State of EU ETS 2017May 29 2017, PARIS

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

1

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

2

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning

• Liquidity

• Auction participation

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

3

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning

• Liquidity

• Auction participation

EU ETS fit for purpose

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

4

What do we expect the EU ETS to deliver?

1. Environmental delivery. Does it deliver against absolute environmental targets as expressed in the EU ETS Directive?

2. Cost effectiveness and economic efficiency. Macro-economic efficiency and cost effectiveness for compliance.

3. Does it function well as a market? It is worth having a market only if it functions well and leads to good price delivery

4. Does it provide effective, and proportional, protection against the risk of carbon leakage?

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

5

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning

• Liquidity

• Auction participation

Environmental delivery

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

6

2 084

1 784

1 372

0

500

1 000

1 500

2 000

2 500

2005 2008 2010 2013 2016 2020 2025 2030

Mill

ion

ton

s

Verified emissions scope corrected

2% GDP

1% GDP

0% GDP

Projectedemissions

Target path

Delivery against trading period target

Environmental delivery

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

7

0

500

1000

1500

2000

2500

3000

2005 2007 2008 2012 2013 2016

mill

ion

ton

s

Freely allocated EUAs solid. Auctioned or sold EUAsCERs and ERUs Verified emissions solid.

Delivery against trading period target

Environmental delivery

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

8

Delivery against long-term EU commitments

Source: ENEL (based on EEA 2016 and EC 2011)

EU ETS fit for purpose

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

9

What do we expect the EU ETS to deliver?

1. Environmental delivery. Does it deliver against absolute environmental targets as expressed in the EU ETS Directive?

2. Cost effectiveness and economic efficiency. Macro-economic efficiency and cost effectiveness for compliance.

3. Does it function well as a market? It is worth having a market only if it functions well and leads to good price delivery

4. Does it provide effective, and proportional, protection against the risk of carbon leakage?

Environmental delivery

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

10

Delivery against international commitments

Impact of Paris Agreement?

• Could have caused short-medium term price hike• However: did not happen

• Market had already internalized domestic 2030 target

• Long term price expectation reacts to domestic policy changes• Paris Agreement needs to be translated into EU in order to

impact expectations

Impact of IPCC 1.5°C Special Report?

• No doubt the report will highlight need for negative emissions

• Unlikely it will have an impact till it is translated into policy – adjusted EU ETS target, together with a renewed 2050 roadmap

Environmental delivery –Lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

11

EU ETS is delivering against trading period target

• Emissions under target path since 2009

• Decarbonization of important industrial sectors is not well understood

• Electricity is decarbonizing faster than the LRF (2.51% decrease on average yearly between 2005 and 2014)

EU ETS is no longer alone in the world

PA and IPCC 1.5°C S.R. need to be translated into domestic policy before they can impact pricce expectations

Coverage of ETS globally

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

12Source: ICAP Status Report 2017

Source: ICAP Status Report 2017

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

13

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning• Liquidity

• Auction participation

Net positions combustion/industry

Industry sectors so far were allocated more free allowances than their verified emissions.

5/3

0/2

01

7

14Combustion of fuels was short of free allowances in all trading periods.

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

-100

-75

-50

-25

0

25

50

20

05

20

07

20

08

20

12

20

13

20

16

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Combustion of fuels

-100

-75

-50

-25

0

25

50

20

05

20

07

20

08

20

12

20

13

20

16

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Industrial sectors

Monetary value net position 5/3

0/2

01

7

15

Allocation minus emissions times yearly average EUA prices

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

32

00

5

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Bil

lio

ns

€

ETS and Innovation 5/3

0/2

01

7

16

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

Source: Calel and Dechezleprêtre (2012) and NE elaborations on Espacenet and ICE data

MAC vs EUA for different technologies

Marginal Abatement Cost for different technologies

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

17

Looking at current market conditions fordifferent technologies, both for energyproduction and energy efficiency, we cancompare the cost of abating a ton of CO2versus the current price of EUAs.

The range of values goes from aminimum of 16 €/ton for switching fromcoal generation to natural gas, to amaximum of 170 €/ton for wind offshoregeneration.

