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1
STATE AND TRENDS OF THE EUROPEAN CARBON MARKET
APEX CONFERENCE
Powernext SAParis - October 15 & 16th
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State of the EU Carbon market Global policy framework Key dates in the establishment of the EU ETS Price dynamics CO2 and energy prices The “pass trough” issue Lessons learnt
Outlooks for phase II Main changes in phase II Functioning of a CDM project CER estimated market size Legal & technical issues on the CER underlying
Powernext results and perspectives Market Model for EUAs and CERs Powernext Carbon EUA market
Post 2012 issues
AGENDA
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STATE OF THE EU ETS
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Global policy frameworkIn order to help achieve its Kyoto targets, the EU a established an Emission Trading Scheme (ETS) for its large industrials emitters
Participants: All EU 27 countries All electricity, ferrous metals, pulp & paper, cement and all facilities with
installed capacity > 20MW
Member states develop National Allocation Plans (NAPs) by sector and installation
Installations receive allocations of EUAs below their business as usual requirement (2’094 Mt each year) and can either: Reduce their emissions to equal their EUA allocation or… Purchase additional EUAs in the market, or… Purchase emissions-reductions certificates (CERs) to cover surplus
emissions
Breakdown of CO2 emissions in the EU-15 in 2005, and estimated % of emissions
covered by ETS
56 %
54 %
Non ETS
CO2
Non CO2
ETS
Other
Power sector
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Key dates in the establishment of the EU ETS
December:Publication of the Commission guidelines for phase III
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Price dynamics
Price on the market is mainly driven by: Weather conditions
Economic activity
Energy prices
Institutions decisions
Price collapse in April 2006: 1st publication of emissions
data
Surplus of allowances (4% in 2005 and 1% in 2006) due to :
Over allocation
Abatements: to what extent? (fuel switch/ investments in low emitting technologies…)
No “banking” allowed between phase I and II 0
20
40
60
80
100
120
140
160
180
MtC
O2
Volume (Total) in Mt
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CO2 and energy prices
With the system of CO2 allowances, electric power generators must now integrate the price of the allowance into the management of their existing power generation stations.
In the short term, their operating costs mainly consist of fuel prices. That is why power generation plants are managed on the basis of “spreads”, which constitute their operating cash flow.
If a power plant burns natural gas, the spread is called the “spark spread”
If it burns coal, the spread is called the “dark spread”.
The higher the “spread”, the more profitable the use of the power plant.
-20 €
0 €
20 €
40 €
60 €
80 €
sept.-06 oct.-06 nov.-06 déc.-06 janv.-07 févr.-07 mars-07 avr.-07 mai-07 juin-07 juil.-07 août-07 sept.-07
Eur
os/M
Wh
Clean spark spread base
Clean dark spread base
Electricity Pow ernext Futures™ month ahead in €/MWh Base
From now on, these spreads are to be corrected by the carbon value.
It’s the “clean spread”, which have now become the signals that guide the management of the fleet of existing power generation plants. All other things being equal, the higher the price of carbon dioxide, the more the operators have an incentive to switch from the power plants with the highest emissions to those that produce fewer emissions.
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The “pass trough” issue
Lack of competition in the electricity sector allows utilities to “pass” the CO2 price in their prices (between 3 and 14 €/MWh)
Impacts mostly energy intensive industries who saw their energy bill increase by about 15%, paying not only for their own emissions (if caped) but also for utilities’ emissions
Carbon contribution to electricity prices in several EU countries (€/MWh)
0
10
20
30
40
50
60
Belgiu
m
Ger
man
y
Spain
Franc
e
Nethe
rland
sUK
Eur
os/M
Wh
C contribution Other
Source: London Economics (2007)
The Commission should answer this issue in the Guidelines for phase III
Full auction for the electricity sector allowances ?
