Post on 27-Sep-2020
transcript
© Vattenfall AB
Vattenfall Capital Markets Day
Emissions Trading
Presentation by
Erik Saether,Head of Vattenfall Trading Services
27 September, 2005
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
2Content
• Vattenfall Trading Services: Roles and Responsibilities• The Emission Trading Scheme• Market Assessment
- Participants- Volumes- Price drivers
• CO2 Impact on the Merit Order• Future Price Effects
• Appendix
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
3Vattenfall Trading Services Vattenfall’s central trading platformService Provider• portfolio management and trading related services
for Vattenfall• hedging strategies for the Vattenfall portfolio’s
Market Access and Trading• Market Access for
- European and Nordic power markets- financial coal, CO2, green certificates, weather
• Trading on own behalf- cross border- interconnectors
Key Markets• Nordic, Germany, Poland,
France and the Netherlands Exchanges, where VTS trades( Nordpool, EEX, APX, Powernext)
Countries, where VTS has offices
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
4CO2 activities of Vattenfall
Execution
Focus on Portfolio Manage-
ment
Trading
MarketAccessMarketAccess
Cross BorderTrading
Cross BorderTrading
Portfolio Management
Analysis
ModelingModeling AnalysisAnalysis
Vattenfall Trading Services (VTS)
OrdersOrders
MandatesMandates
BU Heat (Poland)BU Heat (Poland)
BU M&G (Germany)BU M&G (Germany)
BU Heat (Nordic)BU Heat (Nordic)
RORCRORC
Reference Groups for Analysis and Projects Reference Groups for Analysis and Projects
Exchanges
Access to all ExchangesLow Transaction CostsCross-Netting Facilities
Intermediates
RORC Best Price Screen All Brokers on Direct Lines
Low Transaction Costs
Counterparts
All Major Counterparts Signed
SLAsSLAs
BU Heat (Germany)BU Heat (Germany)
Responsibility according to the national ETS legislation for every installation: • Application for EUA• Monitoring of emissions• EUA Return to Authority
• Identification of position• Portfolio strategy • Identification of position• Portfolio strategy
BU 1
BU 3
….
….
BU 4
BU 2
…
… …
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
5GHG emissions reduction targets
„Kyoto Gases“
• CO2 Carbon Dioxid
• CH4 Methane
• N2O
• HFC
• FC
• SF6
EU 15 Burden SharingKyoto-ProtocolCOP3 -12.1997
- 8 % -28 %
(LUX)
- 5,2 %„Kyoto Gases“
1990
2008 – 2012
UN Climate Convention06.1992
+ 27 %
(P)
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
6The EU emission trading scheme (EU ETS)
• One of the tools for greenhouse gas (GHG) emissions is a cap-and-tradesystem - the new EU ETS
• Included sectors:power and heat production, pulp and paper production, oil refineries,cement, lime and glass production
• Included GHG: only CO2 • ETS sectors represent roughly 45 % of the GHG emissions in the EU
• Objective of EU ETS:Emission reductions shall take place where it is most cost efficient
• First phase (2005-2007) NAPs represent a reduction of approx. 2.7% from“business as usual” emission levels (12,000 installations affected)
• Second Phase (2008-2012) should lead to a reduction in EU emissions to alevel 8% below the1990 rate and may include other sectors and other GHG’s
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
7Timeframe – EU and the global climate policy
Glo
bal C
limat
e re
gim
e
2005 2008 2009 2010 2011 2012 2013
Trading period 2008-2012
2006 2007 20182014 2015 2016 2017
Trading period2013-2017
2004
NAP-04 NAP-06
Trading period 2005-2007
NAP-11 NAP-16
EU´s
Tra
ding
Sys
tem
The Kyoto Protocol in force
First Kyoto Commitment period 2008-2012
Post-2012?
Negotiations start Post-2012?
no borrowingno banking
validity of EU ETS guidelines
Possible Second Kyoto period 2013-2017?
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
8Allocation 2005-07 to the installations of Vattenfall
Sweden• Negligible impact due to the hydro/nuclear generation mix.