It is important to highlight, than between16 € and 40 €, some investments inenergy efficiency may activate.

However, it must be underlined that if inthe case of electricity generation, theeconomic feasibility of a project is themain, and in some cases sufficient,condition to spur investments, in thecase of energy efficiency there are othernon-economic barriers that may hamperthe investment.

174

115

110

109

80

55

40

37

25

25

16

0 50 100 150 200

Wind Offshore

PV

CCS

Hydro

EE - White Certificates

EE - Heat Recovery System

EE - HE Motors

Wind Onshore

EE - Compressed air

EE - Alternative fuel substitution

Fuel Switch* (NatGas)

Marginal Abatement cost are calcualted on the basis of an average EU wholesale price for electricity of 40 €/MWh (130

€/MWh retail price for industries) and an average EU carbon emission factor of fossil generation of 700 gCO2/kWh

EUA Avg 2016

EUA Avg 2008-16

EUA price vs fuel switching

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

18

0

10

20

30

40

50

60

70

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Price Switch€/ton

PriceSwitch EU

EUA €/ton

Fuel switching is commonly used to indicatethe minimum price which triggers the switchfrom generating electricity using carbonintensive coal to less carbon intensive naturalgas. Fuel switching is one of the first low-carbon measures that should be triggered by awell functioning carbon policy.

Looking at the price dynamic that hascharacterized the EU ETS from the verybeginning, the market has never been able tofully incentivize such a switch.

Due to a combination of low carbon prices, lowcoal price and a relatively high natural gasprice, the EU ETS has seldom been able tomake electricity generation from natural gasmore economic than from coal.

National measures –UK floor price 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

19

• UK carbon floor price doubled in April 2015: to £18/ton of CO2

• UK emissions fell by 5,8% between 2015 and 2016

• Coal use dropped by 52% YoY (emissions from coal: -50,1% YoY)

• Increased emissions from oil (1,6%) and gas (12,5%)

• Natural gas use still below levels in 2000s

Source: Carbon Brief (2017)

National measures –UK floor price vs EU ETS 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

20

Source: Carbon Brief (2017)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Electricity Generation Mix UK, 2005-2015

Net import

Other

Solar

Wind

Bioenergy

Hydro

Nuclear

Gas

Oil

Coal

Long-term credibility?

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

21However, very low open-interest for most of these contracts (0 for 2025)

5,15,2

5,2

5,3

5,4

5,5

5,6

5,6

5,7

4,8

4,9

5,0

5,1

5,2

5,3

5,4

5,5

5,6

5,7

5,8

€/ton

ICE DecYY

0%

1%

2%

3%

4%

5%

6%

Day-to-day volatility

EUA Dec

Brent FM

CIF ARA Cal

TTF Cal

EEX Cal

Impact of volatility on economic efficiency 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

22

EU ETS Day-to-day volatilitydecreased in correspondence of thedouble overhaul (backloading +MSR) while the other energycommodities experienced anopposite trend

For great part of the period, EU ETS day-to-day volatilityhas been constantly higher than that of other energycommodities (almost 3-time higher than the Brentvolatility)

Overlapping policiesReduction of Emissions

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

23

The power sector has so far been the main contributor to the reduction of CO2 emissions. However,decrease in emissions from the power sector can hardly be attributed to the EU ETS.

National measures, in the form of incentives to renewable energy sources (RES), have been at the core ofthe experienced reduction.

Energy efficiency policies also played a role, while the missed reduction due to a missed switch from coalto natural gas has resulted in higher emissions.

-250

-200

-150

-100

-50

0

50

100

Mto

n

reduction emissioni due toEE

increase due to higher coal

reduction emissioni due toRES

National measures: RES incentives 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

24

0

100

200

300

400

500

600

0

50

100

150

200

250

300

€/ton€/MWh

National measures: RES incentives

Avg RESincentive

EUA (right)

Avg EU RES

incentive in €/ton (right)

Source: CEER (2017)

Economic efficiency: lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

25

EU ETS has not played a major role in driving decarbonization through its price signal alone

• For electricity: ETS worked as a complementary factor to other policies (RES incentives)

• Scaling down of RES -> pace of innovation has slowed down

Current EUA price and disconnect between short term price and long-term scarcity

• EU ETS is not providing an incentive to drive innovation and long-term investment

EU ETS may have helped some sectors weather the economic crisis

Data availability remains an issue

• Activity level data vs sectoral data, or why not both?

