Transcript Market based Mechanisms to fight Climate Change

MARKET BASED MECHANISMS TO FIGHT
CLIMATE CHANGE
Jean-François Conil-Lacoste
Chief Executive Officer, Powernext SA
APEX Conference
October 30, 2006
Seoul
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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
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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.
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MORE THAN 50% OF THE ALLOWANCES TO POWER AND
HEATING ACTIVITIES
Total : 2.2 billion CO2 (50% of the EU CO2 emissions)
11000 industrial sources
Breakdown per country
Germ any
23,7%
Others
28,1%
Poland
11,4%
France
7,4%
Spain
8,3%
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Breakdown per industry
UK
10,5%
Italy
10,6%
Others
9,0%
Pow er
and
cum bustion
56,0%
Paper
3,0%
Cem ent
glass and
lim e
12,0%
Metals
12,0%
Refining
8,0%
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.
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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)
90,00
30,0
Share between Exchanges
and OTC market : 60/40
80,00
25,0
70,00
Share between Futures and.
Spot Markets : 90/10
60,00
20,0
Mt
€ per ton
50,00
40,00
15,0
30,00
20,00
10,0
10,00
0,00
5,0
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OTC Clearing via Exchanges
Exchanges
OTC
Monthly average price (EEX Index, Pow ernext Carbon Closing Price)
Share of Powernext : 60%
among European spot CO2
Exchanges
Record volume in October
2006 : around 3Mt on
Powernext Carbon
WHAT WE HAVE LEARNT: 4 MAIN MARKET DRIVERS
Long term
 Level of carbon constraint
 Economic growth
 Energy relative prices
 Temperature and rainfall
Short term
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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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40
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Powernext Futures (Calendar baseload contract)
Powernext Carbon closing price
€/ton
€/MWh
25
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”.
Power prices and dark/spark spreads
140
120
100
€/MWh
80
60
40
20
0
-20
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Powernext Futures™ month ahead Peak (€/MWh)
Clean French dark spread (€/MWh) - powernext carbon
Clean French spark spread (€/MWh) - powernext carbon
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.
THE 2005 DIFFERENCE BETWEEN EMISSIONS & ALLOWANCES
Sum of shorts
179,4 Mt [ 9,1% ]
Sum of longs
254,0 Mt [ 12,9% ]
Net 74,6Mt
[ 3,8% ]
-200
-100
0
Millions tons – CO2 EUAs
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100
200
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.
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POWERNEXT: AN ENERGY EXCHANGE AS A LINK BETWEEN
ENERGY PRICES
5,0%
Powernext is an exchange with:
 stable and European
shareholding
with 11,5 M€ capital
 solid market models and
IT systems
5,0%
5,0%
6,8%
17,0% HGRT
24,5%
6,8%
22,2%
53,3%
6,8%
6,8%
6,8%
34,0%
 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.
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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
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CONTACTS
www.powernext.fr
+33 1 73 03 96 00
[email protected]
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