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An important part of the financing for the REPowerEU package comes from carbon allowances. This affected EUA supply and prices at the end of 2023 and the beginning of 2024.
The RepowerEU plan is a response to the political disruptions caused by the war in Ukraine and the following energy crisis. It is a legislative package aiming at making Europe independent from Russian energy sources and make it more sustainable and effective when it comes to power production and usage. The RepowerEU plan is funded by €72 billion in grants and €225 billion in loans. A part of the initiatives will be using money generated from the sale of carbon allowances. As a reminder, European Union Allowances (EUAs) are issued by the EU commission and a part of them is sold through auctions. So, it has been decided that €20 billion worth of allowances will be injected earlier than expected, to raise the necessary funds. However, this supply calendar change impacted EUA prices, which dropped from over €90 in March 2023 to as low as €50 by February 2024. Despite generating €4.4543 billion from EUA sales by 2024, (22.27% of the total funds to be generated by the EU ETS), the EUA sales proceeds fall short of initial expectations due to lower-than-anticipated prices, resulting in a delay of €255.5 million in expected revenues to reach the RepowerEU objectives.
The RepowerEU plan will mobilize €300 billion in total with around €72 billion from grants and €225 billion in loans. In the “grants” category, there are funds coming from the auctioning of EUAs. €8 billion are sourced from Member States' anticipated auctioning of emission allowances, while €12 billion are drawn from the Innovation Fund. The European Union allowances corresponding to those funds are scheduled for auctioning by August 2026.
As mentioned in a recent article, the use of the RepowerEU funds includes:
The European Union is “injecting” €20 billion worth of allowances into the market to fund the RepowerEU initiative. These allowances are “a borrowing from future allocations”. While this injection temporarily increases supply and impacts prices negatively in the short term, it will result in a sharper decrease in supply from 2026 onwards, effectively balancing out demand and supply dynamics in the future.
Several NGOs and carbon market analysts, such as the WWF or Sandbag, had foreseen the potential negative impact of the supply adjustment as early as 2022. In a report published in May 2022, when EUAs were valued at EUR 91 and market sentiment was bullish, concerns were raised by those institutions about the market's ability to withstand disruptions caused by the RepowerEU plan (given the market structure with the Market Stability Reserve as it is currently designed). Even at that time, there were concerns EUA prices could plummet to as low as EUR 60 due to these supply changes. And they ended up being right, even if back then, it was brave to talk about such low levels.
Between March 2023 and February 2024, European Union allowances (EUAs) experienced a notable decline in prices. This downward trend is attributed to various factors, but mainly this injection of EUAs ahead of the projected budget, leading to a supply-demand imbalance. With more EUAs entering the market amid an economy facing reduced economic activity and lower emissions, there was less need for entities to purchase EUAs, resulting in a decrease in prices. This shift saw EUA prices dropping from over EUR 90 in March 2023 to as low as EUR 50 by February 2024.
The 2024 revenues from EUA sales for the RepowerEU program amounted to EUR 1.6261 billion, compared to EUR 2.8282 billion in 2023, bringing the total to EUR 4.4543 billion. The cumulative EUAs sold for the plan currenlty stands at 62,797,500 units.
The EU ETS has contributed 22.27% of the necessary funds for the RepowerEU plan thus far. However, this falls short of initial expectations. Policymakers had projected an average EUA price of EUR 75 based on market conditions at the scheme's introduction, but recent prices have been lower, averaging EUR 60 in 2024. Consequently, there is currently a delay of EUR 255.5 million in the expected revenues corresponding to the volumes sold.
The supply disruptions caused by the RepowerEU plan will gradually be rectified in the coming months and years, leading to a sharper decrease in supply levels by as early as 2025. This will tighten the market and increase prices. This trend has already begun, as evidenced by the rebound in EUA prices from the EUR 50 range to EUR 69 at the time of writing.
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