Montel Magazine 2 2021 - Border control - Page 15

“ We are doing our homework on hydrogen , but it ’ s a medium to long-term play ”

For emissions trading , breaking up is hard

Since its divorce from the EU last year , the UK is now facing calls from businesses and industry to rekindle the relationship somewhat by linking its carbon trading scheme with the EU market . The Intercontinental Exchange ’ s managing director of utility markets tells Karolin Schaps why a link will benefit both markets .
The UK and European carbon markets need to be linked and more sectors need to fall under cap-and-trade schemes to speed up decarbonisation , says Ice ’ s Gordon Bennett .
The US-headquartered firm ’ s trading platform is responsible for nearly EUR 2bn worth of European carbon emissions trades on a daily basis , making it one of the main exchanges handling the selling and buying of emissions rights in the world ’ s biggest carbon market .
The exchange recently made the headlines when it announced its intention to move its London-based European carbon futures and options trading to Amsterdam . A direct consequence of the UK leaving the now 27-nation bloc , Ice ’ s move will take place on 7 June to allow trading to remain located in the EU , where European carbon policy is set .
Additionally , Ice has been appointed by the UK government to carry out the country ’ s new UK ETS auctions . On 19 May , Ice will carry out the first round of UK ETS auctions and launch its own UK Allowance ( UKA ) futures contracts , followed by day-ahead contracts on 21 May .
Yet there are calls from businesses and industry to link the UK ETS with the EU market to spur liquidity and ensure more robust pricing . Being directly involved in both systems , Bennett agrees that linking the two will be beneficial . “ Not only are we in favour of linking the UK and EU systems , but there should generally be more linking of trading programmes and more sectors should need to come under cap and trade ,” he says .
Ice has benefitted from record highs set in the EU carbon market in recent months , with volumes of EUAs futures and options rising to a one-year peak in March . As long-term curve contracts are trading above EUR 50 / t , the market is showing that participants are expecting prices to continue to firm .
“ It ’ s a bankable asset and in order to meet the goals of the Paris Agreement a higher carbon price is needed than we have today . The fundamentals are showing that in the long term the price should rise ,” Bennett says .
With carbon prices at record highs , Ice has recently seen some of its best-performing months in EUA options trading . “ That could well be
Montel Magazine 2 – 2021 a function of how we ’ re in record territory so people may be moving to using an EUA option rather than a futures contract to manage risk .”
Another market which has performed well and has posted record volumes on Ice is the Dutch TTF gas market , underpinned by a bull-run that started at the end of last year . TTF futures and options reached a record high in January and are continuing to trade strongly .
“ Someone coined [ TTF ] as the Brent of natural gas and I tend to agree with that . It ’ s very much cementing itself as a globally important benchmark as it ’ s being internationalised and financialised . We ’ re happy we ’ re continuing to grow off that backdrop ,” Bennett says .
As the European gas benchmark , TTF has become the go-to hedging tool for those trading LNG in and out of the continent . TTF ’ s role as an LNG risk management instrument is also reflected in record demand for Ice ’ s socalled First Line products . These offer dollar and MMbtu-denominated TTF contracts , bringing the Dutch gas contract in line with how LNG is valued and traded globally .
“ March was our best month in the TTF First Line USD / MMBtu Financial Futures . We traded over 6,000 lots and had close to 20,000 lots of open interest . We ’ re getting a lot of interest in the First Line TTF contract ,” Bennett says .
He says the exchange is also looking at hydrogen , a commodity that is of growing importance in the energy transition in Europe and elsewhere . With some pricing agencies launching assessments of hydrogen contracts , interest is growing in establishing a hydrogen marketplace .
Bert den Ouden , the former CEO of APX Endex , the Dutch-based energy exchange taken over by Ice in 2012 , is at the forefront of a proposal to launch an exchange for hydrogen in the Netherlands . Could this be a perfect match to establish the world ’ s first hydrogen exchange ? “ We are not formally involved ,” says Bennet . But Ice is actively looking at the wider hydrogen market for potential business , he adds .
“ We are doing our homework on hydrogen , but it ’ s a medium to long-term play . You need to have the right market structure in place before you consider launching futures contracts and that ’ s not there at the moment .” n 15