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By Bloomberg

German year-ahead power prices, a European benchmark, will probably recover from the lowest in at least seven years in the second half as carbon permits rise.

Ten out of 16 traders and analysts surveyed by Bloomberg News are bullish on German wholesale electricity prices, which have fallen every year since 2010. Societe Generale AG forecasts that the year-ahead contract will gain 13 percent in the fourth quarter.

Carbon may increase if European Union lawmakers back reforms to the bloc’s emissions trading system after prices fell to levels that fail to deter polluters. Power prices will increase as much as 0.80 euro ($0.90) a megawatt-hour for every euro that carbon rises, according to CF Partners U.K. LLP, a London-based trading company.

“Carbon is one of the big wild cards between now and year- end,” Roland Vetter, the head of research at CF Partners, said by e-mail. “It’s looking positive on fixes to the ETS and there’s a risk that prices move higher.”

Four of the 16 surveyed said German power prices would fall by the end of December, while two said they would stay the same. Not all respondents provided price levels.

German year-ahead electricity fell to 31.15 euros a megawatt-hour on May 27, the lowest since at least September 2007 when Bloomberg started compiling broker data. The contract has traded in a 2.85-euro range this year and changed hands at 31.35 euros a megawatt-hour on Wednesday. It reached a peak of 90.90 euros in 2008.

Power prices could rise to as much as 33 euros a megawatt- hour by Dec. 31, according to Patrick Hummel, an analyst at UBS AG.

Carbon Gains

UBS forecasts that the cost of emitting a metric ton of carbon dioxide will rise 32 percent to 10 euros by the end of the year amid anticipation that the EU’s proposed reserve to control the supply of permits is approved. Benchmark carbon contracts increased 3.3 percent this year to 7.58 euros a ton on ICE Futures Europe.

EU nations gave their support last month to start a carbon reserve in 2019 that will soak up a glut of allowances that has driven prices down about 75 percent from highs in 2008. The full EU Parliament is due to give its verdict the week of July 6 and a decision by EU ministers later that month will be the final step in the legislative process.

Electricity prices have reached a floor in the “low 30 euros” area, the lowest level at which about 9 gigawatts of coal-fed plants can still cover their costs, according to Bruno Brunetti, the senior director of electricity at Pira Energy, who sees prices rising to 32.80 euros by the fourth quarter. This capacity is needed to maintain security of supply, he said. A gigawatt is enough to power about 2 million European homes.

Low demand combined with growth in solar and wind production have been “depressing” market prices, according to Paolo Coghe, a senior analyst at Societe Generale. Wholesale prices are already too low to spur new build capacity, he said.

“It is clear that wholesale prices do need to recover over time,” if not, a “large swath of existing plants will eventually retire,” Coghe said. While this would boost prices, it would also mean a less-reliable system, he said.