Auctioning allowances to power producers may not alter all electricity prices effects (and might even increase them again)
However, it would avoid the need for governmental allocation, its associated political issues and generate revenues for the governments
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Lessons learnt
Timeframe is too short
3 and 5 years for phase I and II
Lack of visibility for new investments
It should be possible to bank allowances between 2 phases
Allocation issues:
Harmonization of allocation methodologies to avoid distortion amongst EU member states, especially for new entrants allocation and closure rules
The stringent monitoring and verification requirements
… have proved effective and valuable
… but raise questions about whether the threshold of 20MW thermal is too low, increasing transaction costs for small environmental gain
Information disclosure needs to be more frequent : the market had no idea there was an over supply until April 2006
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OUTLOOKS FOR PHASE II
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Main changes in phase II
EUAs are linked to European Member States allocation (Assigned Amount Units)
Stricter Commission decisions on NAPs : 1st period total cap : 2 142,5 Mt/y Proposed cap: 2 126,14 Mt/y EU Decision: 1 927 Mt/y -10% vs. proposed cap
Possibility to auction up to 10% of the total allocation (vs. 5% in phase I)
Safety valve: use of Kyoto credits for compliance (CERs from Clean Development Mechanism & ERUs from Joint Implementation) but limited to about 300 Mt/y (15% of total annual allocation)
CERs already represent a huge market
French AAUs~ 550 Mt/y
EUA II ~132 Mt/y
Part of the AAUs are converted in EUA II
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Functioning of a CDM project
Kyoto « flexibility mechanism » to facilitate the achievement of emissions reductions
The project developer must prove the project’s additionality
Pro
jection d
’émissio
ns
Scénario de base
Scénario du projet
Em
issions
UR
CE
Partie hôte (non annexe 1) sans obligation de réduction
Stock d’UQAdont les URCE viennent en addition
UR
CE
Partie investisseur (annexe 1) avec un stock d’UQA
Host party (non annex 1)No emission reduction commitment
Investor party (annex 1)With a AAU stock
BAU scenario
Project scenario
Plan
ned
Em
ission
s
Em
ission
s C
ER
CE
RAAU stock (CERs are additional)
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CER estimated market size Répartition des proje ts enregistrés
(nom bre)
2%
15%18%
5%
28%
22%
8%2%
HFCs N2OLandf ill gas Biomass energyWind HydroEE ow n generation Others
Répartition des proje ts enregistrés (volum es)
41%6%
5%
4%12%
16%
10%
6%
HFCs N2OLandf ill gas Biomass energyWind HydroEE ow n generation Others
Breakdown of registered projects(number)
Breakdown of registered projects(volume of CER)
There are few HFC projects (fluoride gases) but they generate a large amount of credits (more than 40%) amongst registered projects. Indeed, HFC’s global warming potential (GWP) is 12 000 times higher than CO2.
As of today, more than 2 000 projects are being validated or already registered by the CDM Executive Board.
The flow of delivered credits should be about 175 M for 2007 and 250-300 Mt over the 2nd period.
At the end of August 2007 : 763 projects were registered (~ 160 Mt/an) 230 projects had issued credits = 70Mt
But these data only concern the primary market, a pre paid market where the buyers use CER for their own compliance.
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Legal and technical issues on the CER underlying
UNFCCC
KYOTO: Marrakech agreement
EUROPE
European Linking directive
COUNTRY
French national legislation
Decision 17/CP17
NO NUCLEAR PROJECT
Article 11 bis a)
NO NUCLEAR PROJECT
NO LULUCF
Article 11 bis b)
NO NUCLEAR PROJECT
NO LULUCF
NO HYDRO PROJECT
> 20 MW that would not respect guidelines from World Commission on Dams depends on countries interpretation
Décret 2006/622 & arrêté 29/5/2006
NO NUCLEAR PROJECT
NO LULUCF
NO HYDRO PROJECT
NO PROJECT IN COUNTRIES IN CONFLICT WITH FRANCE MILITARY & DIPLOMATIC INTERESTS
Legal issues: CERs are not fully fungible
Technical issues: the project type is not available in the Serial Number of the CER in CDM registry (only project identifier number) is only available on UNFCCC’s website (thanks to the project identifier number).
