May’s Brexit Deal Seen Boosting Carbon, Power in Europe

LONDON (Capital Markets in Africa) – Power and carbon prices across Europe may rally if U.K. Prime Minister Theresa May succeeds in getting Parliament to approve a deal for leaving the European Union this month, according to Alfa Energy Ltd.

Britain is a key member of the EU’s emissions trading system, and the risk of Brexit without agreement has weighed on carbon prices in recent weeks. Relieving that risk may push the cost of those allowances higher and drive up power prices as a result, according to Alfa, a London-based consultant that handled about $2 billion of energy trading last year.

Jason Durden, head of energy markets and risk management at Alfa in London, said Friday his most likely scenario is that politicians approve May’s deal before the March 29 deadline with no extension. Lawmakers on Thursday backed the prime minister’s motion to delay Brexit in a vote that potentially buys May time to persuade doubters to back her proposal or risk a lengthy postponement.

Alfa’s remarks shed light on how markets are reacting to developments in the U.K. Parliament, which has twice rejected May’s deal with the EU. With lawmakers also opposed to leaving without an agreement, Alfa says there’s a decent chance that the government will finally win endorsement for its deal, lifting power and carbon in the process.

“As the deadline nears, they’ll realize they want this over and done with,” said Durden.

Britain has more than 1,100 factories, utilities and aircraft operators covered by the carbon cap-and-trade market. A no-deal Brexit would see them crash out of that arrangement and could prompt U.K. holders of those allowances to immediately sell certificates they no longer need. A Brexit deal would provide continuity for a transition to a new system, maintaining most of the current rules for the time being.

Should May’s soft-Brexit withdrawal be agreed, EU carbon allowances would probably enjoy something of a relief rally. That would lift the cost of generating electricity from Warsaw to Lisbon, Durden said. Natural gas prices may not advance as much because supplies this year are so plentiful, including from the global liquefied natural gas market.

Even so, there’s a few other scenarios still under discussion for how the U.K. handles Brexit, including a very long extension for the date where the divorce is final.

Energy Aspects Ltd. estimated Tuesday carbon allowances could rise about 10 percent under a scenario where lawmakers reject May’s deal and then decide to extend the March 29 Brexit deadline by more than three months. Prices could drop 20 percent if an extension is perceived as too short or there’s still a threat of a no-deal exit.

Source: Bloomberg Business News