As Sweden reported 13% surplus of allocated CO2 credits, their price fell to record lows of EUR 11.4/t on Tuesday, down by another 14%. CO2 credits thus fell from its peak in mid April by 63%. As a result, Germany’s 2007 electricity forward fell to EUR 49.25/MWh, down by 4.55% d/d. The CO2 credits started to fall after the Czech Republic, France, Belgium, Netherlands and Estonia reported a surplus of the credits for 2005. More reports are expected from countries such as Germany, Poland, UK and Italy. These are expected to be hold-off until May 15, when European Commission plans to publish 2005 emissions data for the whole region. Spare allowances from 2005 may be used until the end of 2007, when new allocation program (until 2012) will become effective. Preliminary draft for second phase should be known by June 30, 2006. In any case, the future development of CO2 credits price may remain unknown as the EU is expected to cut the national allocations in second phase.
We reiterate that the impact on CEZ is rather limited in the near term and positive in mid-term as (i) CEZ has budget its surplus credits at cEUR20 per ton, (ii) its 2006 CO2 needs will be just covered by its balance and (iii) the company would have to be buying CO2 credits given its rising production in 2007. The negative is impact is on CEZ’s exports as these are realized at a lower prices but the size of exports is falling. Therefore, we believe that it is more the negative sentiment rather than the fundamentals that has driven CEZ’s price down recently. Moreover Czech electricity prices are significantly below those in Germany. Therefore, we reiterate our Buy recommendation on CEZ with fair value of CZK 1,030.