Economic efficiency: lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

26

HOWEVER:EU ETS has played a key role

• Provision of a baseline price-signal

• All reforms are moving in the direction of tighter scarcity• Political commitment

False expectation was created that the EU ETS could act alone

• Business rarely decides on one factor alone

• EUAs are just one driver• Lack of price signal due to regulatory uncertainty

MSR is expected to cope with surplus and other problems

• Flexibility on supply side

• Will it be able to deal with sudden shocks (coal shut down, overlapping policies?)

Economic efficiency: way forward? 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

27

1. Include all costs and benefits in various calculations, and when comparing approaches. • Necessary to calculate the costs/benefits of other policies as well

2. Quantify the new measures• Will the MSR be sufficient on its own to coodinate the effect of

overlapping policies?

3. Create understanding on how overallocation surplus has been used• Economic survival? Decarbonization efforts?

4. Understand impacts of events with LT implications• Increase awareness of LT price singals and scarcity

• How will industry cope with higher prices?

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

28

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning• Liquidity

• Auction participation

Impact of free allowances on value added and operating surplus

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

29

Net positions combustion/industry

Industry sectors so far were allocated more free allowances than their verified emissions.

5/3

0/2

01

7

30Combustion of fuels was short of free allowances in all trading periods.

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

-100

-75

-50

-25

0

25

50

20

05

20

07

20

08

20

12

20

13

20

16

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Combustion of fuels

-100

-75

-50

-25

0

25

50

20

05

20

07

20

08

20

12

20

13

20

16

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Industrial sectors

Indirect costs

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

31

Sector Indicator 2008 2010 2012 2013 2014 2015

Ceramic TilesIndirect costs (€/m2) 0,04 0,03 0,02 0,01 0,01 0,01

% of production costs 0,7% 0,5% 0,3% 0,1% 0,2% N/A

Bricks and roof tilesIndirect costs (€/m2) 1,03 0,64 0,35 0,21 0,28 0,38

% of production costs 1,2% 0,9% 0,4% 0,3% 0,3% N/A

Refineries

Indirect costs (€/ton) 0,77 0,49 0,29 0,16 0,22 0,28

% of energy component

31,2% 20,3% 11,6% 6,4% 9,1% 11,8%

Steel - BOFIndirect costs (€/ton) 7,34 2,94 1,5 0,93 1,16 2,58

% of production costs 2,6% 0,7% 0,4% 0,2% 0,3% 0,4%

Steel -EAFIndirect costs (€/ton) 9,77 5,78 3,08 1,86 2,42 3,09

% of production costs 2,6% 1,8% 0,9% 0,5% 0,8% 1,0%

Primary AluminiumIndirect costs (€/ton) 245,67 152,49 78,09 46,19 61,38 80,23

% of production costs 14,0% 9,0% 3,6% 2,4% 3,3% 3,6%

Downstream and recylcers

Indirect costs (€/ton) 6,11 4,05 2,01 1,16 1,48 1,96

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

32

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning• Liquidity

• Auction participation

Phase 4 - Scenarios

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

33

Parameters Scenario 1 Scenario 2LRF 2,2%/year 2,2%/year until 2024, and

increase to 2,4% in 2025

Funds supplied with allowances from the free allocation share

400 million allowances for the Innovation Fund

MSR withdrawal rate 24%

Cancellation of allowances in the MSR 800 million in 2021

Adjustment of free allocation share to avoid triggering CSCF

No adjustment Adjustment of free allocation share to avoid triggering CSCF (+2%)

Benchmarked-based allocation to sectors non exposed to carbon leakage

30% 0% except district heating

Application of CSCF To every sector

Annual benchmark decrease rate 1%/year

Growth rate in industry 2 cases :• CASE 1: 1,2% p.a. until 2020 and 1,5% p.a. after• CASE 2: 2% p.a.

