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Obstacles and lessons learned when preparing for an ETS Emily Spears; BP Energy Asia, presentation to the BPMR 28th October 2014 – Shenzhen
Agenda
Preparation to ensure your success:
− Establishing a Carbon Project Team
− The need to develop a Market Participation Strategy
− Purchasing preparation & considerations : Primary & Secondary
INTERNAL USE ONLY
LOCAL ENTITY MANAGED
GLOBAL SUPPORT
Carbon Solutions
Identifying mitigation options
Emerging Business & Ventures
Early leanings in emerging markets
Global Emissions Trading Desk Outsourcing & managing risk
Safety & Operational Risk GHG reporting & risk
quantification
Policy, Advocacy & External
Affairs
Strategy Compliance Reporting
Trading & Offsets
Finance & Tax
Purchasing
Communic-ations Sales Systems &
Processes Legal
Project Manager
Governance Board
Establishing A Carbon Project Team
• BP model is to centralise market facing activity into a single trading entity. Benefits of this approach include:
• Individual installations are then able to focus time and resource on their core activities e.g. refining or petchems, where they can be competitively advantaged.
A Central Trading Function
4
1
2
3
Single Face To market
• Prevents individual installations competing against each other in market
• Allows netting of within group long or short positions
Centre of Excellence
• Developing of trading specialist team and infrastructure support (not cost efficient in each individual installation)
• Creates competitive advantage for Sinopec in trading market
Installations are Market Neutral
• Trading division buys/sells from individual installation at annual average price which is market neutral price
• Trading/speculative profits within trading division but stay within Group
The Need to Develop a Market Participation Strategy
Total Harbour Time BP’s Emissions Trading Scheme 1998-2001
In September 1998 BP announced it would operate an internal emissions trading system to reduce its greenhouse gas (GHG) emissions 10% below 1990 levels by 2010.
In 2001 we met our target – Nearly 10 years ahead of schedule & learnt valuable lessons along the way…
The price fluctuated with the reported emissions forecast. The forecast varied dramatically through the year reasons for this are: • Improvements in forecast, particularly
acquired assets and • Acceptance of changing economic outlook • Lack of early market participation
Source: Point Carbon, 2008
EU ETS
Improvements in forecast
Changing Economic Outlook
Limited early market participation
50.00 55.00 60.00 65.00 70.00 75.00 80.00
0 20 40 60 80
100
BEJING ETS Trading Data
Volume (kt) BJEA Price (CYN/t)
35.0
37.0
39.0
41.0
43.0
45.0
0
50
100
150
200
250
SHANGHAI ETS Trading Data
Volume (kt) SHEA13 Price (CYN/t)
35 45 55 65 75 85
0 20000 40000 60000 80000
100000 120000
SHENZEN ETS Trading Data
Volume SZEA13 Price (CNY/t) Source: Adapted from Sinocarbon, 2014
Chinese Pilots
Purchasing preparation & considerations : Primary & Secondary Trading
Allowances – Be ready to act
Ensure you are able to act on time:
• Identify potential counterparties early
• Pre agree trading documentation (STA, Master Agreement, ISDA, Custom)
• Pre approve market entry & exit points with management
45 55 65 75 85 95
105 115 125 135
Shenzhen ETS Trading data (CYN/t)
Source: Adapted from Sinocarbon, 2014
Offset Transaction Risk Considerations
Primary Offset
Refers to the initial transaction between the project developer and the investor. Contract terns vary between projects. Typically, the price agreed is a function of the
inherent risk apportionment within the contract.
.
Secondary Offset
Refers to the onward purchase of an already developed offset or one who’s delivery is guaranteed. Typically, the
buyer in the secondary market carries much less risk and as a result a higher price.
Offset Diversification – A lesson from the CDM
0 5
10 15 20 25 30 35 40 45 50
PDD Volumes Risk Adjusted
Ann
ual I
ssua
nce
(Mt)
CCER Volumes Transport (66%)
Methane (79%)
Landfill Methane Recovery (58%)
Natural gas (59%)
Hydro (81%)
Biomass (96%)
• UNEP RISOE CDM pipeline provides valuable insight into issuance risk.
Conclusion
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