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30/10/2006
MARKET BASED MECHANISMS TO FIGHT CLIMATE CHANGE
Jean-François Conil-LacosteChief Executive Officer, Powernext SA
APEX ConferenceOctober 30, 2006
Seoul
30/10/2006
CLIMATE CHANGE IMPLIES A POLITICAL ANSWER
Concentration and fossil fuel CO2 emissions have increased greatly since pre-industrial periods because of human action.
To mitigate the human impact, the Governments have set up an international climate change policy.
1979: First World Climate Conference
1992: “Earth Summit” in Rio
1997: Kyoto Protocol (binding agreement reached on emissions reductions for developed countries)
2005: Kyoto Protocol is implemented, launch of the EU ETS
Kyoto protocol sets up tools to reduce CO2 emissions through market based mechanisms:
Emissions trading (allows countries with an emissions reduction target to trade with other countries)
Joint implementation (JI) and Clean Development Mechanism (CDM): a country with an emissions reduction target can get credit by funding emissions-reducing projects other countries
30/10/2006
THE EU EMISSION TRADING SCHEME : HOW DOES IT WORK?
CO2 emissions from European industries have been capped;
Each industrial plants has got allowances corresponding to its cap (one allowance = one ton of CO2);
The allowances are tradable all around Europe;
Every year, industrial installations have the obligation to restitute as many allowances as actual CO2 emissions;
Two market periods: 2005-2007 and 2008-2012;
Free banking and borrowing during each period;
Limited possibilities of banking and borrowing between the two periods.
30/10/2006
MORE THAN 50% OF THE ALLOWANCES TO POWER AND HEATING ACTIVITIES
Germany23,7%
Poland11,4%
Italy10,6%UK
10,5%
Spain8,3%
France7,4%
Others28,1%
Refining8,0%
Others9,0% Paper
3,0%
Power and
cumbustion56,0% Metals
12,0%
Cement glass and
lime12,0%
Total : 2.2 billion CO2 (50% of the EU CO2 emissions)
11000 industrial sources
Breakdown per country Breakdown per industry
30/10/2006
THE STRUCTURE OF THE EUROPEAN CO2 MARKET
Directive 2003/87/EC established a scheme for greenhouse gas emissions allowance trading (1rst period 2005-2007) in Europe.
Bilateral Market
Exchanges
OTC Broker Market
InstallationsNAP
Bilateral MarketBilateral Market
ExchangesExchanges
OTC Broker MarketOTC Broker Market
InstallationsNAP
InstallationsNAP
30/10/2006
A GROWING LIQUIDITY FOR THE EU ETS
A very important growth of the OTC market between 2004 (10Mt) 2005 (250Mt) and 2006 (800Mt).
50 to 80 counterparties negotiate regularly on the market (source : Fortis Bank)
Share between Exchanges and OTC market : 60/40
Share between Futures and. Spot Markets : 90/10
Share of Powernext : 60% among European spot CO2
Exchanges
Record volume in October 2006 : around 3Mt on Powernext Carbon
0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
80,00
90,00
1/02/05
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1/06/05
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1/08/05
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1/03/06
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1/06/06
1/07/06
1/08/06
1/09/06
Mt
5,0
10,0
15,0
20,0
25,0
30,0
€ p
er t
on
OTC Clearing via ExchangesExchangesOTCMonthly average price (EEX Index, Pow ernext Carbon Closing Price)
30/10/2006
WHAT WE HAVE LEARNT: 4 MAIN MARKET DRIVERS
Temperature and rainfall
Long term
Short term
Economic growth
Energy relative prices
Level of carbon constraint
30/10/2006
CO2 PRICE : THE CORNERSTONE OF THE ENERGY PRICES (1/2)
A strong correlation between CO2 and power prices.
With 65% of its CO2 emissions produced by the combustion of fossil fuels, the European power generation sector is the largest emitter and is allocated about 30% of the allowances.
Consequently, the power producers add to the production cost of the fuels the price of the allowance multiplied by the quantity of CO2 emitted per MWh generated.
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35
40
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60
65
24/06/2005
24/07/2005
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24/08/2006
24/09/2006
€/M
Wh
5
10
15
20
25
30
35
€/to
n
Powernext Futures (Calendar baseload contract)Powernext Carbon clos ing price
30/10/2006
CO2 PRICE : THE CORNERSTONE OF THE ENERGY PRICES (2/2)
Power generation plants are managed on the basis of “spreads”, which represent their operating cash flow calculated as the difference between the selling price of electricity during peak hours and the price of the fuel used, weighted by the energy output of the power plant.
If a power plant burns natural gas, the spread is called the “spark spread”,
And if it burns coal, the spread is called the “dark spread”.
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.
Power prices and dark/spark spreads
-20
0
20
40
60
80
100
120
140
1/07/2005
30/07/2005
28/08/2005
26/09/2005
25/10/2005
23/11/2005
22/12/2005
20/01/2006
18/02/2006
19/03/2006
17/04/2006
16/05/2006
14/06/2006
13/07/2006
11/08/2006
9/09/2006
€/M
Wh
Powernext Futures™ m onth ahead Peak (€/MWh)
Clean French dark spread (€/MWh) - powernext carbon
Clean French spark spread (€/MWh) - powernext carbon
30/10/2006
THE 2005 DIFFERENCE BETWEEN EMISSIONS & ALLOWANCES
Sum of shorts179,4 Mt [ 9,1% ]
Sum of longs254,0 Mt [ 12,9% ]
Net 74,6Mt[ 3,8% ]
Millions tons – CO2 EUAs
0 100 200-100-200
30/10/2006
SUMMARY ON EU ETS
A significant technical and political achievement The only real CO2 market, emerging standard for carbon credits; Easily the most important global climate policy development; A price on 10% of global emissions.
A multinational emissions trading system 25 sovereign nations of widely differing circumstances and
commitments to climate policy; Successful allocation of common burden among EU15 and
between EU15 and 10 accession states of Eastern Europe.
Global implications An example for others; A “fact on the ground” in global climate negotiations; Creating predisposition to and interest in CO2 trading in China,
India, Brazil and others.
30/10/2006
POWERNEXT: AN ENERGY EXCHANGE AS A LINK BETWEEN ENERGY PRICES
Powernext is an exchange with:
stable and European shareholding with 11,5 M€ capital
solid market models and IT systems
provides several price references and indices:
short term electricity to hedge balancing needs and volume risks: Powernext Day-Ahead™ since November 2001
medium term electricity to hedge price risks: Powernext Futures™ since June 2004
CO2 allowances to hedge greenhouse gas emissions non-compliance risks: Powernext Carbon since June 2005
in cooperation with Météo France, a full range of weather indices taking into account the economic reality of the zones considered: Powernext Weather since November 2005.
6,8%
6,8%
6,8%
6,8%
6,8%
5,0% 5,0% 5,0%
34,0%
17,0%
53,3%
22,2%
24,5%
HGRT
30/10/2006
POWERNEXT CARBON: THE LEADING SPOT MARKET IN EUROPE
Powernext Carbon is:
An anonymous, centralized and transparent market
Secured by a real time payment versus delivery guarantee
Powernext Carbon has a European and diversified membership of 60 members