[1] The MSR withdrawal rate does not have an impact on free allocation, but it has one on the evolution of the surplus and on the price of allowances.[2] The cancellation of allowances in the MSR does not have an impact on free allocation. It is specified here because of the impact it has on the long-term balance of the EU ETS and possibly on prices.

Scenario 1: a CSCF triggered in 2029 or 2030 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

34

Source: I4CE, 2017

96,1%

90,9%

85,6%

80,0%

85,0%

90,0%

95,0%

100,0%

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

CASE 1 - growth rate: 1,2% p.a. until 2020 and 1,5% p.a. after

CASE 2 - growth rate : 2% p.a.

Scenario 1: a CSCF triggered in 2030

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

400

450

500

550

600

650

700

750

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MtC

O2

Free allocation cap Final allocation Preliminary allocation

Remaining allowances under the free allocation cap

35

Growth rate : CASE 11,2% p.a. until 2020 and 1,5% p.a. after

Source: I4CE, 2017

With a higher growth rate, a CSCF triggeredfrom 2029 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

36

Growth rate : CASE 22% p.a. until 2030

400

450

500

550

600

650

700

750

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MtC

O2

Free allocation cap Final allocation Preliminary allocation

Remaining allowances under the free allocation cap

Source: I4CE, 2017

Scenario 1 |Sensitivity of benchmark revisionrate

37

Growth rate : CASE 11,2% p.a. until 2020 and 1,5% p.a. after

400

500

600

700

800

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MtC

O2

Free allocation cap Preliminary allocation

Benchmark revision : 0,5 %

96,1%

78,8%

100,0%

60%

70%

80%

90%

100%

CSCF

1 %

1,5 %

Source: I4CE, 2017

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

38

EU ETS Phase IV : overview of scenarios

Scenario 1

• The Scenario 1 does not foresee any feedback loop price-related which could change theproduction/consumption patterns of industries. Thus, demand does not respond to pricechanges.

• It has been considered a 80:20 (y+1:y+2) hedging strategy for utilities constant over thewhole period.

• ICE prices referred to the Dec settlement as of 9/3/2017

1732

1266

869

528423

298

113

-78 -174

-276-407

-1,000

-500

0

500

1,000

1,500

2,000

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Mton

Baseline vs Scenario1: Cumulative Surplus/Deficit

Baseline scenario

Prices are expressed in real terms

5.7

27.9

38.8

-

5

10

15

20

25

30

35

40

45

€/ton

Scenario comparison: EUA Price Dynamic

ICE DecYY

Base

Source: Nomisma Energia, 2017

Scenario 1 : Cumulative surplus/deficit

Scenario 1

Scenario 1

Scenario 2- no need for a CSCF until2030 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

39400

450

500

550

600

650

700

750

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MtC

O2

Free allocation cap Final allocation Preliminary allocation

Growth rate : CASE 11,2% p.a. until 2020 and 1,5% p.a. after

Remaining allowances under the free allocation cap

Source: I4CE, 2017

With a higher growth rate, the « 2% »flexibility prevents use of CSCF in 2030 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

40400

450

500

550

600

650

700

750

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MtC

O2

Free allocation cap Final allocation Preliminary allocation

92,5%

80%

85%

90%

95%

100%CSCF

Without the 2% additional flexibility

Growth rate : CASE 22% p.a. until 2030

Remaining allowances under the free allocation cap

Source: I4CE, 2017

100,0%

Scenario 2 |Sensitivity of benchmark revisionrate

41400

500

600

700

800

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

MtC

O2

Free allocation cap Preliminary allocation

Benchmark revision : 0,5 %

Growth rate : CASE 11,2% p.a. until 2020 and 1,5% p.a. after

1 %

1,5 %

79,1%

100,0%

60%

70%

80%

90%

100%CSCF

100,0 %

Source: I4CE, 2017

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

42

EU ETS Phase IV : overview of scenarios

Scenario 2

1732

1266

869

528423

298

113

-78 -174

-276 -407

1732

1141

646

227

-128 -269

-472

-683-802

-930-1063

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Mton

Baseline vs Scenario1: Cumulative Surplus/Deficit

Baseline scenario

Scenario 1

• Both scenarios, Scenario 1 and Scenario 2, do not foresee any feedback loop price-related which could affect the production/consumption patterns of industries. Thus,demand does not respond to price changes.

