1 Heikki Niininen, FortumDecember 1, 2004 BALTREL Report on the consequences of Emissions Trading and different allocation methods to the functioning of

Heikki Niininen, Fortum December 1, 2004

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BASREC Conference, Nov. 30 - Dec. 1, 2004, Tallinn, Estonia

BALTREL Report on the consequences of BALTREL Report on the consequences of

Emissions TradingEmissions Tradingand different allocation methods to the functioning of and different allocation methods to the functioning of

the power marketthe power market

By Heikki Niininen Fortum

Chairman of BALTREL's Task Force on Emissions Trading


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Content

• BALTREL • Task Force on Emissions Trading• Emissions trading as a driver of the energy

sector• Emissions Trading Directive and National

Allocation Plans (NAP) - situation• Analyses to compare different NAPs• Findings and conclusions


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Content

• BALTREL • Task Force on Emissions Trading• Emissions trading as a driver• Emissions Trading Directive and National



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BALTREL

Cooperation forum of the electricity supply industry in the Baltic Sea Region

The vision of BALTREL is ...

"To create a Common Open Electricity Market in the Baltic Sea Region"

http://www.baltrel.com/


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"BALTREL countries"

Belarus

Denmark

Estonia

Finland

Germany

Latvia

Lithuania

Norway

Poland

Russia

Sweden


EU ETS

Linking toEU ETS?EU ETS

EU ETS

EU ETS

EU ETS

EU ETS

EU ETS

EU ETS

KyotoFlexMex

KyotoFlexMex


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BALTREL companies

• Belenergo• Energi E2 A/S • Elkraft System • Eesti Energia • Fingrid Oyj • Fortum Corporation • JSC Latvenergo • DC Baltija

• Energibedriftenes landsforening • JSC Lietuvos Energija • Lenenergo • PSE SA - Polskie Sieci Elektroenergetyczne SA • JSC Yantarenergo • RAO UESR• Vattenfall AB • Svenska Kraftnät



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BALTREL

• Founded in 1998 by electricity supply industry in the Baltic Sea Region

• Work periods of 3 years with a rotating chairmanship (presently Fortum in chair)

• Committee, Networks, Task Forces as needed• Focuses on issues connected to

– market development– transmission grid– emissions trading

• 2003-5 work period: Task Forces for these three issues


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Content




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Emissions Trading Task Force

• Terms of Reference: Report and propose positions on the consequences of emissions trading and different allocation methods to the functioning of the power market

• The report approved by the BALTREL Committee on Nov. 4, 2004 covers reviews and analyses of

– Climate instruments– Implications of the Emissions Trading Directive, esp. allocation

of emission allowances– Implications of the Link Directive– Testing Ground idea/Facility

• Position paper to be prepared for the BALTREL Conference June 1-2, 2005 in St. Petersburg


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Emissions Trading Task Force

• Terms of Reference: … to report and propose positions on the consequences of emissions trading and different allocation methods to the functioning of the power market

• The report approved by the BALTREL Committee on Nov. 4, 2004 covers reviews and analyses of

– Climate instruments: ONLY CONCLUSIONS– Implications of the Emissions Trading Directive, esp. allocation

of emission allowances: FOCUS OF THE PRESENTATION!– Implications of the Link Directive: ONLY CONCLUSIONS– Testing Ground idea/Facility: ONLY CONCLUSIONS

• Position paper to be prepared for the BALTREL Conference June 1-2, 2005 in St. Petersburg


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Content




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Emissions trading – a major driverExample of the economic importance• CO2 cost added on fuel cost (at different CO2 price levels)• Base price: Fuel prices without taxes in Finland, summer 2003 (Note: wood = local fuel)• Reflection to the power prices dependent on the system – in any case remarkable• The CO2 price estimates vary, but for Kyoto period 10-30 €/t most often referred to

0 5 10 15 20 25

Coal

Peat

HFO

Gas

Wood

[€/MWh]

Base price CO2 at 5€/t CO2 at 10€/t CO2 at 20€/t


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Varying fuel and emissions prices reflected into variable costs of thermal power

20

30

40

50

60

EU

R/t

0

5

10

15

EU

R/t

CO

2

0

10

20

30

40

EU

R/M

Wh

Average variable costs of coal condense

Impact of emissions

trading

2000 2001 2002 2003 2004 2005 2006

2000 2001 2002 2003 2004 2005 2006

2000 2001 2002 2003 2004 2005 2006

Coal price, market quotations

Emissions price, market quatations

Source: EURELECTRIC, The Impact of Emissions Trading on Power Prices, June 2004


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Content




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Emissions Trading Directive (ETD)

• ETD covers nearly half of the EU’s CO2 emissions, big emitters (e.g. energy production over 20 MWthermal)

• An emission cap is defined for each installation inside the scope of the ETD

• Emission allowances allocated to each installation for emissions equal to the cap

• For each year the operator of the installation must leave for cancellation allowances the same amount as the emissions during that year

• Surplus allowances can be sold, deficit must be bought from the market (sanctions!)


