U.S. Experience in SO2 and NOx Emissions Trading “Flexible Mechanisms for an Efficient Climate...

U.S. Experience in SO2 and NOx Emissions Trading

“Flexible Mechanisms for an Efficient Climate Policy“July 27, 1999

Stuttgart (Germany), „Haus der Wirtschaft“,

Presented By Garth Edward

Natsource Emissions Brokerage Desk

140 Broadway 30Th Floor New York, NY 10005 Phone: (212) 232-5305 Fax: (212) 232-5353 Web: www.natsource.com

Presentation Outline

• Introduction to Natsource, Inc.

• Overview of SO2 emissions allowance

trading program

• State of the NOx emissions markets in the

U.S.

• Developments in the Greenhouse Gas

market


Natsource and emissions markets

• Market leader in Natural Gas, Electricity, Coal, Emissions, Weather Derivatives

• Client base: Utilities, Banks, Energy Producers + Marketers, Insurance and, Industry

• Over $1.5bn by volume in emissions transactions• Global reach: JV with Tullett & Tokyo to develop

energy and environment brokerage worldwide.• One of three founding members of the Emissions

Marketing Association• Member: CCAP GHG Braintrust and advisor to

Whitehouse Climate Change Taskforce


SO2 Emissions Allowance

The right to emit one ton of sulfur dioxide into the atmosphere–Standardized, issued in vintage years–Tradable, any individual can open EPA account–Bankable, unused allowances carry forward– Issued in three Phases– Issued at zero cost basis to affected sources


SO2 Market Overview • Clean Air Act signed 11/14/90,

allowance allocations final on 3/23/93• First trades in 1993 ($250-$300/ton),

tracking system opened March 1994• Phase I (‘95-’99) 20% reduction in SO2

from (‘87 levels), 263 units/110 plants• Phase II (‘00) 50% reduction in SO2

from (‘87 levels), 2,000+ units, all new plants 25MW+


Allowance Tracking System-ATS

• Administered by EPA Acid Rain Division

• Two types of accounts

• Unit account - allowances issued & withdrawn for compliance purposes

• General account - anyone may open, no fee

• Provides inventories for all accounts

• Serial numbers allow the tracking of each allowance’s trading history

• All transfers recorded, posted on internet: ww.epa.gov/acidrain/atsdata

• Does not track forward transactions or options unless executed and transferred

• Allowances issued by vintage

• Allowances not used in specific vintage year may be used in future years


Annual EPA SO2 Auction• Conducted annually by Chicago Board of Trade for EPA• Purpose was to ensure new units with a public

source of allowances and provide price signals to market

• 2.8% of initial allocations withheld by EPA in special auction reserve– 150,000 allowances offered in spot auction– 125,000 allowances offered in advance auction

• Sealed bid, no reserve, discriminatory auction structure held in late march every year

• EPA returns proceeds and unsold allowances (if any) on a pro rata basis to units from which allowances where withheld


SO2 Allowance Market Drivers

• Cost Based Drivers– Coal: Cost adders required to bring coals into

Phase II SO2 limits range from -$2/ton to $14/ton– Oil/Gas: Fuel switching to lower sulfur fuel– Control Equipment: FGD systems $150/ton++

• Regulatory/Industry Restructuring Drivers– New regulations for Ozone, Regional Haze, PM 2.5

and CO2 will impact SO2 value

– Deregulation forcing mergers/acquisitions, divestiture, utilization and ratemaking uncertainty


SO2 Allowance Price History

$65.00

$85.00

$105.00

$125.00

$145.00

$165.00

$185.00

$205.00

$225.00

5/1

4/9

4

11

/14

/94

5/1

4/9

5

11

/14

/95

5/1

4/9

6

11

/14

/96

5/1

4/9

7

11

/14

/97

5/1

4/9

8

11

/14

/98

UER Bi-weekly Spot


Three Types of NOx Markets in U.S.

1 New Source/Offset markets -· Permanent emission reduction credits (ERCs)

2 Compliance Markets - voluntary open markets -· Discrete emission reductions (DERs)· Verified emission reductions (VERs)· “Mass” emission reduction credits (ERCs)

3 Compliance Markets - closed/mandated cap & trade • Ozone Transport Region (Commission) - Allowances• SIP Call Region - Allowances• RECLAIM trading credits - RTCs


Compliance MarketsMandated Cap & Trade under

OTC• 9/94 MOU sets NOx budget (tons) for OTR• Allowances allocated in two phases (219K

99’-02’ and 143K 03’-) for ozone season (May-Sept), based on 55-65% reductions from 1990 levels or .2lbs/MMBtu

