While global electricity use is expanding strongly, the European Union lags behind. Demand in 2025 is forecast to rise only 1.1%, far below China, India or the United States. The key issue is stagnant industrial consumption: after steep declines in 2022–2023, the rebound remains muted, with steel, aluminium and automotive output still subdued. For ETS participants, this means structural electricity demand in Europe is not yet back to pre-crisis levels, muting short-term EUA demand growth from the power sector.
Electricity Supply Tensions: Renewables Strong but Not Enough
Solar PV continues to expand, breaking records in H1 2025 with +22% generation growth. Yet weak wind conditions and drought-affected hydro forced the EU to increase coal and gas output early in the year. This reliance on fossil back-up raised emissions and electricity prices. While 2026 should see fossil declines if weather normalises, the lesson for market participants is clear: intermittency still drives volatility, creating unpredictable EUA demand swings during poor renewable seasons.
Emissions Outlook and EUA Implications
Power sector emissions in the EU are expected to decline overall in 2025–2026, but the trajectory is weather-sensitive. With renewables covering nearly all incremental demand, coal’s share will fall sharply, dropping below 10% of EU generation by 2026. Carbon intensity is set to fall from 175 g CO₂/kWh in 2024 to 140 g CO₂/kWh in 2026 – the steepest reduction globally. For EUA traders, this signals a medium-term bearish factor: declining compliance demand from utilities. However, short-term shocks (cold winters, low wind, or weak hydro) and expected structural deficit from 2027 onwards, can still trigger EUA price spikes, requiring careful hedging.
Price Pressures: A Competitiveness Challenge
Wholesale electricity prices in the EU rose ~30% in H1 2025 to around USD 90/MWh, largely due to higher gas prices and weaker renewable output. EUA prices also edged up, averaging EUR 70/tCO₂, further lifting generation costs. For industrial ETS participants, the combination of high power and carbon costs maintains a wide gap against the US and China, threatening competitiveness. Energy-intensive sectors will remain under pressure, with CBAM only partially mitigating this exposure. The persistence of negative wholesale prices (now 8–9% of hours in Germany, Netherlands, Spain) shows the system’s flexibility challenge: too much renewable power at some times, too little at others — a volatility that complicates both hedging and procurement strategies.
Strategic Takeaways for Market Participants
Utilities and traders should expect subdued EUA demand growth in Europe’s power sector, but weather-driven fossil reliance will continue to create trading opportunities and volatility spikes.
Industrial ETS participants face structurally higher energy costs relative to global competitors, with EUA costs amplifying the gap. Hedging strategies should combine EUA coverage with forward power procurement.
Investors and policymakers need to address system flexibility: growing frequency of negative prices underlines the urgency of scaling storage, demand response and interconnections — all of which will shape the marginal EUA demand curve.