Market players can’t visualize the project type – automatically – such as big hydro dam
Back offices will have to reconcile each CER types for every transaction (serial number versus project identifier & UNFCCC list to find project type)
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POWERNEXT RESULTS AND PERSPECTIVES
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Market Model for EUAs and CERsPowernext Carbon is:
EUA spot market launched in June 2005
CER spot market (launch planned for the end of 2007)
Same market model for both instruments:
Trading on Global Vision from 9 to 5 pm
Real time Payment versus Delivery
CDC Cash
Account
CDC Allowance Account
BUYERCash
Account
Allow-ance
Account
Cash Account
Allow-ance
Account
€
€
CO2
CO2Order
Order
Delivery versus payment
instruction
SELLER
1
1
2
3
3
1 2 3A priori checks
A posteriori checks
CITL/ITL controls
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Competitive environment
Share between Exchanges and OTC market : 60/40
Share between Futures and. Spot Markets : 80/20
Share of Powernext : 60% among European spot CO2 Exchanges
Record volume in February 2007 (around 6Mt on Powernext Carbon)
EUA Futures marketEUA Spot market
From June 05 to August 07
Powernext Carbon
46%
OTC - Brokers
28%
Other exchanges
26%
From June 05 to August 07
ECX60%
Other Exchanges
8%
OTC - Broker32%
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1
22
19
6
1
4
1
32
8
2
1
1
211
Powernext Carbon EUA market
74 European members
Variety within the members: worldwide banks, utilities, industrials, retailer, …
Thanks to a flexible and simple market model & continuous implementations BANKS & MARKET INTERMEDIARIES UTILITIES & INDUSTRIALS
ABLY CARBON ACCORD AMBRIAN COMMODITIES AEM BARCLAYS Bank ASM ENERGYBGC ATEL BNP PARIBAS BP GAS MARKETING CALYON CCIAG CANTOR FITZGERALD CEZ CARBON CAPITAL MARKETS E.ON SALES & TRADINGCLIMATE CHANGE CAPITAL EDF TRADING CLIMATE CORPORATION EDISON TRADING CM CAPITAL MARKETS EGL CONSUS ELECTRABEL CONSUS France ELECTRICITE DE STRASBOURG CREPUSCULE ENDESA FranceDUBUS ENDESA GENERACION ECOPROGRESSO ENDESA TRADING ECOSUR ENEL TRADE ECO-WAY EOSENERGY STOCK MARKET GAS NATURAL FINANCIERE SAINT MERRI GAZPROMFORTIS IBERDROLA GENERACION GASELYS IRIDE MercatoGREENSTREAM ITALCEMENTI HEMLOCK NUON JP MORGAN POWEO LABEL 5 RWE TRADING MAN FINANCIAL SEMPRA ENERGYMERRILL LYNCH SHELL TRADINGMORGAN STANLEY STATKRAFT MARKETS ORBEO TOTAL GAS & POWER PETUM TOTSA TOTAL OIL TRADING PRAVDA CAPITAL TRAFIGURA SAGACARBON UNION FENOSA GENERACION SOCIETE GENERALE VEETRA STX SERVICES VELCAN ENERGY V & A CORPORATION VICAT WIND TO MARKET VOLTALIA
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Post 2012 issues
Review of the EU Directive expected for December 2007
Directive may need adjustment for Phase III to address issues around:
perverse incentives (new entrants, closures)
allow for much greater auctioning: for the longer term, continuing free allocation will require greater institutional independence of allocation authorities. The logical solution to most problems with the EU ETS would be to work towards greater auctioning over time
potentially address competitiveness issues
Integration of the aviation sector from 2011
Linkage with other cap and trade systems ?