• 465 affected sources including utilities, IPPs, Industrials (>250mmbtu/hr. or >=15 MW )

• Banking subject to PFC • Provisions for early reductions (1997, 1998)

and opt-ins


NOX Emissions Allowance

The right to emit one ton of oxides of nitrogen into the atmosphere from May 1 through September 30–Standardized, issued in vintage years–Tradable, any individual can open EPA account–Bankable, unused allowances carry forward with restrictions under PFC–Issued in two Phases:–Issued at zero cost basis to affected sources–Allowance tracking system: similar to SO2


General and OTC NOx Market Drivers

• Cost Based Drivers:– Fuel Switching and Co-Firing: Low Vol Coal, Gas– Combustion Tuning – Post-Combustion Controls - SNCR, SCR

• Regulatory/Industry Restructuring Drivers:– Deregulation in Northeast a big OTC driver– Finalization of some state regulations,

allocations– Coordination of OTC and SIP Call markets in ‘03


OTC NOx Allowance Prices• First unconditioned

trade at $1,700/ton• Original estimates of

$1,500/ton exceeded five-fold

• 35,000+ tons traded to date, 50-100 ton lots standard

• Several energy trading and marketing firms active

• Much quicker learning curve than SO2 market

• Volatility trading as high as 80% (> 1 year Term)

Historical Pricing of NOx Allowances

$2,400

$3,400

$4,400

$5,400

$6,400

$7,400

$8,400

4/21

/98

5/5/

98

5/19

/98

6/2/

98

6/16

/98

6/30

/98

7/14

/98

7/28

/98

8/11

/98

8/25

/98

9/8/

98

9/22

/98

10/6

/98

10/2

0/98

11/3

/98

11/1

7/98

12/1

/98

12/1

5/98

12/2

9/98

1/12

/99

1/26

/99

2/9/

99

2/23

/99

3/9/

99

3/23

/99

4/6/

99

4/20

/99

5/4/

99

5/18

/99

1999

1999-2002 Stream

2000


Impact of NOx on Power Prices

• Assuming $5,000 allowance, a 10,000 Btu/Kwh Heat Rate, the following are NOx cost adders for different rates– .45 lbs./MMBtu results in $11.25/MWh– .30 lbs./MMBtu results in $7.50/MWh– .20 lbs./MMBtu results in $5.00/MWh


The Greenhouse Gas Market

YES, THERE IS A MARKET• Increasing numbers of transactions• Major portfolios being developed: including

portfolios of CERs/ERCs from international initiatives

• Early action pilot trading programs and crediting legislation in US, Canada, UK, Norway, NZ etc

• US State voluntary GHG initiatives• Climate neutral network, companies and

products


The Business View

• Is the science certain? NO• Is the policy certain? NO• Is there a business risk? YES

CEOs have a fiduciary responsibility to their shareholders to manage risk and protect shareholder value. GHG transactions are essentially an insurance policy for emitters.


Further Incentives for Trading

• Start now to meet obligations later + build

competitive advantage

• Hedge price and liquidity risk

• Establish “early credit” + influence policy

• Positive public relations

• Develop technology


Hence: Increasing Commercialization

• From PR to comprehensive strategies

• From demonstrations to portfolios

• From industry opposition to participation

• Now large scale GHG trading is emerging


Dealing With Uncertainty?

• Two major risks in GHG transactions, and two major responses have emerged:

1. Regulatory risk: no legislation enters into force Response: use options, later expirations

2. Validity risk: credits are deficient Response: negotiate liability


Current State of the GHG Market:

Trading Activity• North American transactions + portfolio building• British Petroleum, Royal Dutch Shell, etc:

internal trading• International investment in USIJI + CDM projects• Sequestration projects + trades in Australia• JI investments in Russian Federation• Costa Rica CDM sequestration initiative


Emissions Transaction Structures

• Immediate Settlement• Forward Settlement• European Style Physically settled Options• Vintage Swaps, Loans• Indexed transactions (against UER)• Interpollutant swaps (6 completed in OTC)• Bundling/swapping with power, coal, etc.


Emissions Market Participants

• Electric Utilities• IPPs, Merchant Plants• Waste-to-Energy Facilities• Chemical Plants• Refineries• Other industry (paper, steel, etc.)• Control equipment vendors• Energy trading concerns, speculators


Integrity InformationExecutionService

Date post:	25-Dec-2015
Category:	Documents
Upload:	cynthia-edwards
View:	215 times
Download:	1 times

U.S. Experience in SO2 and NOx Emissions Trading “Flexible Mechanisms for an Efficient Climate...

Documents