The large plant combustion directive is coming into play in the UK for Summer '08. This is a specific directive which links with the emissions scheme directed at specifically large combustion plants i.e. Coal power stations. The theory being posed is that coal power stations will have to limit their usuage far more than under the EU ETS (mainly because the cap is based on production, and not on price) this means that if coal prices stay at the levels they are now, that we should see less coal production during the summer and more during the winter when it is more profitable to run.

Some traders are putting this spread trade on in that they are buying summer and selling winter. In reality though this trade only works if fuel prices stay where they are today. If gas prices fall which although the market is backwardated and so some year on year price fall is already accounted for, then we would expect this switch to happen anyway. Plus the LCPD directive is looking to cut coal production from 120TWh to 100 TWh, although 20TWn seems alot it is more than easily offset by underutilised gas stations a growth in green technology, and a possible reduction in demand.

So theory is important but there are still many unknowns to uncover before this trade looks a dead cert.