Germany• Nearly all necessary allowances received for the 1st trading period 2005-
2007• Vattenfall’s “early actions” have been recognised in the German national
allocation plan• Large CHP portion with a reasonable allocation level
Poland• Necessary allowances received for the 1st trading period 2005 - 2007
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
9Market assessmentParticipants:• Utilities, Gas/Oil Companies and a growing number of Banks• 7 Brokers and 5 Exchanges offering Spot, Futures and Forwards.Volumes:• Traded volume 145 Mt in 2005.• OTC Market represents 50 % of volume traded up until August 2005. • Exchange traded volume is rising as market develops.• Spot Market expected to expand substantially once Registries/Accounts are in
place
First and Second Phase:
• First Phase - Trading has transformed from policy driven into Trading basedon fundamentals
• Second Phase - Trading is still pending - Policy and regulatory framework tobe decided
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
10Countries and sectors
Power and Heat Pulp and Paper MetalsOil and Gas Cement, lime, glass Others
Countries:
• UK• Germany• Denmark• Austria• France• Finland• the Netherlands
National Allocation Plans (EU 25) by Sector:
Approx. 50 participants are trading daily, mainly energy companies, banks and hedge fundsAverage trading volume: 1 million tons per day
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
11Price and volume development
0
5
10
15
20
25
30
01.12.04 01.01.05 01.02.05 01.03.05 01.04.05 01.05.05 01.06.05 01.07.05 01.08.05 01.09.05
Pric
e in
€/t
0
500.000
1.000.000
1.500.000
2.000.000
2.500.000
3.000.000
3.500.000
Vol
ume
in t
EUA`05-07 Volume in t EUA`05 Price in €/t
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
12CO2 price drivers
CO2Price
FXTechnical progress
Economic Growth
Physical Demand
Industrial ProductionFreight
ratesWeather
Reserves
CDM/JI
Phase II NAP
Fuel Prices
Policies
Fuel Switch
Regulatory Framework
Banking & Borrowing
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
13The price of CO2 allowances higher than anticipated
Possible reasons:
• Price is in principle set by marginal cost for abatement • Short term reductions achieved as a consequence of gas substituting coal.
High gas prices result in increased costs for reductions.• The trading period is very brief 2005 – 2007, which means no long term
investments• Uncertainties regarding EUA demands (no reliable statistics available)• Indicators of a larger allowances deficit than expected – NAP´s and draught• Some countries like Poland and Italy are still outside (still no valid NAPs),
only 10 countries have functioning registers • Players with a surplus are not yet active in the market• Lack of knowledge relating to the trading system among many players• CDM/JI not yet available, limited supply in the first period
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
14CO2 impact on continental power
HARDCOAL
GAS
Average Plant efficiency: 38% Average Plant efficiency: 50%
CO2 emissions per MWh: 0,89 t CO2 emissions per MWh: 0,40 t
Cost of CO2: Cost of CO2:
1 €/t equivalent to 0,89 €/MWh 1 €/t equivalent to 0,40 €/MWh
20 €/t equivalent to 17,80 €/MWh 20 €/t equivalent to 8,00 €/MWh
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
15Impact of CO2 prices on merit orderWithout cost of CO2
CoalGas
Oil
Lignite
Mar
gina
l cos
ts
Installed Capacity
CoalGas
Oil
Lignite
Mar
gina
l cos
tsInstalled Capacity
With cost of CO2
CO2CO2
CO2
CO2
• The need for allowances is dependent upon the amount of production
• The market value of allowances is part of the marginal costs of power plants
• The power plant production is offered with the higher marginal costs at the spot market
• If the marginal costs are higher than the spot price, the power plant reduces its production and sells the allowance instead.
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
16Gas to coal spread
CO2 - GasCoal Spread 2006
0,00
5,00
10,00
15,00
20,00
25,00
30,00
35,00
40,00
45,00
19.12.2004 18.01.2005 17.02.2005 19.03.2005 18.04.2005 18.05.2005 17.06.2005 17.07.2005 16.08.2005 15.09.2005 15.10.2005
€/M
Wh
CO2 (€/t)NBP-Coal
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
17Longer term price factors
Marginal abatement costPrice is in principle set by marginal cost for abatement
EUA Reserves The rules governing new entrant reserves are far from clear. A potential 60-180 Mt could potentially be allocated/deleted. Will allowance auction disrupt continuous trading in EU ETS?
Clean Development Mechanism Projects (CDM)Investment in mitigation projects and delivery of Carbon Credits will affect pricing. Current Status of projects suggest max. 25Mt supply of CERs into Phase I.
Joint Implementation (JI) Potential for Emission Reduction Projects is huge. Uncertainty of regulatory frameworks in big JI countries like Russia and Ukraine. No effect on Phase I pricing.
Actual CO2 PositionEmissions subject to weather during Phase 1. First reliable position estimate in April 2006. CO2 price is sensitive to position adjustments.
Phase II (2008-2012) Uncertainty of NAP, Inclusion of other Green House Gases and Industries(?)
© Vattenfall AB
Appendices
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
19Joint Implementation
• CO2 emission reducing projects in Annex I Countries (industrialized or in transition with a CO2 emission reductiontarget)
• Applied methodologies include efficiency improvement, fuel switch, reduction of agriculture-related emissions
• Project transforms AAUs into ERUs (Assigned Amount Units into Emission Reduction Units)
• ERUs have same value as EUAs (EU-Allowances)
• ERUs can only be used for compliance from 2008 to 2012
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
20Clean Development Mechanism
• CO2 emission reducing projects in Non-Annex I countries (no CO2 emission reducing target)
• Applied methodologies include destruction of methane, HFC23, N2O, and new biomass and small hydro plants
• Projects generate CERs (Certified Emission Reductions)
• CERs have same value as EUAs (EU-Allowance), but aregenerated not converted, i.e.no “AAU conversion”.
