REPowerEU and the EU ETS

Aimed at accelerating the financing for the green transition, REPowerEU is EUs plan to break the dependency of Russian fossil fuels. As a reminder, EUR 20 billion will be sourced from the sales of frontloaded allowances from the EU ETS – of which 60% stems from the Innovation Fund and 40% from Member State’s future auction volumes. Auctions started in 2023 and will end by August 2026.The lion’s share of the EUR 320 bn programme will come from the Resilience and Recovery Facility, a funding source created during the Covid pandemic. In total 86.7 million EUAs have been added to the 2024 auction volume. A further 86.7 Mt is stipulated for 2025 and 58 mt for 2026, according to the Auction Regulation.

Below budget

At each EU Common auction in 2024, 610,500 EUAs have been auctioned to raise revenues for REPowerEU. When estimating the volume needed to meet the monetary target, the European Commission used an average auction price of EUR 75/t. So far in 2024, the average auction price for EU Common auctions is far lower than this; €63.11/t. Only at one auction, on 3 June, the clearing price was above €75/t (at €75.35/t).

EUR 2.85 billion have been raised year-to-date in 2024. With the EUR 2.8 bn raised in 2023 the total revenue towards REPowerEU amounts to EUR 5.7 bn, 28% of the total 20 bn target. With an EUR 75/t auction price EUR 3.4 bn would have been raised so far in 2024. The revenue gap is thus EUR 537 million, with 84% of the budgeted amount until now in 2024 raised (see figure 1).

Figure 1: Budgeted vs actual REPowerEU revenue in 2024 y-t-d (10 July).

A question of timing

For that gap to be closed, the price will have to recover considerably over the second half of the year, or more volumes will have to be added to the auctions.  Even if price levels have improved since the February low, an average price in the order of EUR 88/t would be required over the remainder of the year for funds to reach the upfront “budget” for 2024 – which is highly unlikely. Rather, auction volumes will have to be increased, but the timing for when additional volumes could be added to the auction calendar is unclear. The Auction regulation (Article 12(4)) merely stipulates that “the auction platforms concerned shall publish the adjusted auction calendars 4 weeks prior to their date of application, or as soon as practicable thereafter.”

An update to the auction calendar that will adjust the volumes to account for the MSR intake from September is likely to be published some time in July. The European Commission may use this opportunity to recalibrate REPowerEU volumes and announce additional volumes for the remainder of 2024. The Commission is monitoring the price development and will at some point have to adjust volumes to account for actual price developments. However, the European Commission will be cautious and will want to minimise market impacts of any such adjustment and may therefore update volumes only for 2025 and 2026.

We assume that auction volumes will not be changed for 2024 and stay at 86.7 million. Should volumes be added this year, either at the July revision or later, we expect quite a bearish impact on the EUA price. The bid-to-cover ratio has tapered off lately and has been on average 1.56 for 2024 (EU Common auction) (see Figure 2), compared to 1.94 in 2023. Combined with low emissions, especially in the power sector, it is not obvious how the market will absorb potential additional 2024 auction volumes.

Figure 2: Bid-to-cover ratio for 2024 EU Common EUA auctions