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EU CO2 prices may rise, says Fitch Ratings

World Coal,

The European Parliament’s initiative to temporarily withdraw some carbon emission permits began with a vote to withdraw 900 million permits. Following the vote, permit prices rose more than 9% (and by 20% in the six-month forward market).

According to Fitch Ratings, prices could continue to rise if the European Parliament’s initiative gains traction. On its own, however, Fitch suggest it will probably not move permit prices enough to reverse the competitive advantage coal-fired power plants hold over natural gas-fired facilities.

Fitch Ratings stated: “We believe they [emission permit prices] are likely to rise further if the plan is implemented, as the volume withdrawn represents around 15% of the total permits available for 2013 – 2015 and potentially more than a third of the permits due to be auctioned over that period.”

However, implementation is still uncertain as it would need to be approved by national ministers and this could take many months, if it happens at all. Even with broad support, the plan is not likely to lift the permit price from its current level below €5/t to the €15/t – €20/t that Fitch believe would be necessary to make natural gas-fired plants competitive with coal-fired plants at current fuel prices.

The proposal also only delays the issuing of permits, rather than cancelling them altogether. The European Parliament's decision included a commitment not to expand or repeat the measures. This means that if European economies and, therefore, demand for carbon emissions, do not pick up by 2016, or if roll-out of renewable capacity is faster than expected, the supply overhang will return and could worsen.

A decline in the cost of permits since mid-2011, combined with a drop in coal prices, has made coal-fired power plants more profitable in comparison to gas-fired power plants. Uncertainty about the cost of emissions over the medium-term remains one of the key risks for EU power generators.

Fitch concluded “We continue to believe that a diversified and flexible generation portfolio [is vital] for a utility's credit rating, as over-reliance on one resource may prove detrimental to cash flows, if there is a major change in CO2 or fuel prices, or government energy policies.”

Adapted from press release by Samuel Dodson.

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