• ERUs can be used for compliance in both phases and beyond
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
21Accounting principles emission rights
• Received and purchased emission rights are reported as inventories
• In those cases where emission rights are received, or acquired, at a value lower than fair value, the inventory asset is reported at fair value and as deferred income (government grant) in the balance sheet
• The government grant is carried as income over the year and as carbon dioxide is emitted, a cost and a liability for the obligation to provide emission rights are reported
• The liability and inventory asset are valued in a uniform manner
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
22World energy related CO2 emissions by region
IEA – World Energy Outlook 2004
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
23CO2 capture and storage
Vattenfall´s R&D effort
The target is 20€/tons CO2
Commercially available around 2020
International co-operation
Development phase includes a pilot plant
Strong support from the Vattenfall Management
high expectations
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
24EU burden-sharing agreement
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
25Public power and heat sector is short 2005 - 2007
-100 -50 0 50 100 150 200 250 300 350 400
Total
Public Power and Heat
Pulp and Paper
Metals
Oil and Gas
Cement, Lime, Glass
Other
Mio. t CO2LONG SHORTSource: Carbon Market Trader, 01.08.05; own compilation
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
263% shortage 2005 - 2007
Source: Carbon Market Trader, 01.08.05; own compilation
0 1.000 2.000 3.000 4.000 5.000 6.000 7.000
Allocation
Forecast
Mio. t CO2
180 Mio. t
Market is short compared to forecasted emissions
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
27Electricity generation cost - uncertaintiesIncl 20 €/ton CO2, excl. taxes, CHP not shown.
0
10
20
30
40
50
60
70
80
Hydro
power
Nuclear e
xistin
gNucle
ar new
Natural ga
sCoal
CO2 fre
eBio
energ
yCoal
cond
Wind
power
Wave
energy
öre/
kWh
?
? CO2cost
Electricitycerificates
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
28The CO2 emissions trading systemincreases electricity price
HydroNuclear
TWh/year
CHP
Demand
Gas turbines
3002001000 400
Oil
Variable cost
Prices on the Nordic Market - Impact on electricity price from CO2 ETS
öre/kWh
5 €
10 €
20 €
Coal condensing
Price/ton CO2
(normal year)
(wet year)
(dry year)
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
29Theoretical mechanism of dispatch under ETS influence
Model – taking full (opportunity) cost into account
• The allowance-need depends directly on the production amount.
• The Market value of allowances is part of the marginal cost of power plants.
• The power plant production is offered at the spot market with the marginal cost including the market value of certificates
• In case of a switch in the merit order the power plant reduces its production. It gets its contribution margin by selling the allowances.
€/MWh
Strommarktpreis
Deckungsbeitrag 1 bei Verkauf der Zertifikate
Deckungsbeitrag 1 bei Erzeugung und Verkauf des Stromes
Zuw
achs
kost
en
des
Kra
ftwer
ksbl
ocke
sK
oste
n de
r E
mis
sion
srec
hte
Contribution margin in case of electricity sold
mar
gina
l cos
t of t
hepo
wer
pla
nt
cost
of t
heal
low
ance
s Contribution margin in case of allowances sold
Market price electricity
ETS will be taken into account irrespective of the allocation mechanism.Pricing mechanism is essential for function of the ETS system.
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
30Consequences for power plant operationMerit Order of Marginal Cost Depending on Price of Allowances
0,00
10,00
20,00
30,00
40,00
50,00
60,00
70,00
0 5 10 15 20 25 30 35 40 45 50EUR/t CO2
EUR
/MW
h
Lignite old
Hard Coal old
Lignite 2010
Hard Coal 2010
CCGT (without gas tax)
Every cross point leads to a switch in the merit order and another power plant operation
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
31Pricing at the Power Exchange (EEX, Nordpool)
An unavoidable price effect is a higher power market price.The price influence depends on marginal power plants in the region and other influences (fuel prices, demand …).
Capital Markets Day, 27 Sept. 2005© Vattenfall AB
32Taking the opportunity cost into account for the purpose of electricity pricing - Case: 100% of allowances allocated for freeWithout taking CO2 into account With CO2
Marginal costs
Market price power
€/MWh
CM 1without CO2
Marginal costs
costs
EUA
€/MWh
CM 1 with CO2
Allowances have to be surrendered at full volume.Contribution margin = difference between market price and marginal cost.
Plant has to be switched off. Not used allowances are sold to the market.
Contribution margin without CO2 < Contribution margin with CO2Taking CO2 into account for electricity pricing purposes is economically rational.