• It has been considered a 80:20 (y+1:y+2) hedging strategy for utilities constant over the whole period.

53.1

38.8

-

10

20

30

40

50

60

€/ton

Scenario comparison: EUA Price Dynamic

Scenario 1

Base

Prices are expressed in real terms

Scenario 1 VS scenario 2 : Cumulative surplus/deficit

Scenario 1Scenario 2 Scenario 2

Scenario 1

Source: Nomisma Energia, 2017

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

43

EU ETS Phase IV : overview of scenarios

Scenario NE price-responsive

• NE – Scenario 24% takes into consideration investments in low carbon technology which could be triggered as a response to price increases.

• It has been considered a 80:20 (y+1:y+2) hedging strategy for utilities constant over the whole period.

Prices are expressed in real terms

53.1

38.8

25.8

-

10

20

30

40

50

60

€/ton

Scenario comparison: EUA Price Dynamic

Scenario 1

Base

NE - Scenario24%

1732

1266

869

528423

298

113

-78 -174

-276 -407

1732

1141

646

227

-128 -269

-472

-683-802

-930-1063

1,295

934

631 525

392 346 288 218

138 47

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Mton

Baseline vs S1 vs NE: Cumulative Surplus/Deficit

Baseline scenario

Scenario 1

NE - 24%MSR

Scenarios 1 VS 2 VS NE : Cumulative surplus/deficit

Scenario 1Scenario 2

Scenario 2

Scenario 1

Source: Nomisma Energia, 2017

Carbon leakage: lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

44

Lack of evidence of Carbon Leakage

• Impact of current system of ex-ante, fixed free allocation

• However: legacy is also huge now structural surplus

Impact of EU ETS on competitiveness has not been significant

• Notable exceptions: electricity intensive industries

• However: no guarantee past is good representation of the future

• Increased ambition will lead to higher impacts

Carbon leakage: lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

45

Most elements of the EU ETS design impact competitiveness and carbon leakage

• MSR and LRF

• Free allocation rules and benchmarks

• Auction and allocation shares

• Phase 4 could see significant changes to these variables

Free allocation will continue in Phase IV

• Is it a solution for the long term or for the short—to-mid term?

• What other solutions should be examined?

• Debate bound to include international discussions

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

46

1. Introduction – EU ETS fit for purpose

2. Environmental delivery

3. Economic efficiency

• Carbon Leakage

• State of Play – Impact of Phase 4 revision

4. Market functioning• Liquidity

• Auction participation

EUA Prices

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

47

Source: ICE closing prices, Dec delivery of the same year

0

5

10

15

20

25

EU ETS market – surplus and price 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

480

5

10

15

20

25

0

500

1 000

1 500

2 000

2 500

3 000

2005 2008 2010 2013 2016

EUA

pri

ce

Mill

ion

to

ns

Total accumulated surplus EUA price

MSR functioning

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

49

Source: EU registry, Commerzbank Corporates & Markets

24% MSR intake, and assumption that cancellation of units in MRS will take place after first review - EUCO

Cost of Carry –Dec20-Dec16 spread 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

50

Source: ICE

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

M-15 J-15 J-15 A-15 S-15 O-15 N-15 D-15 J-16 F-16 M-16 A-16 M-16 J-16 J-16 A-16 S-16 O-16 N-16

Cost of Carry –Dec16-Dec20 spread vs German Bonds 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

51

Source: ICE

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Dec20-Dec16 Bund 10y - exp20

Auction participation – EEX

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

52

Source: EEX

18,45 17,8319,20 19,50

17,80 16,77 16,50 15,4218,14

19,69 19,57 18,8821,56 22,71

20,6718,77

16,3019,21 18,15

16,6718,42 18,08 17,33 17,57

0

5

10

15

20

25

30

Monthly auction participation Daily auction participation

Auction participation – EEX

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

53

Source: EEX

0

5

10

15

20

25

30 Monthly average auction participation

Auction coverage – EEX

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

54

Source: EEX

3,714,01

3,56

2,39

3,503,11

2,81

3,76

3,11 3,06 3,202,78

2,41 2,21 2,28 2,101,78

2,44 2,27

3,10

2,102,62

2,29 2,43

0

1

2

3

4

5

6

7

Monthly average auction coverage Daily auction coverage

Auction coverage – EEX

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

55

Source: EEX

0

2

4

6

8

10

12

14 Monthly average auction coverage

Auction vs. spot spread

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

56

Source: EEX

-0,20

-0,10

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

Monthly averages Monthly max Monthly min

Auction: auction priceSpot: Mean of best bid/best ask before 11 AM on auction day

