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Market commentary

November 2020

In Europe the consequences of the 2nd lockdown are noticeable. The consumption of gas and electricity continues to decline. At the same time, the extremely high gas storage levels (EU-28) have fallen slightly. The hope of a corona vaccination has boosted the mood on the futures market for oil and gas and caused prices to rise.

The increase, however, is from a level close to the historical low for gas and oil. The futures market therefore has hopes for rising prices. It remains unclear, however, how long the corona-related reduction in consumption will continue. The year 2020 has set new production records for renewable energies (RE) in many market areas on the electricity market because the expansion of RE has progressed unhindered. As a result, the share of renewables has never been higher than now, in parallel with the reduction in consumption in many parts of Europe. Since most renewables (wind, PV, hydro) are included in the merit order curve with marginal costs of 0 EUR/MWh, this fact also made 2020 a very favorable year for electricity on the spot market.

CO2 is the main reason why there has been a significant change in Europe this year: Coal has been replaced by gas in numerous market areas. Favourable gas prices and high CO2 prices have made the production of electricity from coal unprofitable. As a result, the surplus of CO2 certificates in the EU ETS (EU Emissions Trading System) has also increased further. Nevertheless, this had no influence on the price. The reason for this is, on the one hand, the possibility of using the certificates in the future and, on the other hand, the expectation of rising CO2 prices, because the EU emission reduction targets are being increased significantly. Due to the high CO2 prices, the electricity futures market price for the next few years has also not fallen back to the level of 2018 (price: 21.35 EUR/MWh for the year 2019).

This year, the lowest value of the electricity market price for next year was 34.9 EUR/MWh. The difference can be explained by the CO2 price at the beginning of 2018 of about 7 EUR/MWh compared to the CO2 price of about 25 EUR/t on average in 2020.

The CO2 price outside the EU-ETS is slowly becoming known. Germany has already set the prices for it: For CO2 emissions in Germany under the N-ETS (National Emissions Trading System), the cost of CO2 emissions is expected to rise from 25 EUR/t in 2021 to 55 EUR/t by 2025. This is reason enough for speculative traders to increase their positions in the EU-ETS. The assumption that the CO2 prices in the N-ETS will also have an influence on the EU-ETS is understandable.

In principle, the economic recovery will be the main focus in the coming months. The view on soon medical answers to the pandemic lets the markets hope in the future and already today. The spot market will also offer opportunities in 2021, just as the term market is still low today. Risk diversification therefore remains important.

Under these circumstances, we wish you good decisions and health with a mask.

For the Inercomp team
Felix Diwok

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