The benchmark UKA Dec-25 contract closed March at GBP 45.06/t, up GBP 2.19/t (5.1%) from the final trading day of February’s close of GBP 42.87/t. After a continuation of the bearish end to February trading, UKAs received a boost as Treasury minister Livermore made comments to the House of Lords that there was ‘serious consideration’ being given to linking the UK carbon market with its EU counterpart. After gaining 14.4%, UKAs were again bolstered by policymaker comments as a meeting of the Parliamentary Partnership Assembly (EU and UK lawmakers) released a recommendation reaffirming the intention to give ‘serious consideration’ to linking. The PPA’s recommendations were accompanied by confirmation of the 19 May date for an EU-UK summit during which linking is expected to be on the agenda. As the month drew to a close, UKAs moved lower in line with the EU carbon market, as US tariffs and ‘Liberation Day’ loomed.
Low-carbon sources accounted for 67% of total power generation in March. Total power demand fell sharply by 13% month-on-month in March. With lower overall power demand, both gas and wind generation were down by 18% and 32% respectively. Imports and solar generation both picked up significantly, by 34% and 138%.
Significantly lower gas generation coupled with steadily increasing solar and higher power imports through March created a bearish fundamental picture throughout the month. However, as with other markets, fundamentals were largely overshadowed by geopolitical and international trade risk.
The average UKA price in March was GBP 43.27/t, down 2.3% from February’s average of GBP 44.31/t. Daily traded volumes dropped in March, with an average of 2.43 million UKAs changing hands per day in March, compared with 2.99 million in February.
Throughout March, UKAs largely traded in line with EUAs. Correlation between the markets held consistently strong for most trading sessions, with UKAs breaking the correlation on sessions punctuated by linking talk. With the optimism around linking, UKA prices rose relative to EUAs, with the spread between them falling to its lowest levels
March featured two UKA auctions, both clearing at a discount to the secondary market. The 5 March auction settled GBP 0.46 below spot, while the 19 March auction cleared GBP 0.60/t below spot. Despite the lower clearing price, the bid-to-cover ratio for the 5 March auction was above the year-to-date average of 1.87, while the 19 March auction fell below that average.
Besides the linking comments made by Treasury minister Livermore and the recommendations from the PPA, there has been little policy activity impacting the UK ETS through March.
On 19 March, the UK’s aviation allocation table was updated for the 2021-2025 period.
The latest weather forecasts point to cooler weather ahead with rising wind speeds. Colder weather may prompt some additional gas burn, but as we are in the shoulder season, weather is likely to provide less of a directional signal for carbon.
Instead, as has been the case for the past two months, linking, geopolitics and trade will be key for UKAs. We expect the recent trend of UKAs trading in tandem with EUAs to continue, though news of progress towards linking will likely bolster UK carbon without a corresponding move for EUAs. As we move closer to the 19 May summit, expect additional comments from policymakers.
As of the time of writing, US President Donald Trump has delayed tariffs by 90 days, though the only certainty for markets coming from the US remains uncertainty. The delay is unlikely to fully ease disquieted investors. Any updates to tariffs or to progress in US-Russia negotiations on a ceasefire in Ukraine are likely to move both UK and EU markets.
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