By Susanna Twidale
LONDON (Reuters) - Analysts have shaved their forecasts for European carbon prices in the bloc's Emission Trading System (ETS), as high coal prices lead to an increase in gas-fired power generation, curbing demand for carbon permits, a Reuters poll showed.
Analysts cut their forecasts for the next two years by 4-5 percent and now expect EU Allowances (EUA) to average 5.39 euros per ton in 2017 and 5.70 euros ton in 2018, according to the poll of eight analysts published on Friday.
In August, analysts had forecast prices of 5.59 euros for 2017 and 6.02 euros for 2018. They did not submit forecasts for 2019.
The new price forecast for 2017 marks a 7 percent drop from the current benchmark price of around 5.8 euros.
The analysts said increasing use of gas at the expense of coal in power generation, would lead to weaker than previously expected demand for EUAs.
"Coal generation is declining faster than anyone expected and the fall is far from being over. Gas is picking up and low prices (of natural gas) are here to stay," said Matteo Mazzoni, analyst at Nomisma Energia in Italy.
Electricity generators are the largest buyers of carbon allowances in the EU ETS, which charges power plants and factories for every ton of carbon dioxide (CO2) they emit.
European coal futures have surged by around 70 percent this year, due in part to a sharp cut in Chinese coal mining, while gas prices have fallen, meaning power generators are switching to the cheaper fuel.
Gas-fired power generation emits half as much CO2 as coal-fired power plants.
Analysts expect prices to dip next year as more supply comes to the market.
"As of 2017, we expect that the price will be under pressure with auction volumes coming back to normal (as backloading phases out) and demand not increasing the same way to mitigate this effect," said Philipp Ruf, an analyst at ICIS Tschach Solutions.
In an effort to boost prices and curb oversupply of allowances in the EU ETS, a total of 900 million EUAs were being gradually withheld from the market auctions from 2014 to 2016 in a process called backloading.
From 2017 the auctions will return to normal, meaning 200 million more allowances will be auctioned next year compared with 2016.
(Editing by Susan Fenton)