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National Allocation Plan (NAP)

• The key issue of the ETD– A plan how to allocate the mainly free-of-charge emission

allowances, for each trading period, the first being 2005-7– If the supply of allowance (allocation) is less than the demand of

allowances (emissions) => shortage creates price on CO2

• All EU-25 countries except Greece have submitted their NAPs to the Commission

• The Commission has reviewed and approved 16 of those, either fully or conditionally

• The expectation is that the market 2005-7 will not be very short


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Allowance forward prices 2005Source: Point Carbon, Carbon Market Europe (2003-4)

0

2

4

6

8

10

12

14

161.

3.20

03

1.4.

2003

1.5.

2003

1.6.

2003

1.7.

2003

1.8.

2003

1.9.

2003

1.10

.200

3

1.11

.200

3

1.12

.200

3

1.1.

2004

1.2.

2004

1.3.

2004

1.4.

2004

1.5.

2004

1.6.

2004

1.7.

2004

1.8.

2004

1.9.

2004

1.10

.200

4

1.11

.200

4

1.12

.200

4

1.1.

2005

[€/t

CO

2]


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Content




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Fuel Technology Power efficiency

Heat efficiency

Hard coal Condensing 46 % -

Gas Condensing, CCGT 58 % -

Hard coal CHP 35 % 55 %

Gas CHP 38 % 52 %

Model plant for analyses

New installation (new entrant), with fuel input 100 MW and with annual operating time 6000 h, other features below


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0 %

20 %

40 %

60 %

80 %

100 %

120 %

140 %

Denmark Finland Sweden Germany Lithuania Latvia Norway Poland

Sh

are

of

CO

2 e

mis

sio

ns

Allocation to new gas CHP

Solid blue = allocation based on final NAP

Actual emission level


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0 %

20 %

40 %

60 %

80 %

100 %

120 %

140 %

Denmark Finland Sweden Germany Lithuania Latvia (Norway) Poland

Sh

are

of

CO

2 e

mis

sio

ns

Allocation to new coal CHP




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0 %

20 %

40 %

60 %

80 %

100 %

120 %

Denmark Finland (Sweden) Germany Lithuania Latvia Norway Poland

Sh

are

of

CO

2 e

mis

sio

ns

Allocation to new gas condensing, CCGT




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0 %

20 %

40 %

60 %

80 %

100 %

120 %

Denmark Finland (Sweden) Germany Lithuania Latvia (Norway) Poland

Sh

are

of

CO

2 e

mis

sio

ns

Allocation to new coal condensing




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0

50

100

150

200

250

300

Gas CHP Gas poweronly

Coal CHP Coal poweronly

[ktC

O2/

a]

Highest allocation Lowest allocation

Actual emissions

Harmony?Allocation to new entrants in eight Baltic Sea Countries

• Model plant: A new installation of 100 MW fuel input (gas-CHP, Gas-CCGT, coal-CHP, coal condensing)

• The graph shows the actual emissions of the plant and the variation (hi-lo) of allocation in different countries: a certain country may allocate more than the actual emissions, the other one nothing

• The maximum differences in monetary terms:

– at 5 €/tCO2: 1 M€/a

– at 20 €/tCO2: 4 M€/a• BUT: One important parameter fully

harmonised, that is the price of CO2


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Content




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Findings and conclusions (1)

Risk of double climate steering and burden

• In many countries ET comes on top of other climate instruments, like CO2 taxation.

=> • Double steering and double burden should be avoided

by reducing and removing the existing CO2 taxation schemes.


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Uncertainties do not favour investments

• The incentive 2005-7 for emission reduction investments remains low

• Only a few indications exist in the present NAPs for the Kyoto period (2008-12) allocation

• The pay-back times of the energy sector are long

=>• In order to permanently reduce the emissions,

companies would need clear long-term view about the climate policies


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Findings an conclusions (3)

Poor harmonisation - coordination is needed

• Big variations in the allocation to new entrants may result in market distortions and impact on the location of new plants

• For existing plants an observation: free of charge allocation combined with grandfathering includes the risk of uneven bottom line impacts.

• However, ET harmonises one key parameter, the price for carbon (CO2)

• Energy sector the main, if not the only contributor, to the required emission reductions - a more fair burden sharing in future?


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Linking: a possibility - faces uncertainties

• The Link Directive is a useful instrument for the European companies - there are, however, still obstacles to overcome

• The activity of the investing companies towards the utilisation has been low and likely remain, if no longer term climate policy can be ensured

• Doubts exist in potential JI host countries concerning the "double counting rules" that these will lead to unnecessary limitations - the Link Directive throws a “psychological shadow” over the JI


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Challenges of the JI Testing Ground

• The TF welcomes the achievements reached with the TGA and TGF and the invitation of private money to join the TGF activities

• The ground rules for private investments should be fixed as soon as possible

• TGF should focus also on the development of the host countries' JI administrations. This is needed in order to achieve a “level playing field between JI and CDM”


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Recommendations to Baltrel Committee

• Conclusions by the TF should be refined to a Position Paper of Baltrel by the coming Baltrel Conference (June 1-2, 2005)

• Baltrel should give its views about the Emissions Trading Directive review, which the Commission is to perform by June 30, 2006 (esp. the issue of “further harmonisation of the allocation method”)

• Baltrel’s production/supply expertise should be invited to study further the investment locations and market functioning issues


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Thank you for your attention!Thank you for your attention!

See:http://www.baltrel.com/

Documents

1 Heikki Niininen, FortumDecember 1, 2004 BALTREL Report on the consequences of Emissions Trading and different allocation methods to the functioning of