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European power generators' revenues, profits to receive carbon price jolt

Publication Date: 01 Aug 2018 - By ReachX Team By ReachX Team
Actionable
Differentiated

Macro Equity Fundamental Environmental, Social & Governance Equity EU ex-UK UK Energy Utilities

Rising European carbon prices have boosted electricity prices in the region since the start of 2018, and further increases would accelerate decarbonisation while bolstering the revenues and profits of most power producers in 2018-22, according to fresh research. 

In a recent note to clients, ratings agency Moody’s said higher carbon price would benefit power generators. Carbon prices have recently jumped to €17 per tonne in anticipation of market tightening as a result of post-2020 reforms to the European Union's Emissions Trading System (ETS).

Moody's expects carbon prices to trade in a €10-20 per tonne range over the 2018-22 period but a "wider range is possible as uncertainties resolve."

In terms of individual company impact, the ratings agency estimates that a €1 increase in the carbon price may contribute more than 2% to annual EBITDA for some.

Graham Taylor, Vice President and Senior Credit Officer at Moody's, noted: "European power generators are beneficiaries of the rising carbon price, with most companies likely to see higher profits as well as revenues as carbon costs feed through to electricity prices.

"Every €1 increase in the carbon price means €1 billion of additional revenue and €400 million of pre-tax profit for generators in the largest European power markets." 

Until now, the EU cost of carbon, languishing at €3-9 per tonne from 2012 to early 2018, has been too low to displace coal or support low-carbon generation. Despite large investments in renewables, output from coal-fired generation, the most carbon-intensive technology, has remained stubbornly high.

Although coal-to-gas switching can drive rapid decarbonisation, Moody's estimates that carbon prices sustainably above €20 per tonne are needed to make this economic for generators. The UK, where a high carbon tax has largely eliminated coal since 2013, has been the exception that proves the rule, the agency concluded.

 

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