018 Mt

0

20

40

60

80

2016 2021 2026

Corpus Christi

Cove Point

Freeport 2

Freeport 1

Cameron LNG

Sabine Pass0

20

40

60

80

2014 2017 2020 2023

Prelude

Ichthys

Wheatstone

Gorgon

Gladstone

APLNG

Queensland

Curtis (BG)

5 Natural Gas outlook

How does the market balance?

Source: Energy Aspects

NATURAL GAS (2/6)

85

20

33

15

40

4

5

3

5

Demand

Mtpa

3 10

Supply

Mtpa

35 45

+50

44

15

+60

90

10

6 Natural Gas outlook

How does the market balance?

Source: Energy Aspects

NATURAL GAS (3/6)

85

20

33

15

40

4

5

3

5

Demand

Mtpa

3 10

Supply

Mtpa

35 45

+50

44

15

+60

90

10

1 - Qatari spot pushed out of Asia

7 Natural Gas outlook

How does the market balance?

Source: Energy Aspects

NATURAL GAS (4/6)

85

20

33

15

40

4

5

3

5

Demand

Mtpa

3 10

Supply

Mtpa

35 45

+50

44

15

+60

90

10

1 - Qatari spot pushed out of Asia 2 - NA pushed out of Asia

8 Natural Gas outlook

How does the market balance?

Source: Energy Aspects

NATURAL GAS (5/6)

85

20

33

15

40

4

5

3

5

Demand

Mtpa

3 10

Supply

Mtpa

35 45

+50

44

15

+60

90

10

1 - Qatari spot pushed out of Asia 2 - NA pushed out of Asia 3 - NA pushed out of Europe

9 Natural Gas outlook

Europe - the residual LNG taker

NATURAKL GAS (6/6)

EU: gas imports versus terminal capacity Mt

Plenty of capacity, with around 160 bcm/y of unused regas—maybe 120 bcm is realistic factoring in maintenance

EU: fuel switching capacity bcm

Plenty of latent power sector demand to stimulate…about 90 bcm in total. Actual realisable around 50-70 bcm

Source: Bloomberg, Energy Aspects

0

10

20

30

40

50

60

70

80

UK

Be

lgiu

m

Fra

nce

Ne

the

rla

nd

s

Lit

hu

an

ia

Po

lan

d

Ita

ly

Gre

ece

Ibe

ria

NW

Eu

rop

e

Unused Cap

Imports

0

5

10

15

20

GB

Be

l, N

et,

Fra

De

u, A

us

Po

l, H

un

, C

ze

Ita

ly

Ibe

ria

Gre

ece

10 Natural Gas outlook

Any evidence coal to gas is happening now?

Gas prices- TTF supported at first switching level €/MWh

While this episode might not last into Q4, it is a warning of what is to come.

Source: Fearnelys, Energy Aspects

FUEL SWITCH (1/1)

Gas prices- NBP is already fully in the money p/therm

Impact of carbon “price floor” tax

5

10

15

20

25

Jul 15 Oct 15 Jan 16 Apr 16 Jul 16

TTF D+1 50% v 30%

45% v 30% 45% v 34%

0

20

40

60

80

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16

NBP D+1 56% v 30%

50% v 30% 45% v 34%

11 Natural Gas outlook

Watch the inventory…

CARBON BALANCES (1/1)

EUA Inventory per year Mt

Aggregate length starts to fall….

EUA Inventory – Desired Carbon Inventory Mt

Market starts to dip against desired carbon inventory…

(500)

0

500

1,000

1,500

2,000

2,500

08 10 12 14 16 18 20

(1,500)

(1,000)

(500)

0

500

1,000

1,500

2015 2018 2021 2024 2027 2030

Base Base - no MSR

12 Natural Gas outlook

So what questions does this raise?

QUESTIONS (1/1)

• Do even lower EUA prices matter?

• Does it matter if emissions reductions are delivered from somewhere else?

• Will the market be better if there is rapid upwards price volatility?

• The goal of the carbon market is a zero price

14 Natural Gas outlook

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