Auction price minus secondary market price (€)

Ask–bid spread

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

57

Source: EEX

Bid: best bid at secondary market before 11 AMAsk: best ask at secondary market before 11 AM

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

1,00

1,10

1,20

1,30

1,40

Monthly averages Monthly max Monthly min

Best ask minus best bid (€)

Open interest contracts (prev. day) 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

58

Source: ICE

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

jan

v-1

0

avr-

10

juil-

10

oct

-10

jan

v-1

1

avr-

11

juil-

11

oct

-11

jan

v-1

2

avr-

12

juil-

12

oct

-12

jan

v-1

3

avr-

13

juil-

13

oct

-13

jan

v-1

4

avr-

14

juil-

14

oct

-14

jan

v-1

5

avr-

15

juil-

15

oct

-15

jan

v-1

6

avr-

16

juil-

16

oct

-16

jan

v-1

7

Volumes - ICE

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

59

0

1

2

3

4

5

6

7

8

9

10

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2011 2012 2013 2014 2015 2016

Mill

iard

s

Mill

iard

s

Q1

Q2

Q3

Q4

Volumes, quarterly (bars) on left hand axis and annual (red line) on right hand axis

0%

1%

2%

3%

4%

5%

6%

Day-to-day volatility

EUA Dec

Brent FM

CIF ARA Cal

TTF Cal

EEX Cal

Impact of volatility on economic efficiency 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

60

EU ETS Day-to-day volatilitydecreased in correspondence of thedouble overhaul (backloading +MSR) while the other energycommodities experienced anopposite trend

For great part of the period, EU ETS day-to-day volatilityhas been constantly higher than that of other energycommodities (almost 3-time higher than the Brentvolatility)

Brexit impact

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

61

Brexit may impact the EU ETS in a number of ways, and they need to be understood, and risks managed and addressed

• What will be the UK successor of the EU ETS

• Stand alone system

• Part of the EU ETS

• Mirror

• Potential uncertainty over contract validity – unwinding contract may not be simple

• Market behaviour of UK EUA holders and its impact on markets

• Impact on EU ETS policy direction without UK voice at the table

• Impact of UK exit in supply/demand balance

• Impact on hedging and MSR parameters (thresholds)

• How do we deal with UK exit before end of P3?

Conclusion: This needs to be dealt with on priority basis

Market functioning: lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

62

Good functioning: enough liquitidy, good auction participation, tight spreads

• However: exit of market players continues to be a concern – but not translated into market numbers in a clear way. Caution remains necessary

Disconnect ST prices and expected LT scarcity

Electric utilities remain main market participants

• Changes in electricity markets could have big impacts on EU ETS functioning

Market functioning: lessons learned 5

/30

/20

17

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

63

MSR: supply side flexibility

• Parameters set in 2014: energy mix and hedging needs electric utilities has changed dramatically since then

BREXIT?

• Impact on supply/demand balance

• Behaviour of UK EUA holders if Brexit means leaving EU ETS?

State of the EU ETS - Outline

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

64

• EXTRA SLIDES

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

65

Emissions from steel recover from the crises after 2008.

Cement reflects the decline of construction activities.

Refineries and paper&cardboard exhibit a constant decline.

Combustion indicates the impact of RES policies.

