Spain will cut the CO2 credit allowances by 17% for the next period between 2008 and 2012 to 152.65m tons vs 182.9m tons in the first period in order to meet the Kyoto protocol amid rising economy. Spanish utilities will be hurt most with CO2 allowances being cut by 36% to 54.7m tons from 85.4m tons.
Our view: While most of the EU states have not met the deadline for submitting their CO2 credits allocations for the 2nd period by June 30, we believe that most EU countries, which reported a surplus of CO2 in 2005 will cut them in the 2nd period as demonstrated by Spain. Lower allowances should lead to stable to slightly higher price of CO2 credits, currently at EUR16.4/t, which in turn should support electricity prices at above EUR50/MWh keeping CEZ’s convergence story intact. Given the increasing electricity demand we believe that CEZ is covered with sufficient CO2 credits for 2006 and 2007 with a need to purchase some credits for 2008.