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Anthony WhiteHead of Research
Climate Change Capital
Basque Parliament
24th February, 2005
UK Energy Policy
Opening Pandora’s Box?
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Agenda
• Outline of UK Energy Policy
• Do markets work?
• The outlook for emissions trading
• Conclusions
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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
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But will they work?
Spot Energy Prices in England & Wales
0
5
10
15
20
25
30
35
40
45
J an-99 J uly J an-00 J uly J an-01 J uly J an-02 J uly J an-03 J uly J an-04
£/M
Wh
Power
Coal
Gas
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Prices will be volatile!!
time
pri
ce
periodT2
time to shortageT1
spike lengthT3
peakh
new entrant costs
marginal costs
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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
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…and green power
• EU set up Renewables Directive
• UK let “market” set price - ROCs
• Spain – feed-in tariffs & market forces?
• Spanish Government “set” price
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Using the market - renewables
0
10
20
30
40
50
60
70
80
90
£/MWh
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GREEN PRICE
Brown power
Buy-out
Smear
•UK suppliers MUST buy 5% power from green sources (15% in 2015)
•Pay “penalty” for any shortfall
•Technology blind – and optional
•New technologies difficult to finance
•Target not achievable?
UK ROC SYSTEM
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So which is “better”?
Spain: ~8,000 MW
UK: 821MW
Why?Investors do not like market uncertain prices
Spanish system provides a stable prices –expensive?
Investors happy with political risk
Wind Capacity installed in Spain vs UK
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1986 1990 1994 1998 2004
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
MW
% Of world capacity in Spain
Capacity Installed in UK
Capacity installed in Spain
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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??
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Emissions Trading: Background
• Business as Usual Europe misses Kyoto by 7%
• Additional measures could reduce overshoot to 1%
• Trading
should close the gap
European Greenhouse Gas Emissions
Source: European Environment Agency, November, 2003
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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
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EU-25 Abatement Targets for EU ETS
-10
0
10
20
30
40
50
60
Germ
any
Greec
e
Irela
ndIta
ly
Lux
Holland
Portugal
Spain
Sweden UK
EU 15
Total
Czech
Estonia
Cypru
s
Latvi
a
Lithuan
ia
Hungary
Mal
ta
Poland
Slove
nia
Slova
k
Total:
MtC
O2
Allocations
BAU – a bit for power.
“Bit”=
~50-60 mtCO2pa.
2006
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Current prices suggest a price of under €10/tCO2e
Value of allowances will move to ensure coal consumption is reduced.
EU - 25 Abatement Cost Curve
0
2
4
6
8
10
12
14
16
18
20
13 23 33 43 58 73 88 103 118
Abatement in mt CO2e
€/tC
O2e
Gas @€3.77/GJ
Coal $60/t
likely price range
abatement
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EU abatement curve
0
5
10
15
20
25
13 23 33 43 58 73 88 103 118
MtCO2 abated against BAU
Eu
ro/t
CO
2
Gas €3.12/GJ Coal $35/t
Gas €3.34/GJ Coal $35/t
Gas €3.34/GJ Coal $45/t
Gas €3.77/GJ Coal $45/t
Gas €3.77/GJ Coal $55/t
Gas 3.77€/GJ Coal $60/t
Gas €4.54/GJ Coal $60/t
?
Will EU prices be sensible?
Allowance price driven by coal and gas prices
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EU15 for Phase II
4117Mt2001
3877MtKyoto
Excess
4223Mt2010e
350MtAdd’l measures292Mt
CDM supply?
45Mt?
50? Mt
ETS Phase I
ETS Phase IIJI?
6532Mt2002
5905MtKyoto
6660Mt2010e
755MtDTTe
Add’l measures
473Mt
114MtDomesticsinks
800-1200Mt
Russian hot air
200-400Mt
Ukrainianhot air
Current CDM supply30Mt (expected 200Mt)
JI supply?144Mt
EU15, Japan, Canada, Norway, NZ, Switzerland - buyers
EU accession countrieshot air
Kyoto demand and supply
Large shortfall in EU 15 etc
Flexibility unlikely to be sufficient
But Hot Air will!
Expect Russia to determine price
All figures in annual CO2e
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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
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… is it more like this…..?
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