Emission trends

60

80

100

120

2008 2009 2010 2011 2012 2013 2014 2015

Ind

ex (

20

08

=10

0)

Combustion Refineries Pig iron and steel Cement clinker Paper and cardboard

Decarbonization of EU industry

5/3

0/2

01

7

66

ERC

ST/I

CTS

D, W

egen

er C

entr

e, N

om

ism

a En

ergi

a, I4

CE

0

50

100

150

200

250

300

350

400

450

500

0,2

0,4

0,6

0,8

1

1,2

1,4

1970 1980 1990 2000 2001 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Paper and Pulp Grey clinker Float glass Electricity

Paper and pulp (left axis): ton of CO2/ton of product. Source: CEPIGrey clinker (left axis): ton of CO2/ton of grey clinker. Excludes on site power generation Source: GNRFloat glass (left axis): ton of CO2/ton of melted glass. Source: Glass for EuropeElectricity (right hand axis): gCO2/kWh ratio of CO2 emissions from public electricity production (as share of CO2 emissions from public electricity and heat production related to electricity production), and gross electricity production. Source: EEA

Ton of CO2: ton of product gCO2/kWh

Free allowances - Steel

The steel industry exhibits up to 2015 accumulated surpluses that amount to 545 million tons of allowances.

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

67

0

150

300

450

600

2005 2007 2008 2012 2013 2015Em

issi

on

allo

wan

ces

(mill

ion

t C

O2) Cumulated surplus

of allowances

All production of pig iron or steel

-25

0

25

50

75

100

125

2005 2007 2009 2011 2013 2015

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Free allowances

Deficit

Surplus

All countries

All production of pig iron or steel

Free allowances – Cement

The cement industry accumulated in particular in P2 large surpluses of free allowances which cumulate in 2015 to 290 million tons of allowances.

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

68

-25

0

25

50

75

100

125

2005 2007 2009 2011 2013 2015

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Free allowances

Deficit

Surplus

All countries

All production of cement clinker

0

150

300

450

600

2005 2007 2008 2012 2013 2015Em

issi

on

allo

wan

ces

(mill

ion

t C

O2) Cumulated surplus

of allowances

All production of cement clinker

Free allowances –Bulk chemicals

Bulk chemicals have an accumulated surplus of allowances that is close to twice of its annual emissions.

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

69

0

150

300

450

600

2005 2007 2008 2012 2013 2015Em

issi

on

allo

wan

ces

(mill

ion

t C

O2) Cumulated surplus

of allowances

Production of bulk chemicals

-25

0

25

50

75

100

125

2005 2007 2009 2011 2013 2015

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Free allowances

Deficit

Surplus

All countries

Production of bulk chemicals

Free allowances – Paper

The paper and cardboard industry exhibit significant surpluses of allowances that are beyond twice the volume of its annual emissions.

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

70

0

150

300

450

600

2005 2007 2008 2012 2013 2015Em

issi

on

allo

wan

ces

(mill

ion

t C

O2)

Cumulated surplusof allowances

All production of paper or cardboard

-25

0

25

50

75

100

125

2005 2007 2009 2011 2013 2015

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Free allowances

Deficit

Surplus

All countries

All production of paper or cardboard

Free allowances – Ceramics

The particular high surpluses of free allowances of the ceramics industry in P2 have accumulated to three times of its annual emissions.

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

71

0

150

300

450

600

2005 2007 2008 2012 2013 2015Em

issi

on

allo

wan

ces

(mill

ion

t C

O2)

Cumulated surplusof allowances

All manufacture of ceramics

-25

0

25

50

75

100

125

2005 2007 2009 2011 2013 2015

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Free allowances

Deficit

Surplus

All countries

All manufacture of ceramics

Free allowances - Refineries

Refineries up to 2015 could balance their deficits of free allocations in recent years with the surpluses accumulated in previous years.

5/3

0/2

01

7ER

CST

/IC

TSD

, Weg

ener

Cen

tre,

No

mis

ma

Ener

gia,

I4C

E

72

-50

-25

0

25

50

75

100

2005 2007 2009 2011 2013 2015

Net

su

pp

ly o

f fr

ee a

llow

ance

s(P

erce

nt

of

emis

sio

ns)

Free allowances

Deficit

Surplus

All countries

All refining of mineral oil

0

150

300

450

600

2005 2007 2008 2012 2013 2015

Emis

sio

n a

llow

ance

s (m

illio

n t

CO

2)

Cumulated surplusof allowances

All refining of mineral oil