The UK ETS market is at a crucial juncture, facing potential regulatory reforms, a tightening cap leading to significant deficits, and the possibility of linking with the EU ETS. The market's volatility, driven by headlines and speculative trading, underscores the need for a comprehensive understanding of market dynamics and participant behaviour.
Understanding the Complexities of the UK ETS Market:
In response to the tightening market, ClearBlue Markets has partnered with SparkChange to develop a behavioural insights model. This model combines ClearBlue's supply and demand forecasts with behavioural assumptions for industrial and power players to provide insights into traded demand and supply balances in the UK ETS, which ultimately drive price formation.
The model incorporates behavioural clusters, recognizing that trading strategies differ across sectors, geographies, company sizes, and fundamental and activity scenarios. The model operates at an installation level, analyzing roughly 1,200 installations in the UK ETS and attributing them to over 300 companies. These companies are then linked into different clusters based on size, sector, and their behaviour linked to the carbon market. Behavioural assumptions are built for these 16 clusters based on individual company tracking of their trading deficits in both the UK and EU ETS .
Since the future behaviour could develop in various ways, the model utilizes scenario-based analysis. Three hedging scenarios are implemented: a base hedge (continuation of current trends), a low hedge (power hedges closer to spot, industry purely trades spot), and a high hedge (power keeps long-term horizons, industry adjusts quickly for upcoming deficits).
By staggering the demand based on hedging behaviours (spot buying, buying for next year's compliance, etc.), the model reveals potential mismatches between net deficits and actual market demand . Early and proactive hedging by companies to fix future costs could have a significant effect on the UK ETS.
The model also considers the supply side, including auctions, to provide a comprehensive view of market balance . By incorporating historical hedging patterns and rollover from the EU ETS, the model offers a more nuanced understanding of past and future price movements.
The Value of ClearBlue's Behavioural Insights Model:
Ultimately, ClearBlue's Behavioural Insights model is useful because it goes beyond fundamental supply and demand analysis to incorporate the crucial element of how and when companies will act in the market. This forward-looking perspective helps companies:
- Anticipate potential price swings driven by hedging behaviour rather than just fundamental balances.
- Develop more informed hedging strategies by understanding how their peers and other sectors might behave.
- Identify potential opportunities and risks arising from the timing of purchasing decisions in a tightening market.
- Gain a deeper understanding of market dynamics and the potential impact of regulatory changes and linkage discussions on trading behaviour.
As the UK ETS reaches a "turning point" with anticipated regulatory changes and a shift to a significant market deficit, ClearBlue's Behavioural Insights model provides a valuable tool for companies seeking to navigate the increasing complexity and volatility of this evolving carbon market.
Contact ClearBlue today to discuss our EU ETS and UK ETS coverage and how Behavioural Insights can help optimize your position in these markets.