Contango (see glossary) in the emissions market is now in full swing with a €4 premium for 2008 prices versus 2006. If we assume that emissions prices account for about 10% of prices in Summer and 7% in Winter we would assume that this switch from backwardation to contango would have an effect on power prices in the UK. In reality we have actually seen both Summer 07 and Winter 07 prices fall (along with emissions prices) and quotes going beyond this are few but still lower than we have seen in the past.

In reality the power price has reacted to the emissions collapse, and the market has seen significant drops in the Summers perhaps surprisingly the fall in Win 06 as relative to the drop in the emissions been reasonably small. It is made worse by the fact that the market has only limited information on compliance for emissions and when Poland, Germany Italy and the Uk annouce their compliance positions and they also turn out long (which they might well do given the evidence from Sweden) then we would expect emissions prices to go to near to zero. Inevitably if this does happen then prices in the back end currently at €18 will not be sustainable and both the backend and front end will drop. Players seeing the fall in prices will probably buy to cover shorts, and we can expect many to sign up to long dated contracts.