UK Energy Policy

Climate Change Capital

Opening Pandora’s
Box?

Anthony White
Head of Research
Climate Change Capital

Basque Parliament
24th February, 2005

1
 Climate Change Capital
Agenda
• Outline of UK Energy Policy
• Do markets work?
• The outlook for emissions trading
• Conclusions

2
 Climate Change Capital
UK Energy Policy
• Poor performance of public monopolies

• Market liberalised from mid 1980s

– Pandora’s box?

• Energy White Paper of 2003

– Low carbon economy
– Security of supply
– Market mechanisms
– Affordable prices

3
 Climate Change Capital
But will they work?

S po t Ene rg y Pric e s in Eng land & Wale s

45

40

35 Po we r

30

25
£/MWh

20

Gas
15
Co al
10

0
J a n-99 J uly J a n-00 J uly J a n-01 J uly J a n-02 J uly J a n-03 J uly J a n-04

4
 Climate Change Capital
Prices will be volatile!!

period
T2

time to shortage peak new entrant costs

T1 h
price

spike length
T3

marginal costs

time

5
 Climate Change Capital
Competitive or “stable” markets?
• UK market totally liberalised - volatile
• Spain
– CTCs & Tariff caps disrupt the market
– Between Iberdrola and Endesa have 70% of
the market
– But prices stable, investment happening

6
 Climate Change Capital
…and green power
• EU set up Renewables Directive
• UK let “market” set price - ROCs
• Spain – feed-in tariffs & market forces?
• Spanish Government “set” price

7
 Climate Change Capital
Using the market - renewables

•UK suppliers MUST buy UK ROC SYSTEM

5% power from green GREEN PRICE

£/MWh
sources (15% in 2015) 90
80
•Pay “penalty” for any 70 Smear
60
shortfall 50
Buy-out
40
30
•Technology blind – and 20 Brown power
optional 10
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
•New technologies
difficult to finance

•Target not achievable?

8
 Climate Change Capital
So which is “better”?
Spain: ~8,000 MW
Wind Capacity installed in Spain vs UK
20% 9000
UK: 821MW % Of w orld ca pacity in Spa in
18% Ca pa city Insta lle d in UK 8000
Ca pa city insta lle d in Spain
16%
Why? 7000

14%
Investors do not like market 6000
12%
uncertain prices 5000

MW
10%
4000
8%
Spanish system provides a 3000
6%
stable prices –expensive? 2000
4%

1000
Investors happy with
2%

political risk 0%
1986 1990 1994 1998 2004
0

9
 Climate Change Capital
Do markets work?
• Avoid more obvious mistakes
• Release innovation, reduce costs
• De-politicise investment?
• Difficult to “control” – especially if very
competitive – but not if “managed”
• …..So emissions trading??

10
 Climate Change Capital
Emissions Trading: Background

European Greenhouse Gas Emissions

• Business as Usual
Europe misses Kyoto by
7%

• Additional measures
could reduce overshoot
to 1%

• Trading
should close the gap

Source: European Environment Agency, November, 2003

11
 Climate Change Capital
European Emissions Trading Scheme
• 18,000 sites covered, 5 sectors

• Allocations
– “free” allowances given to incumbents
– >95% of allowances created for 1st period; 90%
for second
– up to member states to set method of allocation

• Fines if emissions > allowances

– €40/tCO2 for 2005-2007;
– €100/tCO2e for 2008-2012
12
 “Bit”=
~50-60
power.

mtCO2pa.
Allocations
BAU – a bit for
MtCO2
G
er
m

0
10
20
30
40
50
60

-10
an
G y
re
ec
I re e
la
nd
Ita
ly
Lu
H x
ol
la
P o nd
rt
ug
al
Sp
a
Sw in
ed
en
EU
U
15 K
To
ta
C l
ze
c
Es h
to
n
2006

C ia
yp
ru
s
La
Li tv
th ia
ua
H n ia
un
ga
ry
M
al
t
Po a
la
S l nd
ov
en
i
Sl a
ov
ak
To
ta
EU-25 Abatement Targets for EU ETS

l:
13
Climate Change Capital
 Climate Change Capital
Price drivers

EU - 25 Abatement Cost Curve

20

18
16 Gas @€3.77/GJ
Current prices Coal $60/t
14
suggest a price of 12
abatement
under €10/tCO2e
€/tCO2e

10

8
Value of allowances likely price range
6
will move to ensure
4
coal consumption 2
is reduced. 0
13 23 33 43 58 73 88 103 118

Abatement in mt CO2e

14
 Climate Change Capital

Will EU prices be sensible?

EU abatement curve
Allowance
price driven 25
by coal and
20
gas prices Gas €3.12/GJ Coal $35/t
Gas €3.34/GJ Coal $35/t
Euro/tCO2

15 Gas €3.34/GJ Coal $45/t

Gas €3.77/GJ Coal $45/t
10 Gas €3.77/GJ Coal $55/t
Gas 3.77€/GJ Coal $60/t
Gas €4.54/GJ Coal $60/t
5

0
13 23 33 43 ? 58 73 88 103 118
MtCO2 abated against BAU

15
 Climate Change Capital
EU15 for Phase II

Excess
Add’l
292Mt
350Mt measures

CDM supply?
ETS Phase I
45Mt?

JI? ETS Phase II

50? Mt
4117Mt 3877Mt 4223Mt
2001 Kyoto 2010e

16
 Kyoto demand and supply

Large shortfall in All figures in annual CO2e

EU 15 etc

Current Add’l
Flexibility unlikely CDM supply 473Mt
to be sufficient measures
30Mt
(expected 200Mt) Domestic
114Mt
But Hot Air will! sinks

Expect Russia to 755Mt 800- Russian

determine price
DTTe 1200Mt hot air

EU accession
144Mt countries
hot air
6532Mt 5905Mt 6660Mt JI supply?
2002 Kyoto 2010e 200- Ukrainian
400Mt hot air
EU15, Japan, Canada, Norway, NZ, Switzerland - buyers
 Climate Change Capital
Conclusions
• British love for free markets? Naïve?
• Markets can work, if incentives aligned
• Do not always work as politicians wish
• Need to understand how to design

18
 Climate Change Capital
… is it more like this…..?

19
 Climate Change Capital
For further information, please contact:

Climate Change Capital Ltd

Bond Street House
14 Clifford Street
London W1S 4BX

Telephone: +44 (0)207 290 7040

Facsimile: +44 (0)207 290 7041
ccc@c-c-capital.com

The financial services outlined in this presentation constitute regulated activities as defined by the Financial
Services and Markets Act 2000 (Regulated Activities) Order 2001; as such these activities can only be undertaken
by an authorised person. Climate Change Advisory Limited ("CCA"), a wholly owned subsidiary of Climate Change
Capital Limited ("CCC"), is authorised and regulated by the Financial Services Authority. Consequently the
regulated activities of the CCC Group are carried out by CCA rather than directly by CCC. Some of the information,
and in particular the financial services described within this presentation, are intended exclusively for persons who
qualify as an intermediate customer or market counterparty. Please refer to the disclaimer on the Climate Change
Capital Group website www.climatechangecapital.com for further details.
20