The Opportunity In The Energy Crisis

Energy Markets

The two charts show how the price of carbon credits (future contract on EU Allowance) and electricity (German power future contract) tend to move in unison. Carbon credits are a proxy for industrial activity, and electricity prices a proxy for EU energy cost.

  • An increase in industrial output translates into higher energy demand. 
  • Simultaneously, with higher industrial output, there is more demand from polluter companies to buy the carbon emission credits to offset their emissions.

Carbon credits and power divergence

The recent stark divergence between increasing power prices and decreasing carbon prices, shown in the bottom chart, is unusual. The increase in energy costs forced many factories to shut down their operations and consequently sell their carbon credits.

  • Recent massive increases in energy prices are the consequence of a perfect storm of multiple factors. (e.g., lowest wind in 20 years, lowest gas inventory, supply chain disruption, etc.).

When crisis equals opportunity

This energy crisis, driven by a supply shock, may not be the last of the green transition. But it shows how poorly the governments have been planning the energy transition, focusing on shutting polluting plants without ensuring sufficient replacement. This should catalyze the needed reckoning that ambitious targets require adequate investments.

  • Public investments in green infrastructure to smooth the energy transition are becoming a government duty.

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